[Federal Register Volume 83, Number 33 (Friday, February 16, 2018)]
[Proposed Rules]
[Pages 6986-6994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03214]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Part 1010
RIN 1506-AB39
Proposal of Special Measure Against ABLV Bank, AS as a Financial
Institution of Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN is issuing a notice of proposed rulemaking (NPRM),
pursuant to Section 311 of the USA PATRIOT Act, to prohibit the opening
or maintaining of a correspondent account in the United States for, or
on behalf of, ABLV Bank, AS.
DATES: Written comments on the notice of proposed rulemaking must be
submitted on or before April 17, 2018.
ADDRESSES: You may submit comments, identified by RIN-1506-AB39, by any
of the following methods:
Federal E-rulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Include Docket Number
FinCEN-2017-0013 and RIN-1506-AB39 in the submission.
Mail: The Financial Crimes Enforcement Network, P.O. Box
39, Vienna, VA 22183. Include RIN-1506-AB39 in the body of the text.
Any comments submitted by mail must be postmarked by the due date for
comments indicated above. 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 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 amends the anti-
money laundering (AML) 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 Chapter X. The
authority of the Secretary of the Treasury (the Secretary) to
administer the BSA and its implementing regulations has been delegated
to FinCEN.
Section 311 of the USA PATRIOT Act (Section 311), codified at 31
U.S.C. 5318A, grants FinCEN the authority, upon finding that reasonable
grounds exist for concluding that a jurisdiction outside of the United
States, one or more financial institutions operating outside of the
United States, one or more classes of transactions within or involving
a jurisdiction outside of the United States, or one or more types of
accounts is of primary money laundering concern, to require domestic
financial institutions and domestic financial agencies to take certain
``special measures.'' The five special measures enumerated in Section
311 are prophylactic safeguards that defend the U.S. financial system
from money laundering and terrorist financing. FinCEN may impose one or
more of these special measures in order to protect the U.S. financial
system from these threats. Special measures one through four, codified
at 31 U.S.C. 5318A(b)(1)-(b)(4), impose additional recordkeeping,
information collection, and reporting requirements on covered U.S.
financial institutions. The fifth special measure, codified at 31
U.S.C. 5318A(b)(5), allows FinCEN to prohibit,
[[Page 6987]]
or impose conditions on, the opening or maintaining in the United
States of correspondent or payable-through accounts for, or on behalf
of, a foreign banking institution, if such correspondent account or
payable-through account involves the foreign financial institution
found to be of primary money laundering concern.
Before making a finding that reasonable grounds exist for
concluding that a foreign financial institution is of primary money
laundering concern, the Secretary is required to consult with both the
Secretary of State and the Attorney General.\1\ The Secretary shall
also consider such information as the Secretary determines to be
relevant, including the following potentially relevant factors:
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\1\ 31 U.S.C. 5318A(c)(1).
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The extent to which such a financial institution is used
to facilitate or promote money laundering in or through the
jurisdiction, including any money laundering activity by organized
criminal groups, international terrorists, or entities involved in the
proliferation of weapons of mass destruction (WMD) or missiles;
The extent to which such a financial institution is used
for legitimate business purposes in the jurisdiction; and
The extent to which such action is sufficient to ensure
that the purposes of Section 311 are fulfilled, and to guard against
international money laundering and other financial crimes.\2\
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\2\ 31 U.S.C. 5318A(c)(2)(B).
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Upon finding that a foreign financial institution is of primary
money laundering concern, the Secretary may require covered financial
institutions to take one or more special measures. In selecting which
special measure(s) to take, the Secretary ``shall consult with the
Chairman of the Board of Governors of the Federal Reserve System, any
other appropriate Federal banking agency (as defined in Section 3 of
the Federal Deposit Insurance Act), the Secretary of State, the
Securities and Exchange Commission, the Commodity Futures Trading
Commission, the National Credit Union Administration Board, and in the
sole discretion of the Secretary, such other agencies and interested
parties as the Secretary [of the Treasury] may find appropriate.'' \3\
In imposing the fifth special measure, the Secretary must do so ``in
consultation with the Secretary of State, the Attorney General, and the
Chairman of the Board of Governors of the Federal Reserve System.'' \4\
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\3\ 31 U.S.C. 5318A(a)(4)(A).
\4\ 31 U.S.C. 5318A(b)(5).
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In addition, in selecting which special measure(s) to take, the
Secretary shall consider the following factors:
Whether similar action has been or is being taken by other
nations or multilateral groups;
Whether the imposition of any particular 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 extent to which the action or the timing of the action
would have a significant adverse systemic impact on the international
payment, clearance, and settlement system, or on legitimate business
activities involving the particular jurisdiction, institution, class of
transactions, or type of account; and
The effect of the action on United States national
security and foreign policy.\5\
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\5\ 31 U.S.C. 5318A(a)(4)(B).
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II. Summary of Notice of Proposed Rulemaking
This NPRM sets forth (i) FinCEN's finding that ABLV Bank, AS
(ABLV), a commercial bank located in Riga, Latvia, is a foreign
financial institution of primary money laundering concern pursuant to
Section 311, and (ii) FinCEN's proposal of a prohibition under the
fifth special measure on the opening or maintaining in the United
States of a correspondent account for, or on behalf of, ABLV. As
described more fully below,\6\ FinCEN has reasonable grounds to believe
that ABLV executives, shareholders, and employees have
institutionalized money laundering as a pillar of the bank's business
practices. As described in further detail below, ABLV management
permits the bank and its employees to orchestrate and engage in money
laundering schemes; solicits the high-risk shell company activity that
enables the bank and its customers to launder funds; maintains
inadequate controls over high-risk shell company accounts; and seeks to
obstruct enforcement of Latvian anti-money laundering and combating the
financing of terrorism (AML/CFT) rules in order to protect these
business practices. In addition, illicit financial activity at the bank
has included transactions for parties connected to U.S. and UN-
designated entities, some of which are involved in North Korea's
procurement or export of ballistic missiles.
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\6\ FinCEN has relied on a variety of sources including
nonpublic information in preparing this proposed rule. When a
statement is sourced in publicly available information, FinCEN will
post an exhibit containing the public source. These exhibits will be
posted with this proposed rule at https://www.regulations.gov.
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III. Background on Latvia's Non-Resident Deposit Sector and ABLV Bank
1. Latvia's Non-Resident Deposit Banking Sector
Due to geography, linguistic profile, and a stable and developed
banking system, Latvia serves as a financial bridge between the
Commonwealth of Independent States (CIS),\7\ European Union (EU) and
U.S. financial systems. While it lacks a legal framework that formally
separates domestic banking business and non-resident banking, most
Latvian banks conduct the majority of their business in either domestic
retail/commercial banking or non-resident banking services, not both.
Non-resident banking in Latvia allows offshore companies, including
shell companies, to hold accounts and transact through Latvian banks.
CIS-based actors often transfer their capital via Latvia, frequently
through complex and interconnected legal structures, to various banking
locales in order to reduce scrutiny of transactions and lower the
transactions' risk rating.
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\7\ The Commonwealth of Independent States (CIS) is a loose
confederation of states making up most of the former Soviet Union.
See http://www.cisstat.com/eng/cis.htm. For the purposes of this
notice, the CIS region encompasses all members, associate members,
and former members of the CIS.
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According to Latvia's Financial Capital and Market Commission
(FCMC), the primary banking regulator, non-resident banking services
contribute between 0.8 and 1.5 percent to Latvia's gross domestic
product (GDP). Non-resident deposits (NRDs) in Latvia are equal to
roughly $13 billion. Latvian NRD banking activity transiting the U.S.
financial system is estimated in recent years to have reached billions
of dollars annually.
The Latvian banking system's reliance on NRD funds for capital
exposes it to increased illicit finance risk. A 2014 report by the
European Commission's Directorate General for Economic and Financial
Affairs (ECFIN) singled out Latvia's reliance on NRD banking as a risk
to Latvia's private sector, for a variety of reasons, including the
fact that ensuring compliance with anti-money laundering rules may be
more challenging for non-resident banks as verifying clients'
background and business activities could prove difficult. Criminal
groups and corrupt officials may use elaborate offshore services to
hide true beneficiaries or create fraudulent business transactions.
[[Page 6988]]
In a positive development, since 2015, the FCMC has led significant
efforts to reform Latvia's AML/CFT regulations and enforcement regime.
However, as noted in the aforementioned 2014 ECFIN report, positive
changes need to be consistently implemented jointly with the banks. The
need to improve the institutional capacity remains a long-term
challenge due to the complexities of investigating and prosecuting
money laundering.
2. ABLV Bank
Established in 1993, ABLV Bank, AS (ABLV) is headquartered in Riga,
Latvia. According to data provided by the Association of Latvian
Commercial Banks, ABLV is the second largest bank in Latvia by assets,
with the equivalent of roughly $4.6 billion as of March 31, 2017. ABLV
is Latvia's largest NRD bank by assets. As further described below, the
majority of ABLV's customers are high-risk shell companies registered
outside of Latvia.
ABLV offers banking, investment, and advisory services. ABLV
currently does not maintain correspondent accounts directly with U.S.
banks, but instead accesses the U.S. financial system through nested
U.S. dollar correspondent relationships with other foreign financial
institutions. Those foreign financial institutions, in turn, hold
direct U.S. correspondent accounts.
ABLV holds several subsidiary entities, including a subsidiary
bank, ABLV Bank, Luxembourg, S.A., located in Luxembourg. The
beneficial owners of ABLV are Ernests Bernis and Oleg Fils. Bernis
holds 4.93 percent of shares in the bank directly, and 43.12 percent of
shares indirectly via Cassandra Holding Company, SIA. Fils holds 43.13
percent of shares in ABLV indirectly through SIA ``OF Holding.''
Unspecified ``other shareholders'' own the remaining equity.
IV. Finding ABLV To Be a Foreign Financial Institution of Primary Money
Laundering Concern
Based on information available to the agency, including both public
and nonpublic reporting, and after performing the requisite interagency
consultations and considering each of the factors discussed below,
FinCEN finds that reasonable grounds exist for concluding that ABLV is
a financial institution operating outside the United States of primary
money laundering concern.
1. The Extent to Which ABLV Has Been Used To Facilitate or Promote
Money Laundering, Including by Entities Involved in the Proliferation
of Weapons of Mass Destruction or Missiles
According to information available to FinCEN, ABLV executives,
shareholders, and employees have institutionalized money laundering as
a pillar of the bank's business practices. ABLV management
orchestrates, and permits the bank and its employees to engage in,
money laundering schemes. Management solicits the high-risk shell
company activity that enables the bank and its customers to launder
funds, maintains inadequate controls over high-risk shell company
accounts, and is complicit in the circumvention of AML/CFT controls at
the bank. As a result, multiple actors have exploited the bank in
furtherance of illicit financial activity, including transactions for
parties connected to U.S. and UN-designated entities, some of which are
involved in North Korea's procurement or export of ballistic missiles.
In addition, ABLV management seeks to obstruct enforcement of Latvian
AML/CFT rules. Through 2017, ABLV executives and management have used
bribery to influence Latvian officials when challenging enforcement
actions and perceived threats to their high-risk business.
ABLV's business practices enable the provision of financial
services to clients seeking to evade financial regulatory requirements.
Bank executives and employees are complicit in their clients' illicit
financial activities, including money laundering and the use of shell
companies to conceal the true nature of illicit transactions and the
identities of those responsible. ABLV is considered innovative and
forward leaning in its approaches to circumventing financial
regulations. The bank proactively pushes money laundering and
regulatory circumvention schemes to its client base and ensures that
fraudulent documentation produced to support financial schemes, some of
which is produced by bank employees themselves, is of the highest
quality.
In 2014, ABLV was involved in the theft of over $1 billion in
assets from three Moldovan banks, BC Unibank S.A., Banca Sociala S.A.,
and Banca de Economii S.A., in which criminals took over the three
Moldovan banks using a non-transparent ownership structure, partly
financed by loans from offshore entities banking at ABLV. Separately,
ABLV previously developed a scheme to assist customers in circumventing
foreign currency controls, in which the bank disguised illegal currency
trades as international trade transactions using fraudulent
documentation and shell company accounts.
As referenced in Section III of this notice, Latvian NRD banks
cater to offshore shell companies, and ABLV is Latvia's largest NRD
bank. Offshore shell company business poses inherent money laundering
risks because of its lack of transparency, and financial institutions
must manage the risks associated with providing financial services to
shell companies. As described in detail below, ABLV's continuing
failure to implement adequate AML controls commensurate with this high
risk has caused the bank to facilitate transactions for shell companies
owned or controlled by illicit actors engaged in transnational
organized criminal activity, corruption, and sanctions evasion.
Oftentimes, these actors take advantage of ABLV's propensity to
facilitate high-risk shell company business, using shell company
accounts to obscure the transparency of their illicit activities.
ABLV does not mitigate these risks effectively. ABLV does not
adequately conduct know-your-customer (KYC) checks or customer due
diligence (CDD) on a number of its customers, does not collect or
update supporting documentation from its customers to justify
transactional activity, and uses fraudulent documentation in some of
its CDD files. Furthermore, the bank has had deficiencies in its
internal control system, including insufficient customer due diligence
and monitoring of transactions.
In an example demonstrative of ABLV's failures to mitigate these
risks, ABLV received a substantial amount of funds from a Russia-based
bank in a manner consistent with an illicit transfer of assets. FinCEN
assesses that ABLV should have known that the shell companies receiving
the Russian bank-sourced funds in their ABLV accounts were related to
the ultimate beneficial owners of the Russia-based bank. Such a pattern
is a hallmark of asset-stripping. In addition, ABLV has facilitated
public corruption through the provision of shell company accounts for
corrupt CIS-based politically exposed persons (PEPs) and other corrupt
actors. Through 2014, for example, Ukrainian tycoon Serhiy Kurchenko
funneled billions of dollars through his ABLV shell company accounts.
Treasury's Office of Foreign Assets Control (OFAC) designated Kurchenko
in 2015, finding that he was responsible for, complicit in, or had
engaged in, directly or indirectly, the misappropriation of state
assets of Ukraine or of an economically significant entity in Ukraine.
ABLV
[[Page 6989]]
maintained at least nine shell company accounts linked to Kurchenko. In
another example, an Azerbaijani PEP engaged in large-scale corruption
and money laundering used a shell company account at ABLV to make a
payment.
ABLV's business practice of banking high-risk shell companies
without appropriate risk mitigation policies and procedures has also
caused the bank to facilitate transactions for parties connected to
U.S.- and UN-designated Democratic People's Republic of Korea (DPRK or
North Korea) entities. These designated entities include Foreign Trade
Bank (FTB), Koryo Bank, Koryo Credit Development Bank, Korea Mining and
Development Trading Corporation (KOMID), and Ocean Maritime Management
Company (OMM), some of which are involved in North Korea's procurement
or export of ballistic missiles. ABLV facilitated transactions related
to North Korea after the bank's summer 2017 announcement of a North
Korea ``No Tolerance'' policy.
Widely available public documents describe North Korean sanctioned
entities' use of front and shell companies and financial
representatives to evade international sanctions. As early as 2014, the
UN Panel of Experts (UN POE) noted in its report that sanctioned North
Korean entities used front companies to evade international sanctions
by hiding the sources of funds. Subsequent UN POE reports expanded on
these findings, highlighting specific examples and methodologies used
by North Korea-related entities to evade sanctions. Since 2011, the
Financial Action Task Force (FATF) has called upon its members and
urged all countries to apply effective countermeasures to protect their
financial systems from the money laundering, terrorist financing, and
proliferation financing threat emanating from the DPRK. More recently,
the FATF has highlighted the DPRK's frequent use of front companies,
shell companies, and opaque ownership structures for the purpose of
evading international sanctions.
FinCEN has found that the DPRK is a foreign jurisdiction of
``primary money laundering concern.'' \8\ In its finding, FinCEN
highlighted North Korea's propensity to use front companies and agents
to evade U.S. and international sanctions. Finally, nongovernmental
research organizations have provided in-depth case studies of DPRK-
linked entities' use of front companies and representatives to evade
international sanctions.
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\8\ 81 FR 78715; November 9, 2016.
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FinCEN assesses that the public nature of these reports,
advisories, and actions should have provided ABLV the necessary
guidance to apply appropriate due diligence to accounts and
transactions that fit the typologies described in these public
documents. However, ABLV's pursuit of high-risk shell company business
and its failure to heed these public warnings and implement an
appropriate risk-mitigating CDD and KYC program enabled certain
customers to exploit ABLV's weaknesses to conduct transactions with
parties connected to designated entities. Certain customers'
counterparties have also been designated by OFAC, further demonstrating
their links to the DPRK.
Ninety percent of ABLV's customers are high-risk per ABLV's own
risk rating methodology and are primarily high-risk shell companies
registered in secrecy jurisdictions. FinCEN assesses that, beginning in
2012 and continuing into 2017, ABLV conducted a high volume of
transactions for shell companies registered outside of Latvia in
offshore secrecy jurisdictions totaling tens of billions of dollars.
FinCEN is aware that ABLV frequently fails to respond to other
financial institutions' questions concerning the nature of the
transactions that ABLV is processing. Multiple U.S. financial
institutions have proactively closed ABLV's U.S. correspondent
accounts. Nonetheless, ABLV's indirect correspondent activity with the
U.S. financial system and its business model of facilitating non-
transparent transactions for shell companies both continue.
While publicly stating that it is implementing plans to reform its
AML/CFT compliance program, ABLV owners and executives have privately
expressed an unwillingness to meaningfully alter ABLV's high-risk
business practices. This fact, combined with ABLV's AML/CFT compliance
issues to date raise serious concerns about the entity's commitment to
implementing these plans. These concerns are further supported by the
fact that ABLV management seeks to obstruct enforcement of Latvian AML/
CFT rules and has used bribery to influence Latvian officials. Any
institution that undermines enforcement actions through such corrupt
acts presents a significant risk that it will continue practices which
facilitate illicit activity.
2. The Extent to Which ABLV Is Used for Legitimate Business Purposes
As an NRD bank catering to non-Latvian customers, the majority of
ABLV's customers are not based in Latvia and do not conduct business in
Latvia outside of holding a bank account at ABLV. As described above,
Latvia's NRD banking sector is a financial bridge between the CIS
region's financial systems and the West. ABLV provides entities,
typically controlled by CIS region-based actors, access to U.S. dollar,
euro, pound sterling, and Swiss franc accounts, and ABLV's
correspondent relationships enable its customers to transact with
counterparties holding accounts at banks across the globe, including
U.S. and EU financial institutions. Oftentimes, NRD customers are shell
companies registered in corporate secrecy jurisdictions that are owned
or controlled by parties in third jurisdictions, typically in the CIS
region.
ABLV may be used for some legitimate purposes. However, the high
number of shell company customers banking at ABLV, some of which are
themselves engaged in money laundering or illicit activity, as
described above, indicates that ABLV is extensively used for illicit
purposes.
While it may carry certain risks or an additional AML/CFT
compliance burden, non-resident banking is not inherently suspicious or
illicit. For example, any non-Latvian entity banking in Latvia would
maintain a ``non-resident'' account. Such non-Latvian clients may
include lower-risk entities, such as publicly traded companies in the
United States or other well-regulated jurisdictions. While such
entities may be engaged in non-proximate banking, the customers' lines
of business, ownership, and activity would be transparent, and the
customers may be considered low-risk pursuant to the bank's internal
policies and procedures and the relevant regulatory framework.
However, 90 percent of ABLV's customers are high-risk per ABLV's
own risk rating methodology, and are primarily high-risk shell
companies registered in secrecy jurisdictions, as discussed previously.
FinCEN assesses that ABLV's shell company customers' involvement in a
wide range of illicit and suspicious activity through ABLV indicates
that ABLV does not properly control NRD accounts to ensure they are
used primarily to conduct legitimate business
As noted above, FinCEN does not believe that ABLV, or its
shareholders and executives, plan to meaningfully implement AML/CFT
reforms. While publicly stating that it is implementing plans to reform
its AML/CFT compliance program, ABLV owners and executives have
privately expressed an unwillingness to meaningfully alter ABLV's high-
risk business practices.
[[Page 6990]]
ABLV's ineffective reform measures are exemplified by its facilitation
of transactions related to North Korea after the bank's summer 2017
announcement of a North Korea ``No Tolerance'' policy, as previously
mentioned. Another illustration of ineffective reform measures is the
facilitation of the aforementioned illicit transfers from a Russian
bank, which occurred while ABLV was under an AML/CFT compliance audit.
2. The Extent to Which This Action Is Sufficient To Guard Against
International Money Laundering and Other Financial Crimes
FinCEN assesses that ABLV is used to facilitate money laundering,
illicit financial schemes and other illicit activity conducted by its
customers and other illicit actors, including actors associated with
transnational organized crime, North Korea's procurement or export of
ballistic missiles, sanctions evasion, and large-scale corruption.
Given the national security threat posed by such activity, FinCEN
believes that imposing a prohibition under the fifth special measure
would be sufficient and necessary to prevent ABLV from continuing to
access the U.S. financial system. This action would guard against
international money laundering activity and other financial crimes
involving ABLV.
Although U.S. financial institutions have proactively closed direct
U.S. correspondent relationships with ABLV, many U.S. financial
institutions continue to process transactions for or on behalf of ABLV
through indirect correspondent banking relationships. This action, if
finalized, would sever ABLV's access to U.S. correspondent accounts,
direct or otherwise.
V. Proposed Prohibition on Covered Financial Institutions From Opening
or Maintaining Correspondent Accounts in the United States for ABLV
After performing the requisite interagency consultations,
considering the relevant factors, and making a finding that ABLV is a
foreign financial institution of primary money laundering concern,
FinCEN proposes a prohibition under the fifth special measure. A
prohibition under the fifth special measure is the most effective and
practical measure to safeguard the U.S. financial system from the
illicit finance risks posed by ABLV.
1. Factors Considered in Proposing a Prohibition Under the Fifth
Special Measure
Below is a discussion of the relevant factors FinCEN considered in
proposing a prohibition under the fifth special measure with respect to
ABLV.
A. Whether Similar Action Has Been or Will Be Taken by Other Nations or
Multilateral Groups Against ABLV
FinCEN is not aware of an action by another nation or multilateral
group that would prohibit or place conditions on ABLV's correspondent
banking relationships. However, according to press reports, the
National Bank of Ukraine issued an advisory on August 28, 2016 to
Ukrainian banks warning that ABLV, among other foreign banks, was
suspected of being related to risky financial operations, including
laundering the revenues of criminal activities. In addition, the FCMC
has conducted examinations of ABLV and issued a fine and reprimand of a
board member in May of 2016. None of these actions, however,
sufficiently protect the U.S. financial system from the illicit finance
risk posed by ABLV.
B. 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
While ABLV is a large bank among Latvian financial institutions, it
is not large by international standards and is not a major participant
in the international payment system. Therefore, FinCEN does not believe
that imposing a prohibition under the fifth special measure would cause
a significant competitive disadvantage or place an undue burden or cost
on U.S. financial institutions.
The special due diligence obligations proposed in this rulemaking
would not create undue costs or burden on U.S. financial institutions.
U.S. financial institutions already generally have systems in place to
screen transactions in order to identify and report suspicious activity
and comply with the sanctions programs administered by OFAC.
Institutions can modify these systems to detect transactions involving
ABLV. ABLV does not currently hold U.S. correspondent bank accounts.
While there may be some additional burden on U.S. financial
institutions in conducting due diligence on foreign correspondent
account holders and notifying them of the prohibition, FinCEN believes
that any such burden will likely be minimal, and certainly not undue,
given the threats posed by ABLV's facilitation of money laundering.
C. 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 ABLV
As noted previously, although ABLV is a large bank among Latvian
financial institutions, it is not large by international standards, is
not a major participant in the international payment system, and is not
relied upon by the international banking community for clearance or
settlement services. Thus, the imposition of a prohibition under the
fifth special measure against ABLV will not have an adverse systemic
impact on the international payment, clearance, and settlement system.
FinCEN also considered the extent to which this action could have an
impact on the legitimate business activities of ABLV and concludes that
the need to protect the U.S. financial system from ABLV, a bank that
facilitates illicit financial activity, strongly outweighs any such
impact.
FinCEN notes that ABLV as of July 2017 maintained euro, Japanese
yen, Hong Kong dollar, pound sterling, and Australian dollar
correspondent accounts, according to a commercial database, and thus is
not necessarily limited to U.S. dollar transactions in its
international wire transfer activity. A prohibition on the opening or
maintaining of U.S. correspondent accounts under the fifth special
measure would not prevent ABLV from conducting legitimate business
activities in foreign currencies as long as such activity does not
involve a correspondent account maintained in the United States.
D. The Effect of the Proposed Action on United States National Security
and Foreign Policy
As described in detail above, financial activity that ABLV has
conducted through the U.S. financial system has consisted largely of
international funds transfers between shell entities registered in
offshore secrecy jurisdictions. FinCEN assesses that this financial
activity includes money laundering and other transactions conducted by
a range of illicit actors that threaten the national security of the
United States. Furthermore, ABLV's business practice of banking high-
risk shell companies without adequate risk mitigation policies and
procedures has caused the bank to facilitate transactions for entities
linked to North Korea. Ensuring the effectiveness of the North Korea
sanctions program is a top
[[Page 6991]]
national security and foreign policy priority of the United States.
Prohibiting covered financial institutions from maintaining a
correspondent account for ABLV, and preventing ABLV's indirect access
to a U.S. correspondent account, will enhance national security. The
proposed action serves as a measure to prevent illicit actors from
accessing the U.S. financial system. It will further the U.S. national
security and foreign policy goals of thwarting sanctions evasion and
preventing other illicit financial activity from transiting the U.S.
financial system. The imposition of a prohibition under the fifth
special measure would also complement the U.S. government's worldwide
efforts to expose and disrupt international money laundering.
2. Consideration of Alternative Special Measures
Under Section 311, special measures one through four enable FinCEN
to impose additional recordkeeping, information collection, and
information reporting requirements on covered financial institutions.
The fifth special measure also enables FinCEN to impose conditions as
an alternative to a prohibition on the opening or maintaining of
correspondent accounts. FinCEN considered alternatives to a prohibition
under the fifth special measure, including the imposition of one or
more of the first four special measures, as well as imposing conditions
on the opening or maintaining of correspondent accounts under the fifth
special measure. For the reasons explained below, FinCEN believes that
a prohibition under the fifth special measure would most effectively
safeguard the U.S. financial system from the illicit finance risks
posed by ABLV.
Given ABLV's apparent disregard of regulatory reform and
enforcement measures, FinCEN does not believe that any condition,
additional recordkeeping requirement, or reporting requirement would be
an effective measure to safeguard the U.S. financial system. Such
measures would not prevent ABLV from accessing directly or indirectly
the correspondent accounts of U.S. financial institutions, thus leaving
the U.S. financial system vulnerable to processing the types of illicit
transfers that pose a national security and money laundering risk. In
addition, no recordkeeping requirement or conditions on correspondent
accounts would be sufficient to guard against the risks posed by a bank
that processes transactions that are designed to obscure the
transactions' true nature and are ultimately for the benefit of illicit
actors or activity. Therefore, a prohibition under the fifth special
measure is the only special measure that can adequately protect the
U.S. financial system from the illicit financial risk posed by ABLV.
VI. Section-by-Section Analysis for the Proposal of a Prohibition Under
the Fifth Special Measure
1010.661(a)--Definitions
1. ABLV Bank, AS
The proposed rule defines ``ABLV'' to mean all subsidiaries,
branches, and offices of ABLV Bank, AS operating as a bank in any
jurisdiction. As noted above, FinCEN is aware of one subsidiary bank,
ABLV Bank, Luxembourg, S.A., located in Luxembourg.
2. Correspondent Account
The proposed rule defines ``Correspondent account'' to have the
same meaning as the definition contained in 31 CFR 1010.605(c)(l)(ii).
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.\9\ Under this definition, ``payable through
accounts'' are a type of correspondent account.
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\9\ 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.\10\
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\10\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
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3. Covered Financial Institution
The proposed rule defines ``covered financial institution'' with
the same definition used in the final rule implementing the provisions
of Section 312 of the USA PATRIOT Act, which in general includes the
following:
[ssquf] An insured bank (as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h));
[ssquf] a commercial bank;
[ssquf] an agency or branch of a foreign bank in the United States;
[ssquf] a Federally insured credit union;
[ssquf] a savings association;
[ssquf] a corporation acting under section 25A of the Federal
Reserve Act (12 U.S.C. 611);
[ssquf] a trust bank or trust company;
[ssquf] a broker or dealer in securities;
[ssquf] a futures commission merchant or an introducing broker-
commodities; and
[ssquf] a mutual fund.
4. Foreign Banking Institution
The proposed rule defines ``foreign banking institution'' to mean a
bank organized under foreign law, or an agency, branch, or office
located outside the United States of a bank. The term does not include
an agent, agency, branch, or office within the United States of a bank
organized under foreign law. This is consistent with the definition of
``foreign bank'' under 31 CFR 1010.100.
5. Subsidiary
The proposed rule defines ``subsidiary'' to mean a company of which
more than 50 percent of the voting stock or analogous equity interest
is owned by another company.
1010.661(b)--Prohibition on Accounts and Due Diligence Requirements for
Covered Financial Institutions
1. Prohibition on Opening or Maintaining Correspondent Accounts
Section 1010.661(b)(1) and (2) of this proposed rule would prohibit
covered financial institutions from opening or maintaining in the
United States a correspondent account for, or on behalf of, ABLV. It
would also require covered financial institutions to take reasonable
steps to not process a transaction for the correspondent account of a
foreign banking institution in the United States if such a transaction
involves ABLV. Such reasonable steps are described in 1010.661(b)(3),
which sets forth the special due diligence requirements a covered
financial institution would be required to take when it knows or has
reason to believe that a transaction involves ABLV.
2. Special Due Diligence for Correspondent Accounts
As a corollary to the prohibition set forth in section
1010.661(b)(1) and (2),
[[Page 6992]]
section 1010.661(b)(3) of the proposed rule would require covered
financial institutions to apply special due diligence to all of their
foreign correspondent accounts that is reasonably designed to guard
against such accounts being used to process transactions involving
ABLV. As part of that special due diligence, covered financial
institutions would be required to notify those foreign correspondent
account holders that the covered financial institutions know or have
reason to believe provide services to ABLV that such correspondents may
not provide ABLV 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 1010.661, we are prohibited from
opening or maintaining in the United States a correspondent account
for, or on behalf of, ABLV. The regulations also require us to
notify you that you may not provide ABLV, including any of its
subsidiaries, branches, and offices 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 ABLV, including any of its
subsidiaries, branches, and offices we will be required to take
appropriate steps to prevent such access, including terminating your
account.
The purpose of the notice requirement is to aid cooperation with
correspondent account holders in preventing transactions involving ABLV
from accessing the U.S. financial system. FinCEN does 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 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 ABLV.
Special due diligence also includes implementing risk-based
procedures designed to identify any use of correspondent accounts to
process transactions involving ABLV. A covered financial institution
would be expected to apply an appropriate screening mechanism to
identify a funds transfer order that on its face listed ABLV as the
financial institution of the originator or beneficiary, or otherwise
referenced ABLV 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.
3. Recordkeeping and Reporting
Section 1010.661(b)(4) of the proposed rule would clarify that the
proposed 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
described above.
VII. Request for Comments
FinCEN invites comments on all aspects of the proposed rule,
including the following specific matters:
1. FinCEN's proposal of a prohibition under the fifth special
measure under 31 U.S.C. 5318A(b), as opposed to special measures one
through four or imposing conditions under the fifth special measure;
2. The form and scope of the notice to certain correspondent
account holders that would be required under the rule; and
3. The appropriate scope of the due diligence requirements in this
proposed rule.
VIII. 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.
1. Proposal to Prohibit Covered Financial Institutions From Opening or
Maintaining Correspondent Accounts With Certain Foreign Banks Under the
Fifth Special Measure
A. 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.\11\ Of the estimated 6,192 banks, 80 percent have less than
$550,000,000 in assets and are considered small entities.\12\ Of the
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000
in assets.\13\
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\11\ Table of Small Business Size Standards Matched to North
American Industry Classification System Codes, Small Business
Administration Size Standards (SBA Oct. 1, 2017) [hereinafter ``SBA
Size Standards'']. .) (https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf)
\12\ 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.
\13\ National Credit Union Administration, Credit Union Data,
http://webapps.ncua.gov/customquery/ 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 defined in this release.\14\ Based on SEC estimates, 17
percent of broker-dealers are classified as small entities for purposes
of the RFA.\15\
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\14\ 17 CFR 240.0-10(c).
\15\ 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
CFR1010.100(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
[[Page 6993]]
`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.\16\ 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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\16\ 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 $38,500,000 in gross receipts
annually.\17\ Based on information provided by the National Futures
Association (NFA), 95 percent of introducing brokers-commodities
dealers have less than $38.5 million in adjusted net capital and are
considered to be small entities.
---------------------------------------------------------------------------
\17\ SBA, Size Standards to Define Small Business Concerns, 13
CFR 121.201 (2016), 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.'' \18\ Based on SEC estimates,
seven percent of mutual funds are classified as ``small entities'' for
purposes of the RFA under this definition.\19\
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\18\ 17 CFR 270.0-10.
\19\ 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.
B. Description of the Projected Reporting and Recordkeeping
Requirements of a Prohibition Under the Fifth Special Measure
The proposed prohibition under the 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 ABLV 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 ABLV. 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. The systems that U.S. financial institutions have in
place to comply with these requirements can easily be modified to adapt
to this proposed rule. Thus, the special due diligence that would be
required under the proposed rule--i.e., preventing the processing of
transactions involving ABLV and the transmittal of notice to certain
correspondent account holders--would not impose a significant
additional economic burden upon small U.S. financial institutions.
2. 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 a prohibition under the fifth special measure regarding
ABLV.
IX. 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 the Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506), Washington, DC 20503 (or by email
to [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 April 17, 2018. 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 1010.661 is presented to assist those persons
wishing to comment on the information collection.
The notification requirement in section 1010.661(b)(3)(i)(A) is
intended to aid cooperation from correspondent account holders in
denying ABLV access to the U.S. financial system. The information
required to be maintained by that section would be used by federal
agencies and certain self-regulatory organizations to verify compliance
by covered financial institutions with the provisions of 31 CFR
1010.661. The collection of information would be mandatory.
Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing
brokers-commodities, and mutual funds.
Estimated Number of Affected Financial Institutions: 5,787.
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: 5,787 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.
X. 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.
[[Page 6994]]
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 continues to read as follows:
Authority: 2 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; sec.
701 Pub. L. 114-74, 129 Stat. 599.
0
2. Add Sec. 1010.661 to read as follows:
Sec. 1010.661 Special measures against ABLV
(a) Definitions. For purposes of this section:
(1) ABLV means all subsidiaries, branches, and offices of ABLV
Bank, AS operating as a bank in any jurisdiction.
(2) Correspondent account has the same meaning as provided in Sec.
1010.605(c)(l)(ii).
(3) Covered financial institution has the same meaning as provided
in Sec. 1010.605(e)(l).
(4) Foreign banking institution means a bank organized under
foreign law, or an agency, branch, or office located outside the United
States of a bank. The term does not include an agent, agency, branch,
or office within the United States of a bank organized under foreign
law.
(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 maintaining correspondent accounts for ABLV. A
covered financial institution shall not open or maintain in the United
States a correspondent account for, or on behalf of, ABLV.
(2) Prohibition on use of correspondent accounts involving ABLV. A
covered financial institution shall take reasonable steps not to
process a transaction for the correspondent account in the United
States of a foreign banking institution if such a transaction involves
ABLV.
(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
ABLV. 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 ABLV that such correspondents may not provide ABLV 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 ABLV, 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 ABLV.
(iii) A covered financial institution that knows or has reason to
believe that a foreign bank's correspondent account has been or is
being used to process transactions involving ABLV 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 this section.
(ii) Nothing in paragraph (b) of this section shall require a
covered financial institution to report any information not otherwise
required to be reported by law or regulation.
Dated: February 12, 2018.
Jamal El-Hindi,
Deputy Director, Financial Crimes Enforcement Network.
[FR Doc. 2018-03214 Filed 2-15-18; 8:45 am]
BILLING CODE 4810-2P-P