[Federal Register Volume 81, Number 107 (Friday, June 3, 2016)]
[Proposed Rules]
[Pages 35665-35671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13037]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Part 1010
RIN 1506-AB35
Imposition of Special Measure Against North Korea as a
Jurisdiction of Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: In a finding, notice of which was published elsewhere in this
issue of the Federal Register (``Notice of Finding''), the Director of
FinCEN found that the Democratic People's Republic of Korea (``North
Korea'') is a jurisdiction of primary money laundering concern. FinCEN
is issuing this notice of proposed rulemaking (``NPRM'') to propose to
prohibit covered financial institutions from opening or maintaining a
correspondent account in the United States for or on behalf of a North
Korean banking institution and to prohibit the use of foreign banking
institutions' correspondent accounts at covered U.S. financial
institutions to process transactions involving North Korean financial
institutions.
DATES: Written comments on the notice of proposed rulemaking must be
submitted on or before August 2, 2016.
ADDRESSES: You may submit comments, identified by 1506-AB35, by any of
the following methods:
Federal E-rulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Include 1506-AB35 in
the submission.
Mail: The Financial Crimes Enforcement Network, P.O. Box
39, Vienna, VA 22183. Include RIN 1506-AB35 in the body of the text.
Please submit comments by one method only.
Comments submitted in response to this NPRM will become a
matter of public record. Therefore, you should submit only information
that you wish to make publicly available.
Inspection of comments: FinCEN uses the electronic,
Internet-accessible dockets at Regulations.gov as its complete,
official-record docket; all hard copies of materials that should be in
the docket, including public comments, are electronically scanned and
placed there. Federal Register notices published by FinCEN are
searchable by docket number, RIN, or document title, among other
things, and the docket number, RIN, and title may be found at the
beginning of such notices. In general, FinCEN will make all comments
publicly available by posting them on http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800)
949-2732.
SUPPLEMENTARY INFORMATION:
I. Statutory Provisions
On October 26, 2001, the President signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (the
``USA PATRIOT Act''). Title III of the USA PATRIOT Act amended the
anti-money laundering provisions of the Bank Secrecy Act (``BSA''),
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332, to promote the prevention, detection, and prosecution
of international money laundering and the financing of terrorism.
Regulations implementing the BSA appear at 31 CFR
[[Page 35666]]
Chapter X. The authority of the Secretary of the Treasury (the
``Secretary'') to administer the BSA and its implementing regulations
has been delegated to the Director of FinCEN.\1\
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\1\ Therefore, references to the authority of the Secretary of
the Treasury under Section 311 of the USA PATRIOT Act apply equally
to the Director of FinCEN.
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Section 311 of the USA PATRIOT Act (``Section 311''), codified at
31 U.S.C. 5318A, grants the Director of FinCEN the authority, upon
finding that reasonable grounds exist for concluding that a foreign
jurisdiction, financial institution, class of transactions, or type of
account is of ``primary money laundering concern,'' to require domestic
financial institutions and financial agencies to take certain ``special
measures'' to address the primary money laundering concern.
II. Imposition of a Special Measure Against North Korea as a
Jurisdiction of Primary Money Laundering Concern
A. Proposed Imposition of Special Measure Five
As noticed in the June 2, 2016 Federal Register, on May 27, 2016,
the Director of FinCEN found that North Korea is a jurisdiction of
primary money laundering concern (the ``Finding'').\2\ Based upon that
Finding, the Director of FinCEN is authorized to impose one or more
special measures. Following the consideration of all factors relevant
to the Finding and to selecting the special measure proposed in this
NPRM, the Director of FinCEN proposes to impose the fifth special
measure authorized by section 5318A(b)(5), (the ``fifth special
measure''). This special measure would prohibit covered financial
institutions from opening or maintaining a correspondent account in the
United States for or on behalf of a North Korean banking institution.
Covered financial institutions would also be prohibited from processing
a transaction involving a North Korean financial institution through
the United States correspondent account of a foreign banking
institution.
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\2\ Classified information used in support of a section 311
finding and special measure(s) may be submitted by FinCEN to a
reviewing court ex parte and in camera. See section 376 of the
Intelligence Authorization Act for fiscal year 2004, Public Law 108-
177 (amending U.S.C. 5318A by adding new paragraph (f)).
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In addition, covered financial institutions would be required under
the BSA to apply special due diligence to their foreign correspondent
accounts that is reasonably designed to guard against their use to
process transactions involving North Korean financial institutions.
These proposed requirements are discussed in more detail below. In
connection with this action, FinCEN consulted with the Federal Reserve,
representatives of the Federal functional regulators, the Department of
Justice, and the Department of State, among others.
FinCEN requests comments on all aspects of its proposal to impose
the fifth special measure, to include comments on the proposed
prohibition on covered financial institutions from opening or
maintaining a correspondent account in the United States for or on
behalf of a North Korean banking institution.
B. Discussion of Section 311 Factors
In determining which special measures to implement to address the
primary money laundering concern described in the associated Notice of
Finding, FinCEN considered the following factors.
1. Whether Similar Action Has Been or Will Be Taken by Other Nations or
Multilateral Groups Against North Korea
The international community has taken steps to address North
Korean's illicit financial activity. Between 2006 and 2016 the United
Nations Security Council has adopted multiple resolutions, 1718,\3\
1874,\4\ 2087,\5\ 2094,\6\ and 2270 \7\ which generally restrict North
Korea's financial and operational activities related to its nuclear and
missile programs and conventional arms sales. Most recently, in March
2016, the United Nations adopted United Nations Security Council
Resolution (UNSCR) 2270, which imposes additional sanctions on North
Korea in response to a January 6, 2016 nuclear test and February 7,
2016 launch using ballistic missile technology. This UNSCR contains
provisions that generally require nations to: (i) Prohibit North Korean
banks from opening branches in their territory or engaging in certain
correspondent relationships with these banks; (ii) terminate existing
representative offices or subsidiaries, branches, and correspondent
accounts with North Korean financial institutions; (iii) prohibit their
financial institutions from opening new representative offices or
subsidiaries, branches, or bank accounts in North Korea; and (iv) to
close existing representative offices or subsidiaries, branches, or
bank accounts in North Korea if reasonable grounds exist to believe
such financial services could contribute to North Korea's nuclear or
missile programs, or UNSCR violations.
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\3\ See United Nations Security Council Resolution (``UNSCR'')
1718 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1718(2006)).
\4\ See UNSCR 1874 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1874(2009).
\5\ See UNSCR 2087 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2087(2013)).
\6\ See UNSCR 2094 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2094(2013)).
\7\ See UNSCR 2270 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2270(2016)).
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The Financial Action Task Force (``FATF'') has issued a series of
public statements expressing its concern that North Korea's lack of a
comprehensive AML/CFT regime represents a significant vulnerability
within the international financial system. The statements further
called upon North Korea to address those deficiencies with urgency, and
called upon FATF members and urged all jurisdictions to advise their
financial institutions to give special attention to business
relationships and transactions with North Korea, to protect their
correspondent accounts from being used to evade countermeasures and
risk mitigation practices. Starting in February 2011, the FATF called
upon its members and urged all jurisdictions to apply effective
counter-measures to protect their financial sectors from the money
laundering and financing of terrorism risks emanating from North
Korea.\8\
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\8\ See ``FATF Public Statement--19 February 2016,'' Financial
Action Task Force (http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
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2. Whether the Imposition of the Fifth Special Measure Would Create a
Significant Competitive Disadvantage, Including Any Undue Cost or
Burden Associated With Compliance, for Financial Institutions Organized
or Licensed in the United States
The fifth special measure proposed by this rulemaking would, after
the effective date of the final rule, prohibit covered financial
institutions from opening or maintaining a correspondent account in the
United States for or on behalf of a North Korean banking institution.
It would also prohibit the use of a foreign banking institution's U.S.
correspondent account to process a transaction involving a North Korean
financial institution. As noted in FinCEN's Notice of Finding, none of
North Korea's financial institutions currently maintain correspondent
accounts directly with U.S. banks. Further, as noted above, U.S.
financial institutions are currently subject to a range of prohibitions
related to sanctions concerning North Korea, which has generally
limited their direct exposure to the North Korean financial system.
Therefore, FinCEN believes this
[[Page 35667]]
action will not present an undue regulatory burden.
Covered financial institutions would also potentially be required
to apply special due diligence to their foreign correspondent accounts
that is reasonably designed to guard against their use to process
transactions involving North Korean financial institutions. For direct
correspondent relationships, this would involve a minimal burden in
transmitting a one-time notice to certain foreign correspondent account
holders concerning the prohibition on processing transactions involving
a North Korean financial institution through the U.S. correspondent
account. U.S. financial institutions generally apply some level of
screening and, when required, conduct some level of reporting of their
transactions and accounts, often through the use of commercially
available software such as that used for compliance with the economic
sanctions programs administered by the Office of Foreign Assets Control
(``OFAC'') of the Department of the Treasury and to detect potential
suspicious activity. To ensure that U.S. financial institutions are not
being used unwittingly to process payments for, or on behalf of, a
North Korean financial institution, directly or indirectly, some
marginal additional burden will be incurred by U.S. financial
institutions to be vigilant in their suspicious activity monitoring
procedures. As explained in more detail in the section-by-section
analysis below, financial institutions should be able to leverage these
current screening and reporting procedures to detect transactions
involving a North Korean financial institution.
3. The Extent to Which the Proposed Action or Timing of the Action Will
Have a Significant Adverse Systemic Impact on the International
Payment, Clearance, and Settlement System, or on Legitimate Business
Activities of North Korea
Financial institutions in North Korea are generally not major
participants in the international payment system and are not relied
upon by the international banking community for clearance or settlement
services. In addition, given existing domestic and multilateral
sanctions, coupled with the FATF calls for countermeasures to address
North Korea's AML/CFT deficiencies, it is unlikely that the imposition
of the fifth special measure against North Korea would have a
significant adverse systemic impact on the international payment,
clearance, and settlement system. In light of the reasons for imposing
this special measure, and based on available information, FinCEN does
not believe that it would impose an undue burden on legitimate business
activities.
4. The Effect of the Proposed Action on United States National Security
and Foreign Policy
The exclusion from the U.S. financial system of jurisdictions that
serve as conduits for significant money laundering activity, for the
financing of weapons of mass destruction or their delivery systems, and
for other financial crimes enhances national security by making it more
difficult for terrorists, proliferators, and money launderers to access
the U.S. financial system. To the extent that this action serves as an
additional tool in preventing North Korea from accessing the U.S.
financial system, the proposed action would support and uphold U.S.
national security and foreign policy goals. The imposition of the fifth
special measure also would complement the U.S. Government's worldwide
efforts to expose and disrupt international money laundering.
Therefore, pursuant to the Finding that North Korea is a
jurisdiction of primary money laundering concern, and after conducting
the required consultations and weighing the relevant factors, the
Director of FinCEN proposes to impose the fifth special measure.
C. Consideration of Alternative Special Measures
As noted above, and in FinCEN's Notice of Finding, North Korea is
subject to numerous United Nations Security Council Resolutions \9\ and
U.S. sanctions authorities,\10\ and it has been consistently identified
by the FATF for its AML deficiencies.\11\ The U.N. has specifically
called for enhanced monitoring of financial transactions to prevent the
financing of North Korea's nuclear and ballistic missile programs and
the freezing of any assets suspected of supporting these illicit
programs. Additionally, FinCEN has issued three advisories since 2005
detailing specific concerns of the deceptive financial practices used
by North Korea and North Korean entities and calling on U.S. financial
institutions to take appropriate risk mitigation measures. However,
North Korea has not taken any substantial action to address the range
of concerns and continues to be involved in an array of illicit
activities, as reflected in the Notice of Finding.
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\9\ See UNSCRs 1718, 1874, 2087, 2094, and 2270.
\10\ See, e.g., Executive Order (``E.O.'') 13382 ``Blocking
Property of Weapons of Mass Destruction Proliferators and Their
Supporters'' (2005) (https://www.federalregister.gov/articles/2005/07/01/05-13214/blocking-property-of-weapons-of-mass-destruction-proliferators-and-their-supporters); E.O. 13551 ``Blocking Property
of Certain Persons with Respect to North Korea'' (2010) (https://www.gpo.gov/fdsys/pkg/FR-2010-09-01/pdf/X10-10901.pdf); E.O. 13687
``Imposing Additional Sanctions with Respect to North Korea'' (2015)
(https://www.federalregister.gov/articles/2015/01/06/2015-00058/imposing-additional-sanctions-with-respect-to-north-korea); E.O.
13722 ``Blocking Property of the Government of North Korea and the
Workers' Party of Korea, and Prohibiting Certain Transactions with
Respect to North Korea,'' (2016) (https://www.gpo.gov/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf).
\11\ See ``FATF Public Statement--19 February 2016,'' Financial
Action Task Force (http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
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The special measures enumerated under Section 311 are prophylactic
safeguards that defend the U.S. financial system from money laundering
and terrorist financing. FinCEN may impose a range of these special
measures in order to protect the U.S. financial system from these
threats. To that end, special measures one through four impose
additional recordkeeping, information collection, and information
reporting requirements on covered U.S. financial institutions. The
fifth special measure establishes prohibitions or conditions on opening
or maintaining certain correspondent or payable-through accounts. North
Korea's complicity in money laundering and illicit financial activity,
and flagrant disregard for multiple UN resolutions related to the
proliferation of weapons of mass destruction, constitute a threat to
the integrity of the U.S. financial system. Further, in light of
existing sanctions on North Korea, FinCEN is concerned that any
condition, additional recordkeeping, or reporting requirement would not
be an effective measure to safeguard the U.S. financial system. In the
case of the jurisdiction of North Korea, FinCEN views the fifth special
measure, with its prohibitions on the opening or maintenance of a
correspondent account for or on behalf of a North Korean banking
institution, and on the use of a foreign correspondent account to
process a transaction involving a North Korean financial institution,
as the special measure that can adequately protect the U.S. financial
system from North Korean illicit financial activity.
III. Section-by-Section Analysis for Imposition of the Fifth Special
Measure
The proposed rule would prohibit covered financial institutions
from opening or maintaining in the United States a correspondent
account for or on behalf of a North Korean banking institution. It
would also prohibit the use of a foreign banking institution's
[[Page 35668]]
U.S. correspondent account to process a transaction involving a North
Korean financial institution. As a corollary to this prohibition,
covered financial institutions would be required to screen their
correspondents in a manner that is reasonably designed to guard against
use by foreign banking institutions to process transactions on behalf
of a North Korean financial institution, including access through the
use of indirect correspondent accounts held by those foreign
institutions. A violation of the special measure could result in the
imposition of civil monetary or criminal penalties.
A. 1010.659(a)--Definitions
1. North Korean Financial Institution
A North Korean financial institution would mean any branch, office,
or subsidiary of any foreign financial institution, as defined at 31
CFR 1010.605(f), chartered or licensed by North Korea, including any
branches, offices, or subsidiaries of such financial institution
operating in any jurisdiction, and any branch or office within North
Korea of any foreign financial institution.
2. Foreign Banking Institution
Foreign banking institution has the same meaning as provided in 31
CFR 1010.100(u).
3. Correspondent Account
Section 1010.659(a)(3) of the proposed rule would define the term
``correspondent account'' by reference to the definition contained in
31 CFR 1010.605(c)(1)(i). Section 1010.605(c)(1)(i) defines a
correspondent account to mean an account established to receive
deposits from, or make payments or other disbursements on behalf of, a
foreign financial institution, or to handle other financial
transactions related to the foreign financial institution. Under this
definition, ``payable through accounts'' are a type of correspondent
account.
In the case of a U.S. depository institution, this broad definition
includes most types of banking relationships between a U.S. depository
institution and a foreign bank that are established to provide regular
services, dealings, and other financial transactions, including a
demand deposit, savings deposit, or other transaction or asset account,
and a credit account or other extension of credit. FinCEN is using the
same definition of ``account'' for purposes of this proposed rule as
was established for depository institutions in the final rule
implementing the provisions of section 312 of the USA PATRIOT Act
requiring enhanced due diligence for correspondent accounts maintained
for certain foreign banks.\12\
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\12\ See 31 CFR 1010.605(c)(2)(i).
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In the case of securities broker-dealers, futures commission
merchants, introducing brokers-commodities, and investment companies
that are open-end companies (``mutual funds''), FinCEN is also using
the same definition of ``account'' for purposes of this proposed rule
as was established for these entities in the final rule implementing
the provisions of section 312 of the USA PATRIOT Act requiring enhanced
due diligence for correspondent accounts maintained for certain foreign
banks.\13\
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\13\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
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4. Covered Financial Institution
Section 1010.659(a)(4) of the proposed rule would define ``covered
financial institution'' with the same definition used in the final rule
implementing the provisions of section 312 of the USA PATRIOT Act,\14\
which in general includes the following:
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\14\ See 31 CFR 1010.605(e)(1).
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An insured bank (as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h);
a commercial bank;
an agency or branch of a foreign bank in the United
States;
a Federally insured credit union;
a savings association;
a corporation acting under section 25A of the Federal
Reserve Act (12 U.S.C. 611);
a trust bank or trust company;
a broker or dealer in securities;
a futures commission merchant or an introducing broker-
commodities; and
a mutual fund.
5. Subsidiary
Section 1010.659(a)(5) of the proposed rule would define
``subsidiary'' as a company of which more than 50 percent of the voting
stock or analogous equity interest is owned by another company.
B. 1010.659(b)--Prohibition on Accounts and Due Diligence Requirements
for Covered Financial Institutions
1. Prohibition on Opening or Maintaining Correspondent Accounts
Section 1010.659(b)(1) and (2) of the proposed rule would prohibit
covered financial institutions from establishing, maintaining,
administering, or managing in the United States any correspondent
account for or on behalf of a North Korean banking institution. It
would also prohibit processing of a transaction involving a North
Korean financial institution through the U.S. correspondent account of
a foreign banking institution. These prohibitions would not supersede
the blocking of property under any Executive order issued pursuant to
the International Emergency Economic Powers Act (50 U.S.C. 1701 et
seq.) (IEEPA) or 31 CFR Chapter V.
2. Special Due Diligence for Correspondent Accounts To Prohibit Use
As a corollary to the prohibitions set forth in section
1010.659(b)(1) and (2), section 1010.659(b)(3) of the proposed rule
would require a covered financial institution to apply special due
diligence to all of its foreign correspondent accounts that is
reasonably designed to guard against processing transactions involving
North Korean financial institutions. As part of that special due
diligence, covered financial institutions must notify those foreign
correspondent account holders that the covered financial institutions
know or have reason to believe provide services to a North Korean
financial institution that such correspondents may not provide a North
Korean financial institution with access to the correspondent account
maintained at the covered financial institution. A covered financial
institution may satisfy this notification requirement using the
following notice:
Notice: Pursuant to U.S. regulations issued under Section 311 of
the USA PATRIOT Act, see 31 CFR 1010.659, we are prohibited from
establishing, maintaining, administering, or managing a
correspondent account for, or on behalf of, a North Korean financial
institution. The regulations also require us to notify you that you
may not provide a North Korean financial institution, including any
of its branches, offices, or subsidiaries, with access to the
correspondent account you hold at our financial institution. If we
become aware that the correspondent account you hold at our
financial institution has processed any transactions involving a
North Korean financial institution, including any of its branches,
offices, or subsidiaries, we will be required to take appropriate
steps to prevent such access, including terminating your account.
Covered financial institutions should implement appropriate risk-
based procedures to identify transactions involving a North Korean
financial institution. A covered financial institution may, for
example, have knowledge through transaction screening software that a
correspondent processes transactions for a North Korean financial
institution. The purpose of the notice requirement is to aid
cooperation with correspondent
[[Page 35669]]
account holders in preventing transactions involving a North Korean
financial institution from accessing the U.S. financial system. FinCEN
would not require or expect a covered financial institution to obtain a
certification from any of its correspondent account holders that access
will not be provided to comply with this notice requirement.
Methods of compliance with the notice requirement could include,
for example, transmitting a one-time notice by mail, fax, or email. The
notice should be transmitted whenever a covered financial institution
knows or has reason to believe that a foreign correspondent account
holder provides services to a North Korean financial institution.
FinCEN specifically solicits comments on the form and scope of the
notice that would be required under the rule.
The special due diligence would also include implementing risk-
based procedures designed to identify any use of correspondent accounts
to process transactions involving North Korean financial institutions.
A covered financial institution would be expected to apply an
appropriate screening mechanism to identify a funds transfer order that
on its face listed a North Korean financial institution as the
financial institution of the originator or beneficiary, or otherwise
referenced a North Korean financial institution in a manner detectable
under the financial institution's normal screening mechanisms. An
appropriate screening mechanism could be the mechanisms used by a
covered financial institution to comply with various legal
requirements, such as the commercially available software programs used
to comply with the economic sanctions programs administered by OFAC.
A covered financial institution would also be required to implement
risk-based procedures to identify indirect use of its correspondent
accounts, including through methods used to disguise the originator or
originating institution of a transaction. Specifically, FinCEN is
concerned that a North Korean financial institution may attempt to
disguise its transactions by relying on types of payments and accounts,
including the use of front companies, which would not explicitly
identify the North Korean institution as an involved party in the
transaction. A financial institution may develop a suspicion of such
misuse based on other information in its possession, patterns of
transactions, or any other method available to it based on its existing
systems. Under the proposed rule, a covered financial institution that
suspects or has reason to suspect use of a correspondent account to
process a transaction involving a North Korean financial institution
must take all appropriate steps to attempt to verify and prevent such
use, including a notification to its correspondent account holder
requesting further information regarding a transaction, requesting
corrective action to address the perceived risk and, where necessary,
terminating the correspondent account. A covered financial institution
may re-establish an account closed under the rule if it determines that
the account will not be used to process transactions involving North
Korean financial institutions. FinCEN specifically solicits comments on
the requirement under the proposed rule that covered financial
institutions take reasonable steps to prevent any processing of
transactions involving North Korean financial institutions.
3. Recordkeeping and Reporting
Section 1010.659(b)(4) of the proposed rule would clarify that
paragraph (b) of the rule does not impose any reporting requirement
upon any covered financial institution that is not otherwise required
by applicable law or regulation. A covered financial institution must,
however, document its compliance with the notification requirement
under section 1010.659(b)(3)(i)(A).
IV. Request for Comments
FinCEN invites comments on all aspects of the proposal to impose
the fifth special measure against North Korea and specifically invites
comments on the following matters:
1. The finding that North Korea is a jurisdiction of primary money
laundering concern;
2. The form and scope of the notice to certain correspondent
account holders that would be required under the rule;
3. The appropriate scope of the proposed requirement for a covered
financial institution to take reasonable steps to identify any use of
its foreign correspondent accounts to process transactions involving
North Korean financial institutions; and
4. The appropriate steps a covered financial institution should
take once it identifies use of one of its foreign correspondent
accounts to process transactions involving a North Korean financial
institution.
V. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') requires the agency to ``prepare and make
available for public comment an initial regulatory flexibility
analysis'' that will ``describe the impact of the proposed rule on
small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA allows an
agency to certify a rule, in lieu of preparing an analysis, if the
proposed rulemaking is not expected to have a significant economic
impact on a substantial number of small entities.
A. Proposal To Prohibit Covered Financial Institutions From Opening or
Maintaining Correspondent Accounts With Certain Foreign Banks Under the
Fifth Special Measure
1. Estimate of the Number of Small Entities to Whom the Proposed Fifth
Special Measure Will Apply
For purposes of the RFA, both banks and credit unions are
considered small entities if they have less than $550,000,000 in
assets.\15\ Of the estimated 6,192 banks, 80 percent have less than
$550,000,000 in assets and are considered small entities.\16\ Of the
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000
in assets.\17\
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\15\ Table of Small Business Size Standards Matched to North
American Industry Classification System Codes, Small Business
Administration Size Standards (SBA Feb. 26, 2016) [hereinafter ``SBA
Size Standards'']. (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf).
\16\ Federal Deposit Insurance Corporation, Find an Institution,
http://www2.fdic.gov/idasp/main.asp; select Size or Performance:
Total Assets, type Equal or less than $: ``550000'' and select Find.
\17\ National Credit Union Administration, Credit Union Data,
http://webapps.ncua.gov/customquery/; select Search Fields: Total
Assets, select Operator: Less than or equal to, type Field Values:
``550000000'' and select Go.
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Broker-dealers are defined in 31 CFR 1010.100(h) as those broker-
dealers required to register with the Securities and Exchange
Commission (SEC). For the purposes of the RFA, FinCEN relies on the
SEC's definition of small business as previously submitted to the Small
Business Administration (SBA). The SEC has defined the term small
entity to mean a broker or dealer that: (1) Had total capital (net
worth plus subordinated liabilities) of less than $500,000 on the date
in the prior fiscal year as of which its audited financial statements,
were prepared pursuant to Rule 17a-5(d) or, if not required to file
such statements, a broker or dealer that had total capital (net worth
plus subordinated debt) of less than $500,000 on the last business day
of the preceding fiscal year (or in the time that it has been in
business if shorter); and (2) is not affiliated with any person (other
than a natural person) that is not a small business or small
organization as
[[Page 35670]]
defined in this release.\18\ Based on SEC estimates, 17 percent of
broker-dealers are classified as small entities for purposes of the
RFA.\19\
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\18\ 17 CFR 240.0-10(c).
\19\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871
small broker-dealers of the 5,063 total registered broker-dealers).
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Futures commission merchants (FCMs) are defined in 31 CFR
1010.100(x) as those FCMs that are registered or required to be
registered as a FCM with the Commodity Futures Trading Commission
(CFTC) under the Commodity Exchange Act (CEA), except persons who
register pursuant to section 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2).
Because FinCEN and the CFTC regulate substantially the same population,
for the purposes of the RFA, FinCEN relies on the CFTC's definition of
small business as previously submitted to the SBA. In the CFTC's
``Policy Statement and Establishment of Definitions of `Small Entities'
for Purposes of the Regulatory Flexibility Act,'' the CFTC concluded
that registered FCMs should not be considered to be small entities for
purposes of the RFA.\20\ The CFTC's determination in this regard was
based, in part, upon the obligation of registered FCMs to meet the
capital requirements established by the CFTC.
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\20\ 47 FR 18618, 18619 (Apr. 30, 1982).
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For purposes of the RFA, an introducing broker-commodities dealer
is considered small if it has less than $35,500,000 in gross receipts
annually.\21\ Based on information provided by the National Futures
Association (NFA), 95 percent of introducing brokers-commodities
dealers have less than $35.5 million in adjusted net capital and are
considered to be small entities.
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\21\ SBA Size Standards at 28.
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Mutual funds are defined in 31 CFR 1010.100(gg) as those investment
companies that are open-end investment companies that are registered or
are required to register with the SEC. For the purposes of the RFA,
FinCEN relies on the SEC's definition of small business as previously
submitted to the SBA. The SEC has defined the term ``small entity''
under the Investment Company Act to mean ``an investment company that,
together with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of the
end of its most recent fiscal year.'' \22\ Based on SEC estimates,
seven percent of mutual funds are classified as ``small entities'' for
purposes of the RFA under this definition.\23\
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\22\ 17 CFR 270.0-10.
\23\ 78 FR 23637, 23658 (April 19, 2013).
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As noted above, 80 percent of banks, 92.5 percent of credit unions,
17 percent of broker-dealers, 95 percent of introducing broker-
commodities dealers, no FCMs, and seven percent of mutual funds are
small entities.
2. Description of the Projected Reporting and Recordkeeping
Requirements of the Fifth Special Measure
The proposed fifth special measure would require covered financial
institutions to provide a notification intended to aid cooperation from
foreign correspondent account holders in preventing transactions
involving North Korean financial institutions from being processed by
the U.S. financial system. FinCEN estimates that the burden on
institutions providing this notice is one hour. Covered financial
institutions would also be required to take reasonable measures to
detect use of their correspondent accounts to process transactions
involving North Korean financial institutions.
All U.S. persons, including U.S. financial institutions, currently
must comply with OFAC sanctions, and U.S. financial institutions have
suspicious activity reporting requirements. U.S. financial institutions
are currently subject to a range of sanctions prohibitions related to
North Korea, which has limited their direct exposure to the North
Korean financial system. More recently, on March 15, 2016, the
President issued Executive Order 13722, which places additional
sanctions on North Korea and has the effect of generally prohibiting
U.S. financial institutions from processing transactions involving
persons located in North Korea and the North Korean government, unless
authorized by OFAC.\24\ Therefore, current transactional activity
between U.S. financial institutions and North Korean banks is very
constricted. Further, North Korea is subject to a range of United
Nations sanctions resolutions and it has been consistently called out
by the FATF for its AML deficiencies. This has limited the number of
foreign banking institutions that maintain ties or accounts with North
Korean banks. Thus, the special due diligence that would be required
under the BSA by the imposition of the fifth special measure--i.e., the
one-time transmittal of notice to certain correspondent account
holders, the screening of transactions to identify any use of
correspondent accounts, and the implementation of risk-based measures
to detect use of correspondent accounts--would not impose a significant
additional economic burden upon small U.S. financial institutions.
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\24\ See E.O. 13722 ``Blocking Property of the Government of
North Korea and the Workers Party of Korea, and Prohibiting Certain
Transactions With Respect to North Korea'' (2016) (https://www.gpo.gov/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf).
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B. Certification
For these reasons, FinCEN certifies that the proposals contained in
this rulemaking would not have a significant impact on a substantial
number of small businesses.
FinCEN invites comments from members of the public who believe
there would be a significant economic impact on small entities from the
imposition of the fifth special measure regarding North Korea.
VI. Paperwork Reduction Act
The collection of information contained in this proposed rule is
being submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of information should be sent to
the Desk Officer for the Department of Treasury, Office of Information
and Regulatory Affairs, Office of Management and Budget, Paperwork
Reduction Project (1506), Washington, DC 20503 (or by email to oira
[email protected]) with a copy to FinCEN by mail or email at the
addresses previously specified. Comments should be submitted by one
method only. Comments on the collection of information should be
received by August 2, 2016. In accordance with the requirements of the
Paperwork Reduction Act and its implementing regulations, 5 CFR 1320,
the following information concerning the collection of information as
required by 31 CFR 1010.659 is presented to assist those persons
wishing to comment on the information collection.
A. Proposed Information Collection Under the Fifth Special Measure
The notification requirement in section 1010.659(b)(3)(i) is
intended to aid cooperation from correspondent account holders in
denying North Korea access to the U.S. financial system. The
information required to be maintained by section 1010.659(b)(4)(i)
would be used by federal agencies and certain self-regulatory
organizations to verify compliance by covered financial institutions
with the provisions of 31 CFR 1010.659. The collection of information
would be mandatory.
Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing
brokers-
[[Page 35671]]
commodities, money services businesses, and mutual funds.
Estimated Number of Affected Financial Institutions: 5,000.
Estimated Average Annual Burden in Hours Per Affected Financial
Institution: The estimated average burden associated with the
collection of information in this proposed rule is one hour per
affected financial institution.
Estimated Total Annual Burden: 5,000 hours.
FinCEN specifically invites comments on: (a) Whether the proposed
collection of information is necessary for the proper performance of
the mission of FinCEN, including whether the information would have
practical utility; (b) the accuracy of FinCEN's estimate of the burden
of the proposed collection of information; (c) ways to enhance the
quality, utility, and clarity of the information required to be
maintained; (d) ways to minimize the burden of the required collection
of information, including through the use of automated collection
techniques or other forms of information technology; and (e) estimates
of capital or start-up costs and costs of operation, maintenance, and
purchase of services to report the information.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
OMB control number.
VII. Executive Order 12866
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility. It
has been determined that the proposed rule is not a ``significant
regulatory action'' for purposes of Executive Order 12866.
List of Subjects in 31 CFR Part 1010
Administrative practice and procedure, Banks and banking, Brokers,
Counter-money laundering, Counter-terrorism, Foreign banking.
Authority and Issuance
For the reasons set forth in the preamble, part 1010, chapter X of
title 31 of the Code of Federal Regulations, is proposed to be amended
as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314,
5316-5332; Title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
2. Add Sec. 1010.659 to read as follows:
Sec. 1010.659 Special measures against North Korea.
(a) Definitions. For purposes of this section:
(1) North Korean financial institution means all branches, offices,
or subsidiaries of any foreign financial institution, as defined at
Sec. 1010.605(f), chartered or licensed by North Korea, wherever
located, including any branches, offices, or subsidiaries of such
financial institution operating in any jurisdiction, and any branch or
office within North Korea of any foreign financial institution.
(2) Foreign banking institution has the same meaning as provided in
Sec. 1010.100(u).
(3) Correspondent account has the same meaning as provided in Sec.
1010.605(c)(1)(i).
(4) Covered financial institution has the same meaning as provided
in Sec. 1010.605(e)(1).
(5) Subsidiary means a company of which more than 50 percent of the
voting stock or analogous equity interest is owned by another company.
(b) Prohibition on accounts and due diligence requirements for
covered financial institutions--(1) Opening or maintenance of
correspondent accounts. A covered financial institution shall not open
or maintain in the United States a correspondent account for, or on
behalf of, a North Korean banking institution.
(2) Prohibition on use of correspondent accounts. A covered
financial institution shall not process a transaction for the
correspondent account of a foreign banking institution in the United
States if such transaction involves a North Korean financial
institution.
(3) Special due diligence of correspondent accounts to prohibit
use. (i) A covered financial institution shall apply special due
diligence to its foreign correspondent accounts that is reasonably
designed to guard against their use to process transactions involving
North Korean financial institutions. At a minimum, that special due
diligence must include:
(A) Notifying those foreign correspondent account holders that the
covered financial institution knows or has reason to believe provide
services to a North Korean financial institution that such
correspondents may not provide a North Korean financial institution
with access to the correspondent account maintained at the covered
financial institution; and
(B) Taking reasonable steps to identify any use of its foreign
correspondent accounts by a North Korean financial institution, to the
extent that such use can be determined from transactional records
maintained in the covered financial institution's normal course of
business.
(ii) A covered financial institution shall take a risk-based
approach when deciding what, if any, other due diligence measures it
reasonably must adopt to guard against the use of its foreign
correspondent accounts to process transactions involving North Korean
financial institutions.
(iii) A covered financial institution that knows or has reason to
believe that a foreign banking institution's correspondent account has
been or is being used to process transactions involving a North Korean
financial institution shall take all appropriate steps to further
investigate and prevent such access, including the notification of its
correspondent account holder under paragraph (b)(3)(i)(A) of this
section and, where necessary, termination of the correspondent account.
(4) Recordkeeping and reporting. (i) A covered financial
institution is required to document its compliance with the notice
requirement set forth in paragraph (b)(3)(i)(A) of this section.
(ii) Nothing in this paragraph (b) shall require a covered
financial institution to report any information not otherwise required
to be reported by law or regulation.
Jamal El-Hindi,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-13037 Filed 6-2-16; 8:45 am]
BILLING CODE 4810-02-P