[Federal Register Volume 81, Number 231 (Thursday, December 1, 2016)]
[Rules and Regulations]
[Pages 86577-86579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28752]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB27


Supplemental Information Regarding the Final Rule Imposing the 
Fifth Special Measure Against FBME Bank, Ltd.

AGENCY: Financial Crimes Enforcement Network (``FinCEN'').

ACTION: Supplement to final rule.

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SUMMARY: In its September 20, 2016 order, the U.S. District Court for 
the District of Columbia remanded to FinCEN the final rule imposing a 
prohibition on covered financial institutions from opening or 
maintaining correspondent accounts for, or on behalf of, FBME Bank, 
Ltd. In its memorandum opinion accompanying that order, the Court 
stated that the agency had not responded meaningfully to FBME's 
comments regarding the agency's treatment of aggregate Suspicious 
Activity Report (SAR) data. The Court found that those comments 
challenged FinCEN's interpretation of SAR data on at least four 
distinct grounds. In this supplement to the final rule, FinCEN provides 
further explanation addressing FBME's comments.

DATES: December 1, 2016.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800) 
767-2825 or [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

    In its September 20, 2016 order, the U.S. District Court for the 
District of Columbia remanded to FinCEN the final rule imposing a 
prohibition on covered financial institutions from opening or 
maintaining correspondent accounts for, or on behalf of, FBME Bank, 
Ltd. (FBME). In its memorandum opinion accompanying that order, the 
Court stated that the agency had not responded meaningfully to FBME's 
comments regarding the agency's treatment of aggregate SAR data. In 
this supplement to the final rule, FinCEN notes that FBME's comments 
regarding FinCEN's use of SARs in the rulemaking process reflect a 
misunderstanding of SARs generally and how FinCEN analyzed and used 
SARs in this rulemaking.
    As an initial matter, FBME overstates the centrality of the use of 
SARs in FinCEN's determination that FBME is of primary money laundering 
concern. As reflected in the agency's Notice of Finding (NOF), Final 
Rule, and Administrative Record, far from being the only evidence that 
informed FinCEN's determination that FBME is of primary money 
laundering concern, the agency's analysis of SARs simply affirmed 
FinCEN's concern surrounding FBME's involvement in money laundering 
that was informed by other information in the Administrative Record. 
For instance, as detailed in the NOF, this information included: (1) An 
FBME customer's receipt of a deposit of hundreds of thousands of 
dollars from a financier for Lebanese Hezbollah; (2) providing 
financial services to a financial advisor for a major transnational 
organized crime figure; (3) FBME's facilitation of funds transfers to 
an FBME account involved in fraud against a U.S. person, with the FBME 
customer operating the alleged fraud scheme later being indicted in the 
United States District Court for the Northern District of Ohio; and (4) 
FBME's facilitation of U.S. sanctions evasion through its extensive 
customer base of shell companies, including at least one FBME customer 
that was a front company for a U.S.-sanctioned Syrian entity, the 
Scientific Studies and Research Center, which used its FBME account to 
process transactions through the U.S. financial system.
    Set forth below are summaries of FBME's four arguments in its 
comments surrounding FinCEN's interpretation of SARs and the agency's 
responses.
    1. FBME argues that SARs are so over-inclusive--``sweeping in [so 
many] transactions that are perfectly legitimate''--that 
``categorically'' viewing SARs as indicative of illicit transactions is 
``invalid and improper.''
    In its January 26, 2016 comments, FBME asserted that:

    To paint FBME as posing a significant threat to U.S. and other 
financial institutions, FinCEN relies on limited and misleading 
statistical data regarding ``suspicious wire transfers'' as well as 
biased reports from financial institutions seeking to offload 
responsibility for their own actions. During the hearing before 
Judge Cooper, FinCEN revealed that the statistical data relied upon 
in the NOF was based on SARs. But such reliance is categorically 
invalid and improper. To begin, we know of no instance, prior to 
this proceeding, in which FinCEN has equated any particular SARs 
data or rate as indicative of a problem under Section 311 [of the 
USA PATRIOT Act]. Nor is such use valid. To the contrary, it ignores 
the purpose of a SAR, which involves a designedly low threshold for 
the sake of erring on the side of over-inclusion--sweeping in 
transactions that are perfectly legitimate, simply to ensure there 
is scrutiny of them to ensure against any issue. It is spurious in 
this light to take a SAR or any number of them as evidencing the 
illegitimacy of any transaction or set thereof--not to mention as 
evidence that a particular bank is one of ``primary money laundering 
concern'' under Section 311.\1\
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    \1\ FBME's January 26, 2016 Comments, pp. 50-51.

    Contrary to FBME's assumptions, FinCEN analyzed the SARs as 
qualitative evidence of activity conducted by FBME that reflected one 
of FinCEN's primary concerns about FBME--specifically, a 
``[s]ignificant [v]olume'' of ``[o]bscured [t]ransactions'' as 
indicated in part by the size and number of ``[w]ire transfers related 
to suspected shell company activities.'' NOF, 79 FR at 42640. While 
FinCEN recognizes that actual wrongdoing does not necessarily underlie 
the suspicious activity described in any particular SAR, many of the 
SARs relating to FBME described typical indicators of shell company 
activity. As FinCEN has explained, it is particularly concerned, among 
other things, by the lack of

[[Page 86578]]

transparency associated with transactions by FBME's shell company 
customers, and the high volume of U.S. dollar transactions conducted by 
these shell companies with no apparent business purpose. March 31, 2016 
Final Rule, 81 FR at 18487. Therefore, when reviewing SARs associated 
with such activity, FinCEN appropriately concluded that they were 
indicative of potential money laundering. In addition to the SARs as 
well as other information available to FinCEN discussed in the NOF and 
Final Rule, the agency's concerns were supported by FBME's own 
acknowledgement in its January 26, 2016 comment that it transacted with 
shell companies.
    Moreover, with respect to FBME's claim that SARs are over-
inclusive, based on FinCEN's extensive experience with SAR filings and 
the other illicit conduct at FBME detailed in the NOF, Final Rule, and 
Administrative Record, FinCEN assesses it more likely that the SARs 
understate the size and frequency of shell company and other suspicious 
activity conducted by FBME. The SARs include only the information that 
financial institutions identified and reported to FinCEN; they do not 
necessarily reflect all suspicious transactions engaged in by FBME. 
FinCEN assesses that such is the case here given FinCEN's determination 
that FBME has sought to evade anti-money laundering (AML) regulations, 
has ignored the Central Bank of Cyprus' AML directives, and that 
following the issuance of the NOF, FBME employees took various measures 
to obscure information, all of which may have undermined the ability of 
U.S. financial institutions to detect and report all of FBME's 
suspicious activity.
    2. FBME argues that while the absolute dollar amounts of 
transactions tagged as ``suspicious'' might appear high on the surface, 
they represented a small proportion of FBME's overall transactions.
    FBME notes that while the NOF highlighted ``at least 4,500 
suspicious wire transfers through U.S. correspondent accounts that 
totaled at least $875 million between November 2006 and March 2013,'' 
that figure represented, according to FBME, ``only 0.55% of the total 
amount of transfers and 0.81% of the [U.S. dollar] amount of transfers 
conducted by FBME during this period.'' \2\ In other words, FBME 
asserts without supporting evidence that the SARs reflect a small 
portion of the bank's total transactions. But the final rule never 
suggested otherwise; FinCEN may identify a bank as a financial 
institution of primary money laundering concern pursuant to Section 311 
even if it has extensive legitimate activities.
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    \2\ FBME's January 26, 2016 Comments, p. 52.
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    FinCEN considered the volume of suspicious transactions in absolute 
terms--not whether such money laundering was a greater percentage of 
FBME's activities than that suggested in FBME's comments. FBME's 
comment incorrectly assumes that FinCEN's focus in the NOF was, or 
should have been, based upon a percentage of suspicious activity by 
FBME's customers. To the contrary, FinCEN made clear it was concerned 
by the substantial volume of all suspicious activity at the bank, 
including the suspicious activity reported in SARs and that described 
in other sources available to the agency and included in the 
Administrative Record. The overall amount of such activity informed 
FinCEN's evaluation of the ``extent to which'' FBME has been ``used to 
facilitate or promote money laundering'' \3\ and its conclusion that 
``FBME facilitated a substantial volume of money laundering through the 
bank for many years.'' \4\ FinCEN finds the opportunity for money 
laundering of such a magnitude and through so many transactions to be 
``substantial'' because, in absolute terms, it poses a significant 
threat to the U.S. and international financial systems, potentially 
allowing large amounts of funding to pass to terrorist or criminal 
activity. FinCEN does not find that the size of a bank that facilitates 
a substantial amount of money laundering is determinative of the threat 
posed by that activity. Adopting such an assumption would essentially 
permit significant volumes of money to pass through large banks. In any 
event, for the reasons described in the preceding section, FinCEN 
assesses that it is more likely that, if anything, the SARs understate 
the size and frequency of suspicious activity conducted by FBME.
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    \3\ 31 U.S.C. 5318A(c)(2)(B)(i).
    \4\ 79 FR 42639 (July 22, 2014).
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    3. FBME criticizes FinCEN for ``fail[ing] to consider alternative 
bases for the increase in SARs involving FBME * * * between April 2013 
and April 2014,'' particularly the ``Cypriot financial crisis and 
attendant controls.''
    FinCEN recognizes that suspicious activity and reports of such 
activity could be influenced by a number of factors, including 
financial developments within a country or internationally, but FinCEN 
views this scenario as inapplicable in this case. SARs typically deal 
with suspicious activity by individuals and entities conducting 
transactions, not systemic issues involving debt defaults and liquidity 
challenges by financial institutions. FinCEN did not rely on any 
suggestion that the number of SAR filings involving FBME increased 
during the Cypriot financial crisis as compared to past periods in the 
analysis. In addition, FinCEN finds no reason to assume that any 
renewed focus on Cypriot financial controls would decrease rather than 
increase the credibility of SAR filings as to FBME, let alone decrease 
the credibility of those filings to such an extent as to undermine its 
finding of a substantial volume of shell company activity at FBME. 
Finally, the NOF highlighted suspected shell company activities 
accounting for hundreds of millions of dollars between 2006-2014; \5\ 
such activity was not limited to the period of the Cypriot financial 
crisis.
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    \5\ 79 FR 42639 at 42640 (July 22, 2014).
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    4. FBME faults FinCEN for failing to provide either a ``point of 
comparison between FBME and other * * * banks that [the agency] 
considers similarly situated but less deserving of suspicion given 
their SAR statistics,'' or ``any baseline for the SARs statistics it 
considers standard or acceptable for an international bank like FBME.''
    Again, FBME misunderstands the role that SARs played in FinCEN's 
analysis, incorrectly assuming that the analysis necessarily depended 
on a relative comparison to other banks. FBME appears to assume that 
SAR filings, or the absolute number and size of suspicious transactions 
described in such filings, are not in themselves relevant, but instead 
that only relative SAR rates among banks can be an indication of 
significant suspicious activity. FinCEN finds this assumption 
unwarranted. FinCEN found that the SAR filings discussed in the NOF 
informative of significant shell company activity at FBME to be 
``substantial'' because, in absolute terms, it poses a significant 
threat to the U.S. and international financial system, potentially 
allowing large amounts of funding to pass to terrorist or criminal 
activity. This conclusion did not depend on comparison with other 
banks.
    In addition, as noted in the NOF and Final Rule, FinCEN concluded 
that FBME has sought to evade AML regulations, has ignored the Central 
Bank of Cyprus' AML directives, and that following the issuance of the 
NOF, FBME employees took various measures to obscure information. These 
facts distinguish FBME from other Cypriot banks and may have undermined 
the ability of U.S. financial institutions to detect all of FBME's 
suspicious activity,

[[Page 86579]]

underscoring the high likelihood that SARs involving FBME are actually 
under-inclusive. Given FinCEN's concern regarding FBME's willingness to 
evade AML regulations that may have inhibited the identification of 
suspicious activity by U.S. financial institutions, a comparison of 
SARs filed on FBME compared to other Cypriot financial institutions 
would not necessarily portray the relevant risk posed by FBME.
    More broadly, FinCEN notes that setting a benchmark as FBME 
suggests could simply set a target for banks or customers wishing to 
evade money laundering controls. Instead, the agency reviews relevant 
information and determines whether all of that information, taken 
together, justifies action under Section 311. FinCEN is daily immersed 
in the global flow of financial intelligence, including SARs, and is 
tasked as a policy matter with identifying concerns within that 
intelligence stream. As discussed above, FinCEN assesses that the 
volume of shell company activity reflected in the Administrative 
Record, including SARs filed on FBME, is substantial.

    Dated: November 23, 2016.
Jamal El-Hindi,
Deputy Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-28752 Filed 11-30-16; 8:45 am]
 BILLING CODE 4810-02-P