13 July 2006
Two actions: imposition of sanctions against VEF Banka and withdrawal of
sanctions against
Multibanka
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[Federal Register: July 13, 2006 (Volume 71, Number 134)]
[Rules and Regulations]
[Page 39554-39561]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jy06-15]
[[Page 39554]]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA82
Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations--Imposition of Special Measure Against VEF
Banka, as a Financial Institution of Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network, Department of the
Treasury.
ACTION: Final rule.
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SUMMARY: The Financial Crimes Enforcement Network is issuing a final
rule imposing a special measure against joint stock company VEF Banka
(``VEF'', ``VEF Bank'', or the ``bank'') as a financial institution of
primary money laundering concern, pursuant to the authority contained
in 31 U.S.C. 5318A of the Bank Secrecy Act.
DATES: This final rule is effective on August 14, 2006.
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, Financial Crimes Enforcement Network, (800) 949-2732.
SUPPLEMENTARY INFORMATION:
I. Background
A. 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 (``USA
PATRIOT Act''). Title III of the USA PATRIOT Act amends the anti-money
laundering provisions of the Bank Secrecy Act, codified at 12 U.S.C.
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and 5316-5332, to
promote the prevention, detection, and prosecution of money laundering
and the financing of terrorism. Regulations implementing the Bank
Secrecy Act appear at 31 CFR part 103. The authority of the Secretary
of the Treasury (the ``Secretary'') to administer the Bank Secrecy Act
and its implementing regulations has been delegated to the Director of
the Financial Crimes Enforcement Network (the ``Director'').\1\ The
Bank Secrecy Act authorizes the Director to issue regulations requiring
all financial institutions defined as such in the Bank Secrecy Act to
maintain or file certain reports or records that have been determined
to have a high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings, or in the conduct of intelligence or
counter-intelligence activities, including analysis, to protect against
international terrorism, and to implement anti-money laundering
programs and compliance procedures.\2\
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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 the Financial Crimes Enforcement Network.
\2\ Language expanding the scope of the Bank Secrecy Act to
intelligence or counter-intelligence activities to protect against
international terrorism was added by section 358 of the USA PATRIOT
Act.
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Section 311 of the USA PATRIOT Act added section 5318A to the Bank
Secrecy Act, granting the Secretary the authority, after finding that
reasonable grounds exist for concluding that a foreign jurisdiction,
foreign financial institution, international class of transactions, or
type of account is of ``primary money laundering concern,'' to require
domestic financial institutions and domestic financial agencies to take
certain ``special measures'' against the primary money laundering
concern. Section 311 identifies factors for the Secretary to consider
and Federal agencies to consult before he may find that reasonable
grounds exist for concluding that a jurisdiction, financial
institution, class of transactions, or type of account is of primary
money laundering concern. The statute also provides similar procedures,
including factors and consultation requirements, for selecting the
specific special measures to be imposed against the primary money
laundering concern.
Taken as a whole, section 311 provides the Secretary with a range
of options that can be adapted to target specific money laundering and
terrorist financing concerns most effectively. These options provide
the authority to bring additional and useful pressure on those
jurisdictions and institutions that pose money laundering threats and
the ability to take steps to protect the U.S. financial system. Through
the imposition of various special measures, we can: Gain more
information about the concerned jurisdictions, financial institutions,
transactions, and accounts; monitor more effectively the respective
jurisdictions, financial institutions, transactions, and accounts; and
ultimately protect U.S. financial institutions from involvement with
jurisdictions, financial institutions, transactions, or accounts that
pose a 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 by the Bank Secrecy Act
to consult with both the Secretary of State and the Attorney General.
In addition to these consultations, when finding that a foreign
financial institution is of primary money laundering concern, the
Secretary is required by section 311 to consider ``such information as
the Secretary determines to be relevant, including the following
potentially relevant factors:''
The extent to which such financial institution is used to
facilitate or promote money laundering in or through the jurisdiction;
The extent to which such financial institution is used for
legitimate business purposes in the jurisdiction; and
The extent to which such action is sufficient to ensure,
with respect to transactions involving the institution operating in the
jurisdiction, that the purposes of the Bank Secrecy Act continue to be
fulfilled, and to guard against international money laundering and
other financial crimes.
If we determine that reasonable grounds exist for concluding that a
foreign financial institution is of primary money laundering concern,
we must determine the appropriate special measure(s) to address the
specific money laundering risks. Section 311 provides a range of
special measures that can be imposed, individually or jointly, in any
combination, and in any sequence.\3\ In the imposition of special
measures, we follow procedures similar to those for finding a foreign
financial institution to be of primary money laundering concern, but we
also engage in additional consultations and consider additional
factors. Section 311 requires us to consult with other appropriate
Federal agencies and parties \4\ and to consider the following specific
factors:
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\3\ Available special measures include requiring: (1)
Recordkeeping and reporting of certain financial transactions; (2)
collection of information relating to beneficial ownership; (3)
collection of information relating to certain payable-through
accounts; (4) collection of information relating to certain
correspondent accounts; and (5) prohibition or conditions on the
opening or maintaining of correspondent or payable-through accounts.
31 U.S.C. 5318A(b)(1)-(5). For a complete discussion of the range of
possible countermeasures, see 68 FR 18917 (April 17, 2003)
(proposing to impose special measures against Nauru).
\4\ Section 5318A(a)(4)(A) requires the Secretary to consult
with the Chairman of the Board of Governors of the Federal Reserve
System, any other appropriate Federal banking agency, the Secretary
of State, the U.S. Securities and Exchange Commission, the Commodity
Futures Trading Commission, the National Credit Union
Administration, and, in our sole discretion, ``such other agencies
and interested parties as the Secretary may find to be
appropriate.'' The consultation process must also include the
Attorney General, if the Secretary is considering prohibiting or
imposing conditions upon the opening or maintaining of a
correspondent account by any domestic financial institution or
domestic financial agency for the foreign financial institution of
primary money laundering concern.
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[[Page 39555]]
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 institution; and
The effect of the action on U.S. national security and
foreign policy.\5\
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\5\ Classified information used in support of a section 311
finding of primary money laundering concern and imposition of
special measure(s) may be submitted by the Department of the
Treasury to a reviewing court ex parte and in camera. See section
376 of the Intelligence Authorization Act for Fiscal Year 2004, Pub.
L. 108-177 (amending 31 U.S.C. 5318A by adding new paragraph (f)).
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In this final rule, we are imposing the fifth special measure (31
U.S.C. 5318A(b)(5)) against VEF, a commercial bank in the Republic of
Latvia (``Latvia''). The fifth special measure allows for the
imposition of conditions upon, or the prohibition of, the opening or
maintaining of correspondent or payable-through accounts in the United
States for or on behalf of a foreign financial institution of primary
money laundering concern. Unlike the other special measures, this
special measure may be imposed only through the issuance of a
regulation.
B. VEF
VEF is headquartered in Riga, the capital of Latvia. VEF is one of
the smallest of Latvia's 23 banks, and in 2004 was reported to have
approximately $80 million in assets and 87 employees. Total assets for
the bank as of June 30, 2005 were 27.3 million LATS, equivalent to
approximately $47.4 million. For the first six months of 2005, the bank
made a profit of 288,410 LATS, equivalent to over $501,000. The bank
has one subsidiary, Veiksmes lizings, which offers financial leasing
and factoring services. In addition to its headquarters in Riga, VEF
has one branch in Riga and one representative office in the Czech
Republic. VEF offers corporate and private banking services, issues a
variety of credit cards for non-Latvians, and provides currency
exchange through Internet banking services, i.e., virtual currencies.
In addition, according to VEF's financial statements, VEF maintains
correspondent accounts in countries worldwide, but currently reports
none in the United States.\6\ However, many of the foreign financial
institutions from which VEF obtains financial services in turn maintain
correspondent accounts with financial institutions in the United
States. Accordingly, it appears that VEF may still have indirect access
to the U.S. financial system.
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\6\ Some covered financial institutions closed their
correspondent accounts with VEF before, and another closed its
account with VEF after, the issuance of the notice of proposed
rulemaking in April 2005.
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II. The 2005 Finding and Subsequent Developments
A. The 2005 Finding
Based upon review and analysis of pertinent information,
consultations with relevant Federal agencies and parties, and after
consideration of the factors enumerated in section 311, in April 2005
the Secretary, through his delegate, the Director of the Financial
Crimes Enforcement Network, found that reasonable grounds exist for
concluding that VEF is a financial institution of primary money
laundering concern. This finding was published in a notice of proposed
rulemaking, which proposed prohibiting covered financial institutions
from, directly or indirectly, opening or maintaining correspondent
accounts in the United States for VEF or any of its branches, offices,
or subsidiaries, pursuant to the authority under 31 U.S.C. 5318A.\7\
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\7\ See 70 FR 21369 (April 26, 2005).
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The notice of proposed rulemaking outlined the various factors
supporting the finding and proposed prohibition. In finding VEF to be
of primary money laundering concern, we determined that:
VEF was used by criminals to facilitate or promote money
laundering. In particular, we determined that VEF was an important
banking resource for illicit shell companies and financial fraud rings,
allowing criminals to pursue illegal financial activities. VEF
permitted ATM withdrawals in significant amounts, an essential
component to the execution of large financial fraud schemes typically
associated with carding networks.
Any legitimate business use of VEF appeared to be
significantly outweighed by its use to promote or facilitate money
laundering and other financial crimes.
A finding that VEF is of primary money laundering concern
and prohibiting the maintenance of correspondent accounts for that
institution would prevent suspect accountholders at VEF from accessing
the U.S. financial system to facilitate money laundering and would
bring criminal conduct occurring at or through VEF to the attention of
the international financial community and thus serve the purposes of
the Bank Secrecy Act as well as guard against international money
laundering and other financial crime.
We determined, based on a variety of sources, that VEF Bank has
been used to facilitate or promote money laundering based in part on
its lax identification and verification of accountholders and on its
weak internal controls. In addition, the proceeds of alleged illicit
activity have been transferred to or through accounts held by VEF Bank
at covered financial institutions.
B. Jurisdictional Developments
Latvia's geographical position, situated by the Baltic Sea and
bordering Russia, Estonia, Belarus, and Lithuania, makes it an
attractive transit country for both legitimate and illegitimate trade.
Sources of illegitimate trade include counterfeiting, arms trafficking,
contraband smuggling, and other crimes. It is believed that most of
Latvia's narcotics trafficking is conducted by organized crime groups
that began with cigarette and alcohol smuggling and then progressed to
narcotics. Latvian authorities recently have sought tighter legislative
controls designed to fight money laundering and other financial crime.
However, Latvia's role as a regional financial center, the number of
commercial banks (23), and those banks' sizeable non-resident deposit
base continue to make it vulnerable to money laundering.
Latvia has taken a number of significant steps to address the
reported money laundering risks and corruption highlighted in the
notice of proposed rulemaking. The Parliament of Latvia recently passed
a new law, On the Declaration of Cash on the State Border, which will
go into effect on July 1, 2006.\8\ The law is aimed at preventing money
laundering consistent with the United Nations Convention Against
Transnational Organized Crime and the European Union draft regulation
on the control of cash leaving and entering the European Community. In
2005, Latvian law was amended to broaden
[[Page 39556]]
supervisory authority to revoke banking licenses and to allow
enforcement agencies greater access to bank account information. The
amendments also provide for fines of between 5,000 and 100,000 LATS
(equivalent to over $8,687.50 and over $173,750.00, respectively)
against banks in violation of the anti-money laundering laws; include a
definition of and procedures for determining who qualifies as a ``true
beneficiary''; and introduce criminal liability for providing false
information to banks. Additionally, Latvia has: Banned the
establishment of shell banks; clarified the authority of Latvian
financial institutions to demand customer disclosure regarding the
source of funds; and allowed for the sharing of information between
financial institutions on suspicious activities.
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\8\ The law requires that individuals crossing the Latvian
border with the equivalent of 10,000 Euros ([euro]10,000) in coins,
cash, and/or certain monetary instruments to complete a form stating
the origin of the currency or monetary instruments, the purpose or
use of the currency or monetary instruments, and the receiver of the
currency or monetary instruments.
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In terms of implementation, the Latvian authorities have made
strides in strengthening their anti-money laundering regulation and
supervision and in developing more robust anti-money laundering
examination procedures. To ensure proper protection of Latvia's
financial sector, authorities will need to continue their efforts to
effectively implement and enforce their strengthened anti-money
laundering regime.
C. VEF's Subsequent Developments
We acknowledge that VEF has taken steps to address many of the
money laundering concerns that we previously identified. For example,
the bank revised its policies and procedures, including training
procedures; created an Anti-Money Laundering Manual; closed
approximately 600 questionable accounts; changed some of its management
personnel; \9\ and retained the services of an independent
international accounting firm to identify weaknesses in its anti-money
laundering program and to assist the bank in its goal of reaching a
best practices standard for its anti-money laundering program and
controls.
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\9\ In September 2005, VEF removed its Head of Department for
the Supervision of Clients and its Chief Manager for Remote
Attraction of Clients, as well as dismissed some of the members of
its Board and appointed new members.
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Despite the steps VEF has taken, based on a variety of sources
including classified information, we continue to have serious concerns
about the commitment of the bank to implement its revised policies and
procedures. Specifically, we have continued concern with reported links
between the bank's ownership and organized crime groups that reportedly
facilitate money laundering. Accordingly, we find that VEF continues to
be a financial institution of primary money laundering concern.
III. Imposition of the Fifth Special Measure
Consistent with the finding that VEF is a financial institution of
primary money laundering concern, and based upon additional
consultations with required Federal agencies and parties as well as
consideration of additional relevant factors, including the comments
received on the proposed rule, we are imposing the special measure
authorized by 31 U.S.C. 5318A(b)(5) with regard to VEF.\10\ That
special measure authorizes the prohibition of, or the imposition of
conditions upon, the opening or maintaining of correspondent or
payable-through accounts \11\ by any domestic financial institution or
domestic financial agency for, or on behalf of, a foreign financial
institution found to be of primary money laundering concern. A
discussion of the additional section 311 factors relevant to the
imposition of this particular special measure follows.
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\10\ Supra footnote 3.
\11\ For purposes of the rule, a correspondent account is
defined as an account established to receive deposits from, or make
payments or other disbursements on behalf of, a foreign bank, or
handle other financial transactions related to the foreign bank (see
31 U.S.C. 5318A(e)(1)(B) as implemented in 31 CFR
103.175(d)(1)(ii)).
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A. Similar Actions Have Not Been or May Not Be Taken by Other Nations
or Multilateral Groups Against VEF Bank
At this time, other countries and multilateral groups have not
taken any action similar to the imposition of the fifth special measure
pursuant to section 311, which allows the prohibition of U.S. financial
institutions and financial agencies from opening or maintaining a
correspondent account in the United States for or on behalf of VEF and
requires those institutions and agencies to guard against indirect use
by VEF. We are encouraging other countries to take similar action based
on our finding that VEF is a financial institution of primary money
laundering concern.
B. The Imposition of the Fifth Special Measure Would Not 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 imposed by this rule prohibits covered
financial institutions from opening or maintaining correspondent
accounts in the United States for, or on behalf of, VEF. As a corollary
to this measure, covered financial institutions also are required to
take reasonable steps to apply due diligence to all of their
correspondent accounts to ensure that no such account is being used
indirectly to provide services to VEF. The burden associated with these
requirements is not expected to be significant, given that we are not
aware of any covered financial institution that maintains a
correspondent account directly for VEF. Moreover, there is a minimal
burden involved in transmitting a one-time notice to all correspondent
accountholders concerning the prohibition on indirectly providing
services to VEF. In addition, covered financial institutions generally
apply some degree of due diligence in screening 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 Department of the Treasury's Office of Foreign
Assets Control. As explained in more detail in the section-by-section
analysis below, financial institutions should be able to adapt their
existing screening procedures to comply with this special measure.
Thus, the due diligence that is required by this rule is not expected
to impose a significant additional burden upon covered financial
institutions.
C. The Action or Timing of the Action Will Not Have a Significant
Adverse Systemic Impact on the International Payment, Clearance, and
Settlement System, or on Legitimate Business Activities Involving VEF
Bank
VEF 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 the fifth
special measure against VEF will not have a significant adverse
systemic impact on the international payment, clearance, and settlement
system. In addition, we believe that any legitimate use of VEF is
significantly outweighed by its reported use to promote or facilitate
money laundering. Moreover, in light of the existence of approximately
15 larger banks in Latvia, we believe that imposition of the fifth
special measure against VEF will not impose an undue burden on
legitimate business activities in Latvia.
D. The Action Enhances U.S. National Security and Complements U.S.
Foreign Policy
The exclusion from the U.S. financial system of banks such as VEF
that serve
[[Page 39557]]
as conduits for significant money laundering activity and that
participate in other financial crime enhances U.S. national security by
making it more difficult for criminals to access the substantial
resources and services of the U.S. financial system. In addition, the
imposition of the fifth special measure against VEF complements the
U.S. Government's overall foreign policy strategy of making entry into
the U.S. financial system more difficult for high-risk financial
institutions.
IV. Notice of Proposed Rulemaking and Comments
We received 13 comment letters on the notice of proposed
rulemaking: Three on behalf of VEF; \12\ one comment letter from a
securities industry trade association; one from a U.S. firm providing
search software to U.S. financial institutions; one from Latvia's
banking regulator, the Financial and Capital Markets Commission; five
comment letters from VEF accountholders; and two comment letters from
foreign companies that do business with VEF accountholders.
Additionally, we met with representatives of VEF on several occasions.
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\12\ One comment letter is from VEF, through its U.S. legal
counsel, and two comment letters are from the chairman of the
Supervisory Council, who owns between 33 and 50 percent of VEF.
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Most of the comments raised by VEF were unrelated to our request
for comment on the proposed imposition of the fifth special measure.
VEF claims: That it was unaware of accountholders funneling illicit
proceeds through its accounts; that the references in the notice of
proposed rulemaking were too vague to rebut; and that we did not
provide the bank notice before issuing the proposed rule.
The bank also claims that we did not respond fully to certain
statutory criteria. VEF asserts that we did not address whether the
imposition of the fifth special measure would have a significant
adverse systemic impact on the international payment, clearance, and
settlement system. However, we addressed this issue when we stated in
the notice of proposed rulemaking that VEF 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
and, therefore, imposing the fifth special measure would not have a
significant adverse impact on the international payment, settlement,
and clearance system.\13\ Furthermore, although we recognize that
certain current accountholders at VEF will be affected by this final
rule, Latvia has 22 other banks that can meet their legitimate business
needs. The statutory criteria for finding VEF to be a financial
institution of primary money laundering concern and for imposing the
fifth special measure have been fully addressed.\14\
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\13\ See 70 FR at 21373.
\14\ See note 7, supra.
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The Latvian regulator commented on representations that we made
about Latvian financial institutions. In response to our concern that
Latvian financial institutions did not appear to serve the Latvian
community, it stated that foreign deposits have always been a central
feature in Latvia, which is a regional financial center due to its
geographic location. The regulator also took issue with our
representation that Latvia had material weaknesses in the
implementation and enforcement of its anti-money laundering laws. As
previously stated in section II.B., supra, Latvia has significantly
enhanced its anti-money laundering laws.
The remaining commenters were companies that were accountholders at
VEF (five commenters), companies that conducted business with
accountholders at VEF (two commenters), a trade association, and a U.S.
search software solutions company. The VEF accountholders and the
companies that conducted business with VEF accountholders maintained
that VEF operated lawfully and professionally and that the issuance of
the proposed rule adversely impacted them. Some of the accountholders
expressed concern that the closure of correspondent accounts held by
VEF at covered financial institutions might require accountholders to:
(1) Open new accounts with other banks that are unfamiliar with their
businesses and products; and (2) revise many contracts that include
banking details for the parties involved. We specifically solicited
comment on the impact of the fifth special measure on legitimate
business involving VEF, and we understand that the measure may require
legitimate businesses to make alternative banking arrangements with any
one of the other 22 available Latvian banking institutions. Despite the
difficulty this may pose for some businesses, we continue to believe
that legitimate business use involving VEF is outweighed by its use to
promote or facilitate money laundering and other financial crimes.
V. Section-by-Section Analysis
The final rule prohibits covered financial institutions from
opening or maintaining any correspondent account for, or on behalf of,
VEF. Covered financial institutions are required to apply due diligence
to their correspondent accounts to guard against their indirect use by
VEF. At a minimum, that due diligence must include two elements. First,
a covered financial institution must notify its correspondent
accountholders that the account may not be used to provide VEF with
access to the covered financial institution. Second, a covered
financial institution must take reasonable steps to identify any
indirect use of its correspondent accounts by VEF, to the extent that
such indirect use can be determined from transactional records
maintained by the covered financial institution in the normal course of
business. A covered financial institution must take a risk-based
approach when deciding what, if any, additional due diligence measures
it should adopt to guard against the indirect use of correspondent
accounts by VEF, based on risk factors such as the type of services
offered by, and geographic locations of, its correspondents.
A. Section 103.192(a)--Definitions
1. VEF
Section 103.192(a)(4) of the rule defines VEF to include all
branches, offices, and subsidiaries of VEF operating in the Republic of
Latvia or in any other jurisdiction. The one known VEF subsidiary,
Veiksmes lizings, and any of its branches or offices, is included in
the definition. We will provide information regarding the existence or
establishment of any other subsidiaries as it becomes available;
however, covered financial institutions should take commercially
reasonable measures to determine whether a customer is a branch,
office, or subsidiary of VEF.
2. Correspondent Account
Section 103.192(a)(1) defines the term ``correspondent account'' by
reference to the definition contained in 31 CFR 103.175(d)(1)(ii).
Section 103.175(d)(1)(ii) defines a correspondent account to mean an
account established for a foreign bank to receive deposits from, or
make payments or other disbursements on behalf of the foreign bank, or
to handle other financial transactions related to the foreign bank.
In the case of a depository institution in the United States, this
broad definition of account includes most types of banking
relationships between the depository institution and a foreign bank
that are established to provide regular services, dealings, and other
[[Page 39558]]
financial transactions including a demand deposit, savings deposit, or
other transaction or asset account, and a credit account or other
extension of credit.
In the case of securities broker-dealers, futures commission
merchants, introducing brokers in commodities, and investment companies
that are open-end companies (``mutual funds''), we are using the same
definition of ``account'' for purposes of this rule that was
established in the final rule implementing section 312 of the USA
PATRIOT Act.\15\
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\15\ See 31 CFR 103.175(d)(2)(ii)-(iv).
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3. Covered Financial Institution
Section 103.192(a)(2) of the rule defines covered financial
institution to include the following:
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 et seq.);
A trust bank or trust company that is federally regulated
and is subject to an anti-money laundering program requirement;
A broker or dealer in securities registered, or required
to be registered, with the U.S. Securities and Exchange Commission
under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.),
except persons who register pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934;
A futures commission merchant or an introducing broker
registered, or required to be registered, with the Commodity Futures
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et
seq.), except persons who register pursuant to section 4(f)(a)(2) of
the Commodity Exchange Act; and
A mutual fund, which means an investment company (as
defined in section 3(a)(1) of the Investment Company Act of 1940
((``Investment Company Act'') (15 U.S.C. 80a-3(a)(1)) that is an open-
end company (as defined in section 5(a)(1) of the Investment Company
Act (15 U.S.C. 80a-5(a)(1)) and that is registered, or is required to
register, with the U.S. Securities and Exchange Commission pursuant to
the Investment Company Act.
In the notice of proposed rulemaking, we defined ``covered financial
institution'' by reference to 31 CFR 103.175(f)(2), the operative
definition of that term for purposes of the rules implementing sections
313 and 319 of the USA PATRIOT Act, and we also included in the
definition futures commission merchants, introducing brokers, and
mutual funds. The definition of ``covered financial institution'' we
are adopting for purposes of this final rule is substantially the same
as in 31 CFR 103.175(f)(2).
B. Section 103.192(b)--Requirements for Covered Financial Institutions
For purposes of complying with the final rule's prohibition on the
opening or maintaining in the United States of correspondent accounts
for, or on behalf of, VEF Bank, we expect a covered financial
institution to take such steps that a reasonable and prudent financial
institution would take to protect itself from loan or other fraud or
loss based on misidentification of a person's status.
1. Prohibition of Direct Use of Correspondent Accounts
Section 103.192(b)(1) of the rule prohibits all covered financial
institutions from opening or maintaining a correspondent account in the
United States for, or on behalf of, VEF Bank. The prohibition requires
all covered financial institutions to review their account records to
ensure that they maintain no accounts directly for, or on behalf of,
VEF Bank.
2. Due Diligence Upon Correspondent Accounts To Prohibit Indirect Use
As a corollary to the prohibition on the opening or maintaining of
correspondent accounts directly for VEF Bank, Sec. 103.192(b)(2)
requires a covered financial institution to apply due diligence to its
correspondent accounts \16\ that is reasonably designed to guard
against their indirect use by VEF Bank. At a minimum, that due
diligence must include notifying correspondent accountholders that
correspondent accounts may not be used to provide VEF Bank with access
to the covered financial institution. For example, a covered financial
institution may satisfy this requirement by transmitting the following
notice to all of its correspondent accountholders:
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\16\ Again, for purposes of the final rule, a correspondent
account is defined as an account established by a covered financial
institution for a foreign bank to receive deposits from, or to make
payments or other disbursements on behalf of, a foreign bank, or to
handle other financial transactions related to the foreign bank. For
purposes of this definition, the term account means any formal
banking or business relationship established to provide regular
services, dealings, and other financial transactions. See 31 CFR
103.175(d)(2).
Notice: Pursuant to U.S. regulations issued under section 311 of
the USA PATRIOT Act, 31 CFR 103.192, we are prohibited from opening
or maintaining a correspondent account for, or on behalf of, VEF
Bank (Republic of Latvia) or any of its subsidiaries (including
Veiksmes lizings). The regulations also require us to notify you
that your correspondent account with our financial institution may
not be used to provide VEF Bank or any of its subsidiaries with
access to our financial institution. If we become aware that VEF
Bank or any of its subsidiaries is indirectly using the
correspondent account you hold at our financial institution, we will
be required to take appropriate steps to prevent such access,
---------------------------------------------------------------------------
including terminating your account.
The purpose of the notice requirement is to help ensure that VEF is
denied access to the U.S. financial system, as well as to increase
awareness within the international financial community of the risks and
deficiencies of VEF. However, we do not require or expect a covered
financial institution to obtain a certification from its correspondent
accountholders that indirect access will not be provided in order to
comply with this notice requirement. Instead, methods of compliance
with the notice requirement could include, for example, transmitting a
one-time notice by mail, fax, or e-mail to a covered financial
institution's correspondent accountholders, informing those
accountholders that their correspondent accounts may not be used to
provide VEF Bank with indirect access to the covered financial
institution, or including such information in the next regularly
occurring transmittal from the covered financial institution to its
correspondent accountholders.
In its comment letter, the trade association requested that we
consider permitting other methods of providing notice to correspondent
accountholders or allowing sufficient flexibility so that covered
financial institutions can use systems already established under other
provisions of the USA PATRIOT Act to provide notice. As we indicated in
the notice of proposed rulemaking, a covered financial institution is
not obligated to use any specific form or method in notifying its
correspondent accountholders of the special measure. We suggested the
provision of written notice containing certain language as only one
example of how a covered financial institution could comply with its
obligation to notify its correspondents. The trade association further
suggested that we specifically consider means such as including the
notice within the certificates used by financial institutions to comply
with the
[[Page 39559]]
rules issued under sections 313 and 319 of the USA PATRIOT Act.
Although there may be circumstances where this would be appropriate, we
note that those certificates are renewable only every three years and
that relying solely on the certification process for notice purposes
would not be reasonable where a re-certification would not be made
within a reasonable time following the issuance of this final rule.
Furthermore, as noted above, we are not requiring that covered
financial institutions obtain a certification regarding compliance with
the final rule from each correspondent accountholder.
This final rule also requires a covered financial institution to
take reasonable steps to identify any indirect use of its correspondent
accounts by VEF, to the extent that such indirect use can be determined
from transactional records maintained by the covered financial
institution in the normal course of business. For example, a covered
financial institution is expected to apply an appropriate screening
mechanism to be able to identify a funds transfer order that, on its
face, lists VEF as the originator's or beneficiary's financial
institution, or otherwise references VEF in a manner detectable under
the financial institution's normal business screening procedures. We
acknowledge that not all institutions are capable of screening every
field in a funds transfer message and that the risk-based controls of
some institutions may not necessitate such comprehensive screening.
Alternatively, other institutions may perform more thorough screening
as part of their risk-based determination to perform ``additional due
diligence,'' as described below. An appropriate screening mechanism
could be the mechanism currently used by a covered financial
institution to comply with various legal requirements, such as the
commercially available software used to comply with the sanctions
programs administered by the Office of Foreign Assets Control.
In its letter, the software company commenter sought clarification
on how covered financial institutions were expected to prevent indirect
use of correspondent services to VEF. In particular, the software
company asked if a one-time search was sufficient to determine if the
financial institution was being used indirectly by a subject to a
section 311 special measure and whether the proposed rule also extends
to wire transfer activity, payable-through accounts, debit and credit
card transactions, and any other financial activities through which a
U.S. financial institution may eventually directly transact or act as
an intermediary.
After we issue a final section 311 rulemaking and impose the fifth
special measure with regard to a financial institution (``section 311
institution''), a covered financial institution is required to apply
due diligence to its correspondent accounts that is reasonably designed
to guard against their indirect use by the section 311 institution.
Specifically, a covered financial institution must: (1) Notify its
correspondent accountholders that the correspondent account may not be
used to provide the section 311 institution with access to the covered
financial institution; and (2) take reasonable steps to identify any
indirect use of its correspondent accounts by the section 311
institution. We gave an example above of how a one-time transmittal
notice to correspondent accountholders would satisfy the notification
requirement. With respect to the second requirement, a covered
financial institution has an ongoing--as opposed to a one-time--
obligation to take reasonable steps to identify all correspondent
account services it may directly or indirectly provide to the section
311 institution.
This commenter also suggested that section 311 institutions, like
VEF, be included in the Office of Foreign Assets Control Specially
Designated Nationals List to avoid compelling covered financial
institutions to comply with two separate lists and, therefore,
alleviate regulatory burden.\17\ However, the suggestion is problematic
given that the Financial Crimes Enforcement Network and the Office of
Foreign Assets Control are distinct governmental entities with
different policy objectives. The Office of Foreign Assets Control
administers and enforces economic and trade sanctions based on U.S.
foreign policy and national security goals, while the intent of
imposing the fifth special measure under a section 311 rulemaking is to
prevent entities of primary money laundering concern from accessing the
U.S. financial system. The two lists referenced are not comparable and
have separate statutory criteria and legal bases and are, therefore,
not equivalent or interchangeable.
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\17\ The software company commenter also requested that we
provide a list of section 311 institutions in an electronic format
available for download on its Web site in the same formats as our
section 314(a) (mandatory law enforcement information sharing
request) lists and lists provided by the Office of Foreign Assets
Control. This request presupposes that the section 311 list is as
massive or frequent as the other lists and merits our providing it
in a downloadable format. However, the number of section 311
rulemakings issued in one year does not merit such treatment. We
maintain a list of section 311 rulemakings and withdrawals at http://www.fincen.gov
under Regulatory/Section 311.
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Nonetheless, as stated above, covered financial institutions may
seek to monitor for section 311 institutions by using software that
they are currently using, such as the commercially available software
used to comply with the sanctions programs administered by the Office
of Foreign Assets Control to flag certain entities. Using existing
screening software should alleviate regulatory burden for covered
financial institutions in complying with this rulemaking. However, each
covered financial institution has the flexibility to establish and
apply a screening mechanism appropriate for its business.
Notifying correspondent accountholders and taking reasonable steps
to identify any indirect use of correspondent accounts by VEF in the
manner discussed above are the minimum due diligence requirements under
this final rule. Beyond these minimum steps, a covered financial
institution should adopt a risk-based approach for determining what, if
any, additional due diligence measures it should implement to guard
against the indirect use of its correspondent accounts by VEF, based on
risk factors such as the type of services it offers and the geographic
locations of its correspondent accountholders.
A covered financial institution that obtains knowledge that a
correspondent account is being used by a foreign bank to provide
indirect access to VEF must take all appropriate steps to prevent such
indirect access, including, when necessary, terminating the
correspondent account. A covered financial institution may afford such
foreign bank a reasonable opportunity to take corrective action prior
to terminating the correspondent account. We have added language in the
final rule clarifying that, should the foreign bank refuse to comply,
or if the covered financial institution cannot obtain adequate
assurances that the account will not be available to VEF, the covered
financial institution must terminate the account within a commercially
reasonable time. This means that the covered financial institution
should not permit the foreign bank to establish any new positions or
execute any transactions through the account, other than those
necessary to close the account. A covered financial institution may
reestablish an account closed under this rule if it determines that the
account will not be used to provide banking services indirectly to VEF.
[[Page 39560]]
3. Reporting Not Required
Section 103.192(b)(3) of the rule clarifies that the rule does not
impose any reporting requirement upon any covered financial institution
that is not otherwise required by applicable law or regulation.
However, a covered financial institution must document its compliance
with the requirement that it notify its correspondent accountholders
that the accounts may not be used to provide VEF with access to the
covered financial institution.
VI. Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. It appears
that VEF no longer holds correspondent accounts in the United States.
The correspondent accounts that the bank previously held in the United
States were closed, and any correspondent accounts that may still be
held in the United States for foreign banks that still maintain a
correspondent relationship with VEF are held with large banks. Thus,
the prohibition on establishing or maintaining such correspondent
accounts will not have a significant impact on a substantial number of
small entities. In addition, all covered financial institutions
currently must exercise some degree of due diligence in order to comply
with various legal requirements. The tools used for such purposes,
including commercially available software used to comply with the
economic sanctions programs administered by the Office of Foreign
Assets Control, can be modified to monitor for the use of correspondent
accounts by VEF. Thus, the due diligence that is required by this
rule--i.e., the one-time transmittal of notice to correspondent
accountholders and screening of transactions to identify any indirect
use of a correspondent account--is not expected to impose a significant
additional economic burden on small covered financial institutions.
VII. Paperwork Reduction Act of 1995
The collection of information contained in the final rule has been
approved by the Office of Management and Budget (OMB) in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and has
been assigned OMB Control Number 1506-0041. 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 control number assigned by OMB.
The only requirements in the final rule that are subject to the
Paperwork Reduction Act are the requirements that a covered financial
institution notify its correspondent accountholders that the
correspondent accounts maintained on their behalf may not be used to
provide VEF with access to the covered financial institution and the
requirement that a covered financial institution document its
compliance with this obligation to notify its correspondents. The
estimated annual average burden associated with this collection of
information is one hour per affected financial institution. We received
no comments on this information collection burden estimate.
Comments concerning the accuracy of this information collection
estimate and suggestions for reducing this burden should be sent
(preferably by fax (202-395-6974)) to Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Office
of Management and Budget, Washington, DC 20503 (or by the Internet to
Alexander_T._Hunt@omb.eop.gov), with a copy to the Financial Crimes
Enforcement Network by paper mail to FinCEN, P.O. Box 39, Vienna, VA
22183, ``ATTN: Section 311--Imposition of Special Measure Against VEF''
or by electronic mail to regcomments@fincen.treas.gov with the caption
``ATTN: Section 311--Imposition of Special Measure Against VEF'' in the
body of the text.
VIII. Executive Order 12866
This rule is not a significant regulatory action for purposes of
Executive Order 12866, ``Regulatory Planning and Review.''
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Banks and banking, Brokers,
Counter-money laundering, Counter-terrorism, and Foreign banking.
Authority and Issuance
0
For the reasons set forth in the preamble, part 103 of title 31 of the
Code of Federal Regulations is amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FINANCIAL TRANSACTIONS
0
1. The authority citation for part 103 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
Subpart I--[Amended]
0
2. Subpart I of part 103 is amended by adding new Sec. 103.192 as
follows:
Sec. 103.192 Special measures against VEF Bank.
(a) Definitions. For purposes of this section:
(1) Correspondent account has the same meaning as provided in Sec.
103.175(d)(1)(ii).
(2) Covered financial institution includes:
(i) An insured bank (as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h)));
(ii) A commercial bank;
(iii) An agency or branch of a foreign bank in the United States;
(iv) A federally insured credit union;
(v) A savings association;
(vi) A corporation acting under section 25A of the Federal Reserve
Act (12 U.S.C. 611 et seq.);
(vii) A trust bank or trust company that is federally regulated and
is subject to an anti-money laundering program requirement;
(viii) A broker or dealer in securities registered, or required to
be registered, with the U.S. Securities and Exchange Commission under
the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except
persons who register pursuant to section 15(b)(11) of the Securities
Exchange Act of 1934;
(ix) A futures commission merchant or an introducing broker
registered, or required to be registered, with the Commodity Futures
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et
seq.), except persons who register pursuant to section 4(f)(a)(2) of
the Commodity Exchange Act; and
(x) A mutual fund, which means an investment company (as defined in
section 3(a)(1) of the Investment Company Act of 1940 ((``Investment
Company Act'') (15 U.S.C. 80a-3(a)(1))) that is an open-end company (as
defined in section 5(a)(1) of the Investment Company Act (15 U.S.C.
80a-5(a)(1))) and that is registered, or is required to register, with
the U.S. Securities and Exchange Commission pursuant to the Investment
Company Act.
(3) Subsidiary means a company of which more than 50 percent of the
voting stock or analogous equity interest is owned by another company.
(4) VEF Bank means any branch, office, or subsidiary of joint stock
company VEF Banka operating in the Republic of Latvia or in any other
jurisdiction. The one known VEF Bank subsidiary, Veiksmes lizings, and
any branches or offices, are included in the definition.
(b) Requirements for covered financial institutions--(1)
Prohibition on direct use of correspondent accounts. A covered
financial institution shall
[[Page 39561]]
terminate any correspondent account that is opened or maintained in the
United States for, or on behalf of, VEF Bank.
(2) Due diligence of correspondent accounts to prohibit indirect
use. (i) A covered financial institution shall apply due diligence to
its correspondent accounts that is reasonably designed to guard against
their indirect use by VEF Bank. At a minimum, that due diligence must
include:
(A) Notifying correspondent accountholders that the correspondent
account may not be used to provide VEF Bank with access to the covered
financial institution; and
(B) Taking reasonable steps to identify any indirect use of its
correspondent accounts by VEF Bank, to the extent that such indirect
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, additional due diligence measures
it should adopt to guard against the indirect use of its correspondent
accounts by VEF Bank.
(iii) A covered financial institution that obtains knowledge that a
correspondent account is being used by the foreign bank to provide
indirect access to VEF Bank shall take all appropriate steps to prevent
such indirect access, including, where necessary, terminating the
correspondent account.
(iv) A covered financial institution required to terminate a
correspondent account pursuant to paragraph (b)(2)(iii) of this
section:
(A) Should do so within a commercially reasonable time, and should
not permit the foreign bank to establish any new positions or execute
any transaction through such correspondent account, other than those
necessary to close the correspondent account; and
(B) May reestablish a correspondent account closed pursuant to this
paragraph if it determines that the correspondent account will not be
used to provide banking services indirectly to VEF Bank.
(3) Recordkeeping and reporting. (i) A covered financial
institution is required to document its compliance with the notice
requirement set forth in paragraph (b)(2)(i)(A) of this section.
(ii) Nothing in this section shall require a covered financial
institution to report any information not otherwise required to be
reported by law or regulation.
Dated: July 5, 2006.
Robert W. Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. E6-11043 Filed 7-12-06; 8:45 am]
BILLING CODE 4810-02-P
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[Federal Register: July 13, 2006 (Volume 71, Number 134)]
[Proposed Rules]
[Page 39606-39609]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jy06-39]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA81
Financial Crimes Enforcement Network; Withdrawal of the Finding
of Primary Money Laundering Concern and the Notice of Proposed
Rulemaking Against Multibanka
AGENCY: Financial Crimes Enforcement Network, Department of the
Treasury.
ACTION: Withdrawal of the notice of proposed rulemaking.
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SUMMARY: This document withdraws our April 26, 2005 finding that joint
stock company Multibanka (``Multibanka'' or the ``bank'') is a
financial institution of primary money laundering concern and our
notice of proposed rulemaking recommending the imposition of a special
measure, pursuant to the authority contained in 31 U.S.C. 5318A of the
Bank Secrecy Act.
DATES: The notice of proposed rulemaking is withdrawn as of July 13,
2006.
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, Financial Crimes Enforcement Network, (800) 949-2732.
SUPPLEMENTARY INFORMATION:
I. Background
A. 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 (``USA
PATRIOT Act''). Title III of the USA PATRIOT Act amends the anti-money
laundering provisions of the Bank Secrecy Act, codified at 12 U.S.C.
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and 5316-5332, to
promote the prevention, detection, and prosecution of money laundering
and the financing of terrorism. Regulations implementing the Bank
Secrecy Act appear at 31 CFR part 103. The authority of the Secretary
of the Treasury (the ``Secretary'') to administer the Bank Secrecy Act
and its implementing regulations has been delegated to the Director of
the Financial Crimes Enforcement Network (the ``Director'').\1\ The
Bank Secrecy Act authorizes the Director to issue regulations requiring
all financial institutions defined as such in the Bank Secrecy Act to
maintain or file certain reports or records that have been determined
to have a high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings, or in the conduct of intelligence or
counter-intelligence activities, including analysis, to protect against
international terrorism, and to implement anti-money laundering
programs and compliance procedures.\2\
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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 the Financial Crimes Enforcement Network.
\2\ Language expanding the scope of the Bank Secrecy Act to
intelligence or counter-intelligence activities to protect against
international terrorism was added by section 358 of the USA PATRIOT
Act.
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Section 311 of the USA PATRIOT Act added section 5318A to the Bank
Secrecy Act, granting the Secretary the authority, after finding that
reasonable grounds exist for concluding that a foreign jurisdiction,
foreign financial institution, class of international transactions, or
type of account is of ``primary money laundering concern,'' to require
domestic financial institutions and domestic financial agencies to take
certain ``special measures'' against the primary money laundering
concern. Section 311 identifies factors for the Secretary to consider
and Federal agencies to consult before he may find that reasonable
grounds exist for concluding that a jurisdiction, financial
institution, class of transactions, or type of account is of primary
money laundering concern. The statute also provides similar procedures,
including factors and consultation requirements, for selecting the
specific special measures to be imposed against the primary money
laundering concern.
Taken as a whole, section 311 provides the Secretary with a range
of options that can be adapted to target specific money laundering and
terrorist financing concerns most effectively. These options provide
the authority to bring additional and useful pressure on those
jurisdictions and institutions that pose money laundering threats and
the ability to take steps to protect the U.S. financial system. Through
the imposition of various special measures, we can: Gain more
information about the concerned jurisdictions, financial institutions,
transactions, and accounts; monitor more effectively the respective
jurisdictions, financial institutions, transactions, and accounts; and
ultimately protect U.S. financial institutions from involvement with
jurisdictions, financial institutions, transactions, or accounts that
pose a 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 by the Bank Secrecy Act
to consult with both the Secretary of State and the Attorney General.
In addition to these consultations, when finding that a foreign
financial institution is of primary money laundering concern, the
Secretary is required by section 311 to consider ``such information as
the Secretary determines to be relevant, including the following
potentially relevant factors:''
The extent to which such financial institution is used to
facilitate or promote money laundering in or through the jurisdiction;
The extent to which such financial institution is used for
legitimate business purposes in the jurisdiction; and
The extent to which such action is sufficient to ensure,
with respect to
[[Page 39607]]
transactions involving the institution operating in the jurisdiction,
that the purposes of the Bank Secrecy Act continue to be fulfilled, and
to guard against international money laundering and other financial
crimes.
If we determine that reasonable grounds exist for concluding that a
foreign financial institution is of primary money laundering concern,
we must determine the appropriate special measure(s) to address the
specific money laundering risks. Section 311 provides a range of
special measures that can be imposed, individually or jointly, in any
combination, and in any sequence.\3\ In the imposition of special
measures, we follow procedures similar to those for finding a foreign
financial institution to be of primary money laundering concern, but we
also engage in additional consultations and consider additional
factors. Section 311 requires us to consult with other appropriate
Federal agencies and parties \4\ and to consider the following specific
factors:
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\3\ Available special measures include requiring: (1)
Recordkeeping and reporting of certain financial transactions; (2)
collection of information relating to beneficial ownership; (3)
collection of information relating to certain payable-through
accounts; (4) collection of information relating to certain
correspondent accounts; and (5) prohibition or conditions on the
opening or maintaining of correspondent or payable-through accounts.
31 U.S.C. 5318A(b)(1)-(5). For a complete discussion of the range of
possible countermeasures, see 68 FR 18917 (April 17, 2003)
(proposing to impose special measures against Nauru).
\4\ Section 5318A(a)(4)(A) requires the Secretary to consult
with the Chairman of the Board of Governors of the Federal Reserve
System, any other appropriate Federal banking agency, the Secretary
of State, the U.S. Securities and Exchange Commission, the Commodity
Futures Trading Commission, the National Credit Union
Administration, and, in our sole discretion, ``such other agencies
and interested parties as the Secretary may find to be
appropriate.'' The consultation process must also include the
Attorney General, if the Secretary is considering prohibiting or
imposing conditions upon the opening or maintaining of a
correspondent account by any domestic financial institution or
domestic financial agency for the foreign financial institution of
primary money laundering concern.
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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 institution; and
The effect of the action on U.S. national security and
foreign policy.\5\
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\5\ Classified information used in support of a section 311
finding of primary money laundering concern and imposition of
special measure(s) may be submitted by the Department of the
Treasury 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 31 U.S.C. 5318A by adding new paragraph
(f)).
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B. Multibanka
Multibanka is headquartered in Riga, the capital of the Republic of
Latvia (``Latvia''). Multibanka is the oldest commercial bank in Latvia
and is among the smallest of Latvia's 23 banks. It has: Four foreign
offices, which are located in Russia, Ukraine, and Belarus; five
domestic branches; and one leasing subsidiary, Multilizings. Multibanka
provides a full range of banking services in the Latvian market and is
a member of the Riga Stock Exchange, the Central Depository, and the
Association of Commercial Banks of Latvia. Multibanka currently has
direct ties to the U.S. financial system through one of its
correspondent relationships.
II. The 2005 Finding and Subsequent Developments
A. The 2005 Finding
Based upon review and analysis of relevant information,
consultations with relevant Federal agencies and parties, and after
consideration of the factors enumerated in section 311, in April 2005
the Secretary, through his delegate, the Director of the Financial
Crimes Enforcement Network, found that reasonable grounds exist for
concluding that Multibanka is a financial institution of primary money
laundering concern. This finding was published in a notice of proposed
rulemaking which proposed prohibiting covered financial institutions
from, directly or indirectly, opening or maintaining correspondent
accounts in the United States for Multibanka or any of its branches,
offices, or subsidiaries, pursuant to the authority under 31 U.S.C.
5318A.\6\
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\6\ See 70 FR 21362 (April 26, 2005).
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The notice of proposed rulemaking outlined the various factors
supporting the finding and proposed prohibition. In finding Multibanka
to be of primary money laundering concern, we determined that:
Multibanka was used by criminals to facilitate or promote
money laundering. In particular, we determined Multibanka was an
important banking resource for illicit shell companies and financial
fraud rings, allowing criminals to pursue illegal financial activities.
Any legitimate business use of Multibanka appeared to be
significantly outweighed by its use to promote or facilitate money
laundering and other financial crimes.
A finding that Multibanka was a financial institution of
primary money laundering concern and prohibiting the maintenance of
correspondent accounts for that financial institution would prevent
suspect accountholders at Multibanka from accessing the U.S. financial
system to facilitate money laundering and would bring criminal conduct
occurring at or through Multibanka to the attention of the
international financial community, thus serving the purposes of the
Bank Secrecy Act and guarding against international money laundering
and other financial crimes.
We determined, based on a variety of sources, that Multibanka had
been used to facilitate or promote money laundering based in part on
its lax identification and verification of accountholders and on its
weak internal controls. In addition, the proceeds of alleged illicit
activity had been transferred to or through accounts held by Multibanka
at U.S. financial institutions.
B. Jurisdictional Developments
Latvia's geographical position, situated by the Baltic Sea and
bordering Russia, Estonia, Belarus, and Lithuania, makes it an
attractive transit country for both legitimate and illegitimate trade.
Sources of illegitimate trade include counterfeiting, arms trafficking,
contraband smuggling, and other crimes. It is believed that most of
Latvia's narcotics trafficking is conducted by organized crime groups
that began with cigarette and alcohol smuggling and then progressed to
narcotics. Latvian authorities recently have sought tighter legislative
controls designed to fight money laundering and other financial crime.
However, Latvia's role as a regional financial center, the number of
commercial banks (23), and those banks' sizeable non-resident deposit
base continue to make it vulnerable to money laundering.
Latvia has taken a number of significant steps to address the
reported money laundering risks and corruption highlighted in the
notice of proposed rulemaking. The Parliament of Latvia recently passed
a new law, On the Declaration of Cash on the State Border, which will
go into effect on July 1, 2006.\7\ The law is aimed at preventing
[[Page 39608]]
money laundering consistent with the United Nations Convention Against
Transnational Organized Crime and the European Union draft regulation
on the control of cash leaving and entering the European Community. In
2005, Latvian law was amended to broaden supervisory authority to
revoke banking licenses and to allow enforcement agencies greater
access to bank account information. The amendments: Provide for fines
of between 5,000 and 100,000 LATS (equivalent to over $8,687.50 and
over $173,750.00, respectively) against banks in violation of the anti-
money laundering laws; include a definition of and procedures for
determining who qualifies as a ``true beneficiary''; and introduce
criminal liability for providing false information to banks.
Additionally, Latvia has: Banned the establishment of shell banks;
clarified the authority of Latvian financial institutions to demand
customer disclosure regarding the source of funds; and allowed for the
sharing of information between financial institutions on suspicious
activities.
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\7\ The law requires that individuals crossing the Latvian
border with the equivalent of 10,000 Euros ([euroi]10,000) in coins,
cash, and/or certain monetary instruments to complete a form stating
the origin of the currency or monetary instruments, the purpose or
use of the currency or monetary instruments, and the receiver of the
currency or monetary instruments.
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In terms of implementation, the Latvian authorities have made
strides in strengthening their anti-money laundering regulation and
supervision and in developing more robust anti-money laundering
examination procedures. To ensure proper protection of Latvia's
financial sector, authorities will need to continue their efforts to
effectively implement and enforce their strengthened anti-money
laundering regime.
C. Multibanka's Subsequent Developments
Multibanka has informed us that it has taken significant steps to
address deficiencies in its anti-money laundering programs and
controls. Although some of these efforts were initiated prior to the
finding that Multibanka was a financial institution of primary money
laundering concern, the bank is continuing to improve its anti-money
laundering procedures and is working to ensure that these are
translated effectively into practice. First, the bank revised its
policies, procedures, and internal controls, and established an Anti-
Money Laundering Manual to address previously identified weaknesses,
which included lax practices in the identification and verification of
accountholders and insufficient internal controls. Second, it committed
to review, and has since reviewed, its entire portfolio of accounts
with the aim of verifying the identities of all accountholders. We
understand that, in connection with this review process, the bank
terminated relationships with more than 2,600 customers that were
unwilling or unable to comply with Multibanka's enhanced information
collection and verification standards. As a result, 98 percent of the
bank's non-resident accounts and more than 50 percent of the bank's
resident accounts have been closed. Third, Multibanka retained the
services of an independent, international accounting firm to identify
weaknesses in its anti-money laundering program and to assist the bank
in its goal of reaching a best international practices standard for its
anti-money laundering program and internal controls. Together, the bank
and the international accounting firm have created an action plan to
address deficiencies and have targeted compliance dates, and the bank
has evinced implementation of the plan. Fourth, the bank has made
organizational changes to coordinate and lead anti-money laundering
activities, including the creation of a Compliance Committee, a Finance
Monitoring Department, a Corporate Customer Department, and a Customer
Management Division. In addition to hiring additional employees to
assist with compliance, the bank has enhanced training opportunities
for bank personnel with key anti-money laundering responsibilities.
Fifth, in an effort to improve internal controls, the bank has enhanced
and continues to enhance information technology systems that assist in
the automated screening of accountholders, beneficial owners, and other
persons and transactions that need to be flagged for enhanced scrutiny
or possible reporting.
We believe that Multibanka has been forthcoming in addressing the
concerns that we identified in the notice of proposed rulemaking and
has instituted measures to guard against money laundering abuses. The
bank, through its counsel, initiated meetings with us in May and
October 2005, with the intent to demonstrate the remedial measures
taken. We permitted the bank to submit additional documentation to
demonstrate its continued efforts and the bank has provided copies of
its revised policies, procedures, and internal controls.
Multibanka has significantly improved its anti-money laundering
policies, procedures, and internal controls, has enhanced its
organizational structure, and has strengthened its accountholder
identification and verification requirements. We believe that the
bank's cumulative efforts demonstrate its continuing commitment to
fighting money laundering and other financial crimes.
If a financial institution that is the object of a proposed section
311 special measure is determined to no longer be of primary money
laundering concern, we have authority to withdraw the finding and to
withdraw any related proposal to impose a special measure. In light of
Multibanka's significant remedial measures, described above, to address
deficiencies in its anti-money laundering program and internal
controls, particularly the bank's attempts to review its accounts to
focus on legitimate business customers, we believe that the risk of
criminals using Multibanka to facilitate or promote money laundering
has decreased.
III. Notice of Proposed Rulemaking and Comments
In the April 26, 2005 notice of proposed rulemaking, we proposed to
impose the fifth special measure authorized by 31 U.S.C. 5318A(b)(5)
against Multibanka, which would prohibit U.S. financial institutions
from opening or maintaining correspondent or payable-through accounts
for Multibanka in the United States.
We received six comments on the notice of proposed rulemaking.
Three comments, one each from an industry association, a firm providing
search software to financial institutions, and a private individual,
addressed the finding and rulemaking under Section 311 generally, but
did not provide specifics with respect to Multibanka. The Latvian
financial intelligence unit and a Latvian financial services
supervisory authority jointly filed a comment regarding Latvian anti-
money laundering requirements, but similarly provided no specifics with
respect to Multibanka. Legal counsel to Multibanka submitted two
comment letters, and representatives of Multibanka met with us to
discuss the anti-money laundering efforts described in their comments.
IV. Withdrawal of the Finding of Multibanka as a Financial Institution
of Primary Laundering Concern
For the reasons set forth above, we hereby withdraw our finding
that Multibanka is a financial institution of primary money laundering
concern as of July 13, 2006.
[[Page 39609]]
V. Withdrawal of Notice of Proposed Rulemaking
For the reasons set forth above, we hereby withdraw the notice of
proposed rulemaking imposing the fifth special measure authorized by 31
U.S.C. 5318A(b)(5) against Multibanka for purposes of section 5318A as
published in the Federal Register on April 26, 2005 (70 FR 21362).
Dated: May 12, 2006.
Robert W. Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. E6-10941 Filed 7-12-06; 8:45 am]
BILLING CODE 4810-02-P