[Federal Register Volume 81, Number 62 (Thursday, March 31, 2016)]
[Rules and Regulations]
[Pages 18480-18494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07210]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB27


Imposition of Special Measure Against FBME Bank Ltd., Formerly 
Known as the Federal Bank of the Middle East Ltd., as a Financial 
Institution of Primary Money Laundering Concern

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Final rule.

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SUMMARY: In a Notice of Finding (NOF) published in the Federal Register 
on July 22, 2014, FinCEN found that reasonable grounds exist for 
concluding that FBME Bank Ltd. (FBME), formerly known as the Federal 
Bank of the Middle East Ltd., is a financial institution of primary 
money laundering concern pursuant to Section 311 of the USA PATRIOT Act 
(Section 311). On the same date, FinCEN also published in the Federal 
Register a Notice of Proposed Rulemaking (NPRM) to propose the 
imposition of a special measure authorized by Section 311 against FBME 
and opened a comment period that closed on September 22, 2014. On July 
29, 2015, FinCEN published in the Federal Register a final rule 
imposing the fifth special measure, which the United States District 
Court for the District of Columbia subsequently enjoined before the 
rule's effective date of August 28, 2015. FinCEN is issuing this final 
rule imposing a prohibition on U.S. financial institutions from opening 
or maintaining a correspondent account for, or on behalf of, FBME in 
place of the rule published on July 29, 2015.

DATES: This final rule is effective July 29, 2016.

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

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 (the 
USA PATRIOT

[[Page 18481]]

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) grants FinCEN the 
authority, upon finding that reasonable grounds exist for concluding 
that a foreign jurisdiction, foreign financial institution, class of 
transactions, or type of account is of ``primary money laundering 
concern,'' to require domestic financial institutions and financial 
agencies to take certain ``special measures'' to address the primary 
money laundering concern. The special measures enumerated under Section 
311 are prophylactic safeguards that defend the U.S. financial system 
from money laundering and terrorist financing. FinCEN may impose 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 or impose conditions on 
the opening or maintaining of correspondent or payable-through accounts 
for the identified institution by U.S. financial institutions.

B. FBME Bank Ltd.

    FBME Bank Ltd. (FBME) was established in 1982 in Cyprus as the 
Federal Bank of the Middle East Ltd., a subsidiary of the private 
Lebanese bank, the Federal Bank of Lebanon. Both FBME and the Federal 
Bank of Lebanon are owned by Ayoub-Farid M. Saab and Fadi M. Saab. In 
1986, FBME changed its country of incorporation to the Cayman Islands, 
and its banking presence in Cyprus was re-registered as a branch of the 
Cayman Islands entity. In 2003, FBME left the Cayman Islands and 
incorporated and established its headquarters in Tanzania. At the same 
time, FBME's Cypriot operations became a branch of FBME Tanzania Ltd. 
In 2005, FBME changed its name from the Federal Bank of the Middle East 
Ltd. to FBME Bank Ltd.
    As of July 22, 2014, the date that FinCEN issued its Notice of 
Finding, FBME's headquarters in Tanzania was widely regarded as the 
largest bank in Tanzania based on its $2 billion asset size, despite 
having only four Tanzania-based branches. While FBME is presently 
headquartered in Tanzania, as of July 2014, FBME transacted over 90 
percent of its global banking business and held over 90 percent of its 
assets in its Cyprus branch. FBME has long maintained a significant 
presence in Cyprus.

II. FinCEN's Section 311 Rulemaking Regarding FBME

A. The 2014 Notice of Finding and Notice of Proposed Rulemaking

    In a Notice of Finding (NOF) published in the Federal Register on 
July 22, 2014, FinCEN explained its finding that reasonable grounds 
exist for concluding that FBME is a financial institution of primary 
money laundering concern pursuant to 31 U.S.C. 5318A.\1\ FinCEN's NOF 
identified two main areas of concern: (1) FBME's facilitation of money 
laundering, terrorist financing, transnational organized crime, fraud 
schemes, sanctions evasion, weapons proliferation, corruption by 
politically-exposed persons, and other financial crime, and (2) FBME's 
weak AML controls, which allowed its customers to perform a significant 
volume of obscured transactions and activities through the U.S. 
financial system. In particular, FinCEN found that FBME had been used 
to facilitate this illicit activity internationally and through the 
U.S. financial system, and attracted high-risk shell companies (i.e., 
entities that typically have no physical presence other than a mailing 
address, and generate little to no independent economic value). As 
described in the NOF, FBME performed a significant volume of 
transactions and activities that had little or no transparency with 
regard to customer information and often no apparent legitimate 
business purpose. Such lack of transparency makes it difficult for U.S. 
and other financial institutions, as well as law enforcement, to detect 
illicit activity.
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    \1\ See 79 FR 42639 (July 22, 2014).
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    As detailed in the NOF, illicit activities involving FBME included: 
(1) An FBME customer's receipt of a deposit of hundreds of thousands of 
dollars from a financier for Lebanese Hezbollah; (2) providing 
financial services to a financial advisor for a major transnational 
organized crime figure; (3) FBME's facilitation of funds transfers to 
an FBME account involved in fraud against a U.S. person, with the FBME 
customer operating the alleged fraud scheme later being indicted in the 
United States District Court for the Northern District of Ohio; and (4) 
FBME's facilitation of U.S. sanctions evasion through its extensive 
customer base of shell companies, including at least one FBME customer 
that was a front company for a U.S.-sanctioned Syrian entity, the 
Scientific Studies and Research Center (SSRC), which used its FBME 
account to process transactions through the U.S. financial system.
    On the same day it published the NOF, FinCEN also published in the 
Federal Register a related Notice of Proposed Rulemaking (NPRM) 
proposing the imposition of a prohibition on U.S. financial 
institutions from opening or maintaining a correspondent account for, 
or on behalf of, FBME.\2\ On July 29, 2015, after considering comments 
and other information available to FinCEN, including both public and 
non-public information, FinCEN finalized the rule, to take effect on 
August 28, 2015.\3\
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    \2\ 79 FR 42486 (July 22, 2014) (RIN 1506-AB27).
    \3\ 80 FR 45057 (July 29, 2015) (RIN 1506-AB27).
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B. Re-Opening of the Comment Period

    Following the publication of the rule in the Federal Register, on 
August 7, 2015, FBME filed suit in the United States District Court for 
the District of Columbia, seeking a preliminary injunction against the 
final rule. On August 27, 2015, the court granted FBME's motion for 
preliminary injunction and enjoined the rule from taking effect.\4\ In 
its order, the court held that FBME was likely to succeed on the merits 
of two of its claims: (1) That FinCEN had provided insufficient notice 
of unclassified, non-protected information on which it relied during 
the rulemaking proceedings, and (2) that FinCEN had failed to 
adequately consider at least one potentially significant, viable, and 
obvious alternative to the special measure it had imposed.\5\
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    \4\ FBME Bank Ltd. v. Lew, No. 1:15-cv-01270 (CRC), 2015 WL 
5081209 (D.D.C. Aug. 27, 2015).
    \5\ Id. at *5.
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    On November 6, 2015, the court granted FinCEN's motion for 
voluntary remand so that FinCEN could engage in further rulemaking to 
address the procedural issues identified by the court. On November 27, 
2015, FinCEN published in the Federal Register a Notice to re-open the 
final rule for 60 days to solicit additional comments in connection 
with the rulemaking, particularly with respect to the unclassified, 
non-protected documents

[[Page 18482]]

that supported the rulemaking, and whether any alternatives to the 
prohibition on the opening or maintaining of correspondent accounts for 
FBME would effectively mitigate the money laundering and terrorist 
financing risks associated with FBME. FinCEN also made available for 
comment on www.regulations.gov the unclassified, non-protected material 
that FinCEN considered and intended to rely upon during the rulemaking 
proceeding. The re-opened comment period closed on January 26, 2016.

III. FBME Developments

    This section outlines steps taken by FBME's relevant banking 
regulators in FBME's jurisdictions of operation following FinCEN's 
announcement of its NOF and NPRM.
    On July 21, 2014, the Central Bank of Cyprus (CBC), under authority 
of the Cyprus Resolution Act, issued a decree announcing that it would 
formally place FBME's Cyprus branch ``under resolution'' and appoint a 
Special Administrator to protect the bank's depositors. On December 21, 
2015, the CBC announced that it is considering the withdrawal of FBME's 
license to operate the branch in Cyprus; however, there is litigation 
pending between FBME and the CBC.
    On July 24, 2014, the Bank of Tanzania (BoT) appointed a statutory 
manager over FBME's headquarters in Tanzania to ensure sound operations 
of the bank in order to restore and maintain confidence of depositors 
and the general public; to ensure the safety of bank assets; and to 
execute duties in accordance with the prevailing laws and regulations, 
guidelines, and directives issued by the BoT.

IV. Summary of FinCEN's Ongoing Concerns Regarding FBME

    After considering comments from FBME and the public as well as 
other information available to the agency, including both public and 
non-public information, FinCEN is issuing this rule imposing a 
prohibition on U.S. financial institutions from opening or maintaining 
a correspondent account for, or on behalf of, FBME. The information 
available to FinCEN \6\ provides reason to conclude that FBME's AML 
compliance efforts remain inadequate to address the risks posed by 
FBME, and that FBME continues to facilitate illicit financial activity. 
Because of the ongoing money laundering and terrorist financing 
concerns that FinCEN has regarding FBME, FinCEN finds that FBME 
continues to be a financial institution of primary money laundering 
concern.
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    \6\ As contemplated by Section 311, FinCEN's determinations that 
FBME is of primary money laundering concern and the appropriate 
special measure to address that concern are based on unclassified 
information provided to the public as well as classified or 
otherwise-protected materials. This final rule necessarily describes 
only the record information made available to the public or 
authorized to be publicly released.
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    As described in Part V, audits of FBME's Cyprus branch performed by 
third parties in 2013 and 2014 that FBME provided to FinCEN to 
demonstrate the effectiveness of its AML compliance program instead 
identified significant, recurring weaknesses in FBME's compliance 
program. Indeed, one of the third party auditors identified several 
deficiencies as being of high or medium significance. These 
deficiencies, which FinCEN has reason to conclude have continued since 
the issuance of the NOF, facilitate the illicit financial activities of 
FBME's customers.
    Furthermore, FinCEN notes that these audits only address the bank's 
Cyprus branch. As defined in the NOF and NPRM, FinCEN's finding that 
FBME is of primary money laundering concern identified the entire bank, 
to include its headquarters in Tanzania and its other branches, 
offices, and subsidiaries.
    Also, as discussed below, the CBC's identification of ``serious and 
systemic'' AML deficiencies at FBME following an AML examination of the 
bank's Cyprus branch in 2014, as well as the CBC's findings since the 
issuance of the NOF and NPRM, reinforce and corroborate FinCEN's 
concerns regarding the money laundering and terrorist financing risks 
associated with FBME.
    FinCEN also concludes that FBME has sought to evade AML regulations 
and has ignored the CBC's AML directives. As noted in FinCEN's NOF, 
FBME was recognized by its high-risk customers for its ease of use. 
FBME even advertised the bank to its potential customer base as being 
willing to facilitate the evasion of AML regulations. FBME's Cyprus 
branch also ignored instructions from its AML regulator, the CBC, to 
remedy AML deficiencies specifically identified by the CBC. In 
addition, in late 2014, FBME employees took various measures to obscure 
information. FinCEN finds this behavior may have been part of an effort 
to reduce scrutiny over FBME's operations following the issuance of the 
NOF and increased regulatory scrutiny. Moreover, FinCEN is concerned 
that terrorist financing activity involving the bank has continued 
beyond publication of the NOF. As of early 2015, an alleged Hezbollah 
associate and the Tanzanian company he managed owned accounts at FBME. 
And this is not the first episode of the bank's involvement in 
financial activity possibly connected to Hezbollah. As discussed in the 
NOF, in 2008, an FBME customer received a deposit of hundreds of 
thousands of dollars from a financier for Hezbollah.

The CBC's AML Examination of FBME's Cyprus Branch

    As described in the NOF, FinCEN had reasonable grounds to find FBME 
to be of primary money laundering concern because, among other things, 
the bank's AML controls encouraged use of the bank by high-risk 
customers, and the bank conducted a significant volume of transactions 
and activities with little or no transparency and often with no 
apparent legitimate business purpose. The CBC independently identified 
many of these same concerns during an on-site AML examination of FBME's 
Cyprus branch conducted from June to September 2014.\7\
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    \7\ That examination sought to evaluate FBME's Cyprus branch for 
compliance with the provisions of Part VIII of the Prevention and 
Suppression of Money Laundering Activities Law of 2007, the 
Directive issued by the CBC for the Prevention of Money Laundering 
and Terrorist Financing in December 2013, and the provisions of 
Regulation 1781/2006 of the European Parliament and of the Council 
of November 15, 2006 regarding information related to funds transfer 
information.
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    In a September 18, 2015 letter to the Special Administrator of 
FBME's Cyprus branch regarding that examination,\8\ the CBC found, 
among other things, that FBME (1) failed to apply enhanced due 
diligence to high-risk customers; (2) allowed customers to use FBME's 
physical address in wire transfers in lieu of the customers' true 
addresses, thus obscuring key transactional details that U.S. and other 
financial institutions need to conduct appropriate AML screening; (3) 
failed to adequately assess its own money laundering and terrorist 
financing risk, thus hindering the bank's ability to mitigate those 
risks; (4) accepted false beneficial ownership information for high-
risk customers; and (5) maintained incomplete customer due diligence 
information and failed to update and review customer files.
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    \8\ FBME provided this letter to FinCEN as Exhibit 41 to its 
January 26, 2016 comment. FBME also included, as Exhibit 41a to its 
comment, a letter from the bank to the CBC, dated September 28, 
2015, in which it raised issues regarding the conclusions set forth 
in the CBC's September 18, 2015 letter.
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    In sum, according to the September 18, 2015 letter, the CBC 
identified ``serious and systemic'' AML failures--failures to comply 
with applicable AML laws that resulted in an ``inadequate and 
ineffective'' AML system. The CBC fined FBME [euro]1.2 million in 
December 2015 for these AML deficiencies. These deficiencies 
contributed to the CBC's

[[Page 18483]]

conclusion that the lack of robust AML controls at FBME's Cyprus branch 
increases the risk that the branch's services can be used by criminals 
for the purpose of money laundering and/or terrorist financing. FinCEN 
shares this concern.
    Banks with weak AML controls, like FBME, can become a magnet for 
illicit actors seeking to hide their identity and the illicit nature of 
their activities. Indeed, the illicit activity at FBME, including 
holding an account for an alleged Hezbollah associate and the Tanzanian 
company he managed, illustrates this vulnerability. Protecting the 
United States from such illicit financial activity requires FinCEN to 
ensure that banks with severely deficient AML controls, like FBME, do 
not have access to the U.S. financial system.
    As part of its January 26, 2016 comment, FBME included responses to 
the CBC's conclusions, which FinCEN reviewed as part of its evaluation 
of whether FBME remains of primary money laundering concern. FBME's 
responses generally consisted of arguments that the CBC misinterpreted 
FBME's banking records or Cypriot regulations, that other Cypriot banks 
were as non-compliant with certain AML provisions as FBME, or expressed 
general disagreement with the CBC's conclusion. After a thorough point-
by-point review of the deficiencies identified by the CBC and FBME's 
responses, FinCEN found FBME's responses to be neither persuasive nor 
sufficient to alleviate FinCEN's concerns surrounding FBME's AML 
deficiencies. For example, although FBME disputed the CBC's findings 
that the bank failed to maintain sufficiently comprehensive and up-to-
date files on its customers, FinCEN notes that in some cases FBME 
conceded that the CBC's findings were correct. Further, FinCEN remains 
troubled by the fact that as of June 2014, FBME had completed its 
review of only three percent of its high-risk customer files. As 
another example, FBME accepted false identifying information regarding 
beneficial ownership of FBME customers who it should have known were 
high-risk. FBME contended that valid confidentiality concerns existed 
and that accepting the false information did not impede the application 
of enhanced due diligence measures. FinCEN, however, agrees with the 
CBC's assessment that excluding certain relevant information on 
customer forms prevented FBME from adequately identifying and 
mitigating money laundering risks.

V. Consideration of Comments

    Following the issuance of the July 22, 2014, NOF and NPRM, FinCEN 
opened a comment period that closed on September 22, 2014. FinCEN re-
opened the comment period on November 27, 2015, following the court's 
order granting the government's motion for a voluntary remand to allow 
for further rulemaking. That comment period closed on January 26, 2016. 
FinCEN first addresses the comments received from FBME and then 
addresses the other comments received.

A. Comments Received From FBME

1. FBME's September 22, 2014 Comment and Additional Submissions 
Regarding the Notice of Finding and Proposed Rulemaking
    FBME, through its counsel, submitted a comment dated September 22, 
2014. FBME made six additional submissions of information related to 
that comment. FinCEN reviewed and considered each of these submissions 
in drafting this final rule.
    FBME's September 22, 2014 comment consists of an introduction 
followed by two major sections. In its introduction, FBME makes six key 
points.
     First, FBME states that its AML compliance program 
policies are in line with applicable requirements, including the 
requirements of the European Union's Third Money Laundering Directive 
and the CBC's Fourth Directive. FBME contends that this alignment has 
been the case since at least 2013, according to third party audits.
     Second, FBME states that, in response to recommendations 
made as a result of audits conducted by Ernst & Young (EY) in 2011 and 
KPMG in 2013, FBME substantially strengthened its compliance program 
between 2012 and 2014.
     Third, FBME states that FBME and its officers and 
directors do not condone the use of FBME for illicit purposes and 
strive to prevent such misuse.
     Fourth, FBME contends that some of the statements made in 
the NOF are incorrect or are based on incomplete information, which 
FBME also describes in the second section of its comment.
     Fifth, FBME states that, in some cases, FBME filed 
Suspicious Transaction Reports (STRs) with the Cypriot Financial 
Intelligence Unit (MOKAS) on activity described in the NOF and NPRM.
     Sixth, FBME claims that the NOF and NPRM have had a 
significant adverse impact on FBME and its customers.
    The first section of FBME's September 22, 2014 comment then 
describes aspects of its AML compliance program, and the second section 
responds to statements made in the NOF that FBME asserts are inaccurate 
or based on incomplete information.\9\
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    \9\ In this final rule, FinCEN focuses its response on the six 
points in the introduction, which summarize FBME's concerns with the 
NOF and NPRM. In responding to the first three points of FBME's 
introduction, FinCEN addresses the first section of FBME's comment 
because the first three points of FBME's introduction and the first 
section of FBME's comment all refer to FBME's AML compliance 
program, its policies, audits conducted by third parties, and FBME's 
management. In responding to the fourth point of FBME's 
introduction, FinCEN addresses the second section of FBME's comment 
because both the fourth point of the introduction and the second 
section of the comment refer to the same statements in the NOF that 
FBME asserts are inaccurate or based on incomplete information.
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FBME's AML Program
    With regard to FBME's first and second points, i.e., FBME's 
contention that its AML compliance program policies are in line with 
applicable requirements and that it has substantially strengthened its 
compliance program, the KPMG and EY audits that FBME provided to FinCEN 
show a pattern of recurring AML deficiencies at the bank. FBME has 
asserted that it continued to make improvements, but FBME has not 
provided meaningful information to support these assertions. These 
deficiencies included failures to maintain adequate customer 
identification files and other customer due diligence weaknesses, 
failure to ensure that third parties the bank relied on to establish 
new customer relationships employed appropriate AML controls with 
regard to such persons, and issues with sanctions-related screening.
    According to FBME's September 22, 2014 comment, EY conducted an 
audit in 2011 (the EY 2011 Audit). During that audit, according to 
FBME, EY found that FBME's due diligence procedures with respect to 
obtaining information from new clients met the requirements of the CBC 
Directive at the time, but also noted that some customer information 
requirements of the Directive had not been fully met by FBME in 
previous iterations of its AML procedures and policies. According to 
FBME's comment, EY conducted another audit in 2014 (the EY 2014 Audit), 
which found that, although FBME had an AML compliance program in place 
that incorporated the requirements of both the CBC Fourth Directive and 
the European Union Third Directive, FBME nevertheless had deficiencies 
in its

[[Page 18484]]

customer due diligence, automated alerts system, and AML training 
areas.
    According to FBME's September 22, 2014 comment, KPMG also conducted 
an audit in 2013 (the KPMG 2013 Audit) which found that FBME 
``basically fulfills'' the AML regulatory requirements of the CBC and 
the European Union, but also identified issues of ``high or medium'' 
significance with FBME's use of Approved Third Parties and FBME's 
sanction screening procedures. As FBME stated in its September 22, 2014 
comment, FBME uses its relationships with Approved Third Parties (a 
person authorized by a bank to introduce new customers to the bank), 
some of which are in foreign jurisdictions, to develop potential new 
customer relationships. According to the KPMG 2013 Audit, FBME had 
never attempted to ensure the adequacy of its Approved Third Parties' 
AML measures. In addition, the KPMG 2013 Audit found that FBME only 
screened the related parties of its Approved Third Parties when the 
customers were initially onboarded.
    The KPMG 2013 Audit also found FBME's customer due diligence 
procedures to be deficient. As FBME disclosed in its September 22, 2014 
comment, in its 2013 audit, KPMG recommended better presentation of 
ownership information to demonstrate links between group entities for 
older customers, in line with a new structure that had been introduced 
for new customers. KPMG also found that certain customer files reviewed 
did not have sufficient information to gain a complete understanding of 
the customers' activities or business rationale. In its 2013 audit, 
KPMG further found that FBME's use of hold-mail accounts (a service 
that allowed a number of customers to keep their mail within the branch 
and use the branch's address in payment messages for the transfer of 
funds) and post office boxes managed by Approved Third Parties should 
be reconsidered by FBME in order to avoid potential anonymization.
    The EY 2014 Audit identified numerous deficiencies in FBME's 
compliance program. Specifically, the EY 2014 Audit made the following 
recommendations: Consistently documenting the efforts taken to verify 
the sources of funds and business purpose of accounts from prospective 
customers; more thoroughly investigating relationships among FBME 
customers, especially when inordinate volumes of internal transfers are 
identified; modifying FBME's periodic customer due diligence process to 
align with industry practices (e.g., moving to a rolling 12 or 36-month 
review cycle, depending on the customer's risk); implementing an 
automated case management system to record the alerts generated, stage 
of investigation, and ultimate disposition of the alerts generated by 
FBME's screening software, as opposed to the current process of 
manually entering the alerts/outcome on several different spreadsheets; 
and more thoroughly documenting the AML/sanctions training given for 
new hires and providing general awareness training to all employees on 
an annual basis.
    The numerous AML compliance program deficiencies described in the 
KPMG 2013 Audit and the EY 2014 Audit in particular are similar to AML 
deficiencies FinCEN identified in the NOF. As FBME acknowledged in its 
September 22, 2014 comment, in 2010, the CBC fined FBME for customer 
identification, due diligence, and automated monitoring deficiencies. 
According to the KPMG 2013 Audit, FBME also undertook an extensive Know 
Your Customer (KYC) remediation project from 2009 through 2011 that was 
ordered by the CBC and resulted in the closure of thousands of FBME 
accounts. Despite this remediation project, the CBC identified 
deficiencies in the customer due diligence controls at the Cypriot 
branch during its 2014 AML audit. Also, the CBC fined FBME [euro]1.2 
million in December 2015 for AML deficiencies.
    Finally, FBME's argument that its AML compliance program is now 
adequate is weakened by the list of illicit actors identified in the 
NOF that continued to make use of FBME as recently as 2014, including 
narcotics traffickers, terrorist financiers, and organized crime 
figures. In addition, as of early 2015, an alleged Hezbollah associate 
and the Tanzanian company he managed owned accounts at FBME.
FBME's Management
    With regard to FBME's third point, i.e., FBME's contention that 
FBME and its officers and directors do not condone the use of FBME for 
illicit purposes, FinCEN has no reason to believe that FBME's 
leadership has changed after issuance of the NOF. Given that FinCEN has 
reason to believe that illicit activity occurred at FBME after the NOF, 
FinCEN has no reason to believe that management has modified its 
practices and FBME has not provided information to support such a 
conclusion.
Alleged Errors in the Notice of Finding
    With regard to FBME's fourth point, i.e., where FBME has argued 
that portions of the eight statements in the NOF were incorrect or 
based on incomplete information, FBME submitted on December 5, 2014 a 
report prepared by EY (2014 EY Transaction Review) that specifically 
examined the concerns that FinCEN identified in the NOF and NPRM. The 
2014 EY Transaction Review in some cases partially identified the 
activity of concern, and as noted below, failed to identify the 
activity of concern, or identified additional illicit financial 
activity that FinCEN has not previously identified. After a careful 
consideration of the public and non-public information available to 
FinCEN, including the 2014 EY Transaction Review, FinCEN continues to 
believe that the concerns identified in the NOF remain valid and 
accurate.
    FinCEN amended the NOF based on these comments in the final rule 
issued on July 29, 2015 that was subsequently enjoined by the court. In 
the first case, FBME stated that it was not fined by the CBC in 2008, 
but that the CBC imposed an administrative fine on FBME in 2010. FinCEN 
agrees that the fine in question was imposed in 2010, not in 2008.
    In the second case, FBME argued that the report that FBME may have 
been subject to a fine of up to [euro]240 million is from a November 
2013 article in the Cypriot press that relied on anonymous sources at 
the CBC. FinCEN agrees that the source of this statement was an article 
that appeared in the Cypriot press that referenced statements by a CBC 
official speaking anonymously. Neither of these two cases, nor any of 
FBME's remaining claims of incompleteness and factual inaccuracy, 
present any new information that would undercut the accuracy of the 
other information presented in the NOF.
FBME's Filing of STRs
    With regard to FBME's fifth point, i.e., FBME's assertion that it 
filed STRs with MOKAS on activity described in the NOF and NPRM, FinCEN 
notes that the filing of STRs on suspicious activities or transactions 
by a financial institution is not, taken in isolation, an adequate 
indicator of the robustness and comprehensiveness of a compliance 
program. Moreover, filing STRs does not excuse a financial 
institution's failure to adequately implement other areas of its AML 
program, such as, for example, customer due diligence procedures.
Adverse Impact on FBME and Its Customers
    FBME claims in its sixth point that the NOF and NPRM have had a 
significant adverse impact on FBME and its customers. As part of 
FinCEN's consideration of the statutory factors supporting its 
imposition of a

[[Page 18485]]

prohibition under the fifth special measure, FinCEN has considered 
``the extent to which the action or the timing of the action would have 
a significant adverse systemic impact on . . . legitimate business 
activities involving'' FBME.\10\ This factor is discussed in the NOF 
and Part VI, Section A(3) below.
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    \10\ 31 U.S.C. 5318A(a)(4)(B)(iii).
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    In addition to its public comment, FBME submitted supplemental 
information regarding FBME's policies and procedures, along with 
reports of the audits conducted by KPMG in 2013 and EY in 2014. Many of 
these submissions are addressed elsewhere in this final rule. FinCEN 
has considered these materials, which outline some of the steps that 
FBME may have taken to strengthen its compliance program. Although FBME 
claims that it took steps to address some of the obvious deficiencies 
in its AML controls, it failed to correct other deficiencies and it 
continues to pose a significant risk. After reviewing and considering 
these and other public and non-public materials, FinCEN concludes that, 
except as acknowledged in this final rule, the statements made in the 
NOF remain accurate.
2. FBME's January 26, 2016 Comment on the Re-Opened Rulemaking
    FBME submitted a comment on January 26, 2016, during the re-opened 
comment period. Set forth below are the key points raised in this 
comment and FinCEN's responses.\11\
---------------------------------------------------------------------------

    \11\ FBME also submitted an additional exhibit to its January 
26, 2016 comment on January 29, 2016. FinCEN reviewed and considered 
this exhibit in drafting this final rule.
---------------------------------------------------------------------------

    First, FBME argues that the procedures FinCEN followed in 
connection with the proposed rule are unconstitutional and unlawful. 
Specifically, FBME asserts that (1) FinCEN failed to provide FBME with 
meaningful notice and opportunity to confront evidence against it; (2) 
FBME is entitled to a neutral arbiter; and (3) FBME has a right to a 
hearing.
    The procedures used by FinCEN are constitutional and lawful. FinCEN 
provided FBME with meaningful notice and opportunity to confront the 
evidence against it. Although FBME argues that FinCEN should not be 
able to rely on ``secret'' evidence, as previously noted, FinCEN 
disclosed all of the unclassified, non-protected information that it 
relied upon or otherwise considered during the rulemaking. FinCEN did 
not disclose information that is classified or otherwise protected from 
disclosure, and the law does not require that it do so. As for the due 
process argument, the process that FinCEN has undertaken is consistent 
with the Constitution and the Administrative Procedure Act (APA). 
Section 311 expressly provides for the reliance on classified 
information in making findings of primary money laundering concern and 
provides that such information will be submitted to the court ex parte 
and in camera. The BSA expressly protects from disclosure information 
to include Suspicious Activity Reports (SARs) to protect reporting 
financial institutions and their employees, and to encourage honest and 
open reporting of suspicious activity. FinCEN's use of SARs is more 
fully discussed later in this rule.
    FinCEN engaged in a fully interactive process with FBME. It 
accepted and considered multiple submissions of information from FBME 
that sought to rebut or otherwise address the agency's findings, and 
participated in an active, long-running dialogue with the bank's 
counsel regarding the finding and the NPRM. Ultimately, after reviewing 
the bank's submissions, as well as additional information obtained from 
various non-public sources, FinCEN exercised its discretion in 
determining that reasonable grounds existed to find FBME of primary 
money laundering concern.
    In making the finding that FBME was of primary money laundering 
concern, FinCEN exercised the specific grant of authority given to 
FinCEN by Congress and the Secretary.\12\ FinCEN interpreted the 
relevant law and statutory provisions applicable to this exercise of 
authority. FinCEN exercised this authority consistent with the statute. 
Section 311 does not provide a right to a hearing, nor do applicable 
authorities allow for a neutral arbiter in making findings of primary 
money laundering concern. Section 311, as delegated by the Secretary, 
gives the authority to make such findings to FinCEN upon consultation 
with the Departments of State and Justice. The APA does not require 
otherwise for Section 311 rulemaking.
---------------------------------------------------------------------------

    \12\ 31 U.S.C. 5318A.
---------------------------------------------------------------------------

    Second, FBME argues that FinCEN should not rely on information 
provided to it by the CBC, as the Cypriot government has consistently 
discriminated against FBME because it is owned by non-Cypriots and is 
financially stable. In support of this argument, FBME provides several 
examples of the CBC's alleged discrimination, including its denial of 
FBME's attempts to incorporate in Cyprus and other business 
opportunities, as well as the imposition of what FBME describes as 
unreasonable regulatory requirements and fines. FBME also argues that 
coordination between FinCEN and the CBC raises serious concerns, 
claiming that FinCEN and the CBC acted in concert against FBME.
    As part of this rulemaking, FinCEN has reviewed a significant 
amount of information, including information related to fines that the 
CBC imposed on FBME and CBC examinations of FBME's Cyprus branch. As 
with any information available to the agency, FinCEN makes an 
independent assessment of its credibility and relevance. FinCEN 
assesses that the CBC is a government authority with relevant 
information related to the finding that FBME is of primary money 
laundering concern. The CBC has received positive reviews that cite the 
CBC's adequate monitoring of the Cypriot financial system for money 
laundering and terrorist financing issues from the Committee of Experts 
on the Evaluation of Anti-Money Laundering and the Financing of 
Terrorism (MONEYVAL), an inter-governmental organization established to 
set standards and promote effective implementation of measures for 
combating money laundering and terrorist financing.\13\
---------------------------------------------------------------------------

    \13\ Committee of Experts on the Evaluation of Anti-Money 
Laundering and the Financing of Terrorism (MONEYVAL). ``Report of 
the Fourth Assessment Visit--Executive Summary: Anti-Money 
Laundering and the Combating of the Financing of Terrorism: 
CYPRUS.'' 27 Sep 2011. (last visited March 21, 2016). <https://www.coe.int/t/dghl/monitoring/moneyval/Countries/Cyprus_en.asp>.
---------------------------------------------------------------------------

    FinCEN's consideration of information and actions related to the 
CBC's supervisory role over FBME is not improper and does not reflect 
inappropriate coordination with the CBC. Contrary to FBME's assertion, 
FinCEN has exercised its authority independently under Section 311 to 
protect the U.S. financial system.
    Third, FBME argues that this administrative action is flawed for 
the following key reasons:
     FBME asserts that it has rebutted each of the allegations 
identified in FinCEN's NOF and that FinCEN did not provide any 
additional information supporting its finding that FBME is of primary 
money laundering concern since the publication of the NOF. With respect 
to FBME's assertion that it rebutted each of the allegations in the 
NOF, FinCEN disagrees and notes that it considered and addressed FBME's 
September 22, 2014 comment, and its supplemental submissions, and 
FBME's January 26, 2016 comment, which contained FBME's rebuttals to 
the allegations identified in FinCEN's NOF, as set forth in Part V, 
Section A.

[[Page 18486]]

Pursuant to the court's order granting FinCEN's request for a voluntary 
remand, the agency made publicly available all unclassified, non-
protected information the agency relied upon as part of this 
rulemaking, including news articles regarding Italian government 
corruption and money laundering involving FBME, and information 
concerning alleged Hezbollah affiliated accounts at FBME.
     FBME contends that FinCEN ignored its assertion that FBME 
has an extensive AML compliance program that meets or exceeds local and 
European requirements. FBME also asserts that it has continued to make 
improvements to its AML program, as recently as January 2016. Even if 
FBME adopted specific policies and procedures to comply with AML 
requirements, FinCEN is concerned that FBME would not implement those 
policies and procedures given FBME's history of ignoring instructions 
from the CBC to improve the bank's AML controls at it Cyprus bank and 
its past willingness to evade AML regulations. For example, in late 
2014, FBME employees took various measures to obscure information. 
Separately, the CBC noted in assessing a [euro]1.2 million fine in 
December 2015 that FBME failed to comply with Cypriot money laundering 
laws and directives and European Union regulations related to funds 
transfers.
     FBME argues that FinCEN continues to ignore the positive 
conclusions reached by independent auditors and investigators 
concerning FBME's evolving AML practices. The EY 2014 Audit and other 
third party audits show a pattern of recurring AML deficiencies at 
FBME. This issue is addressed more fully above in Part V, Section A(1) 
above. As discussed, the deficiencies in FBME's AML compliance program 
described in the KPMG 2013 Audit and the EY 2014 Audit are similar to 
the AML deficiencies that FinCEN identified in the NOF, and support 
FinCEN's conclusion that there have been longstanding and comprehensive 
deficiencies in FBME's AML compliance program.
     FBME asserts that FinCEN failed to consider that FBME has 
promptly and consistently adopted auditors' suggestions to establish an 
AML compliance program that exceeds applicable legal requirements. As 
more fully addressed in Part V, Section A(1) above, FBME's assertion is 
contradicted by the findings of its third party auditors and by the 
CBC. FBME states that Exhibit 28 to its January 26, 2016 comment 
demonstrates its commitment to effective AML policies by documenting 
FBME's responses to, and implementation of, KPMG's recommendations in 
its 2013 audit to improve FBME's AML program, as of January 26, 2016. 
FBME also notes that Exhibit 33 to its January 26, 2016 comment details 
how FBME purportedly implemented the recommendations identified in the 
EY 2014 Audit. However, FBME does not provide any meaningful 
information that allows FinCEN to fully evaluate whether FBME has 
implemented those recommendations in the manner that FBME asserts it 
has. For example, according to FBME, it has purchased and implemented 
an onboarding platform to maintain key information regarding ultimate 
beneficial owners and address information for FBME customers. However, 
FBME did not provide meaningful information or documentation to 
demonstrate whether that onboarding platform satisfies EY's 
recommendation.
     FBME states that the allegations in FinCEN's NOF are 
misleading and inaccurate.
    [cir] FBME argues that the 2014 EY Transaction Review refutes the 
allegations in the NOF.\14\ However, FinCEN disagrees as discussed 
above in Part V, Section A(1).
---------------------------------------------------------------------------

    \14\ The 2014 EY Transaction Review was an evaluation of 11 
statements from the NOF deemed specific enough for EY to attempt to 
identify and validate the relevant FBME customers, their activities, 
and related transactions.
---------------------------------------------------------------------------

    [cir] FBME argues that supplemental information that FinCEN 
provided as part of the re-opened comment period only further 
undermines FinCEN's conclusions in the NOF. When FinCEN re-opened the 
comment period in November 2015, it provided supplemental information 
indicating that FBME had been used as part of a scheme involving 
Italian government corruption and money laundering. The money 
transferred to FBME in Tanzania was frozen and then sent back to Italy 
when the Tanzanian Financial Intelligence Unit and the BoT, which 
monitors foreign currency transactions, became suspicious of the 
activity at FBME. FBME argues that it detected the suspicious 
transaction, suspended the activity, returned the funds, closed the 
customer's accounts and all accounts related to it, and notified the 
Tanzanian authorities pursuant to FBME's AML policies and procedures. 
FinCEN notes that FBME did not provide documentation to substantiate 
its assertion. Regardless, the identification of a single transaction 
does not address FinCEN's broader concerns about FBME's systemic AML 
deficiencies.
    [cir] FinCEN's NOF and NPRM found, as reflected in the 
administrative record, that FBME facilitated sanctions evasion on 
behalf of a sanctioned Syrian entity. FBME argues that FinCEN's 
reliance on the fact that a sanctioned individual was a customer of 
FBME as part of its finding that FBME was of primary money laundering 
concern was unjust, in part, because the customer's account had been 
closed or inactive since at least 2008, which FBME notes was years 
before the customer was sanctioned. In the 2014 EY Transaction Review, 
FBME identified an individual who was sanctioned by the Treasury 
Department's Office of Foreign Assets Control (OFAC) in 2014 for 
providing material support and services to the Government of Syria as 
an FBME customer. However, the sanctioned entity referenced in FinCEN's 
NOF was not the individual identified by FBME. Instead, FBME identified 
an additional sanctioned entity related to Syria that was also a 
customer of FBME.
    [cir] FBME argues that FinCEN's use of SARs is misconceived and 
these reports should be made available to FBME to satisfy due process 
requirements. FBME argues that FinCEN does not correctly analyze SARs, 
that its reliance on SARs is arbitrary and capricious, that FinCEN 
should not rely upon SARs filed by other financial institutions, and 
that FinCEN's refusal to provide SARs to FBME violates due process.
    FinCEN disagrees and notes that SARs, which are filed by financial 
institutions regarding transactions revealing a possible violation of 
law, are an invaluable source of information and an important tool for 
financial investigations. In this case, FinCEN believes that the SARs 
related to FBME are relevant to the finding that FBME is of primary 
money laundering concern when viewed in the context of all the other 
information considered. Multiple SARs indicate that FBME facilitated 
transactions on behalf of shell companies which, as stated earlier, can 
be an indicator of money laundering and other suspicious activity.
    Regarding disclosure of SARs to FBME, the improper disclosure of 
SARs may cause significant risk to the filing institution and its 
employees. To encourage honest and open reporting of suspicious 
activity and to protect reporting financial institutions and their 
employees, the BSA and its implementing regulations impose severe 
restrictions on improper disclosures of SARs, and violations of these

[[Page 18487]]

restrictions may result in civil or criminal sanctions.\15\
---------------------------------------------------------------------------

    \15\ See 31 U.S.C. 5318(g)(2) (prohibiting disclosure of SAR 
information to anyone involved in the reported transaction); 31 CFR 
1020.320(e) (implementing regulation for depository institution 
SARs); 31 U.S.C. 5321, 5322 criminal and civil sanctions for BSA 
violations, including improper SAR disclosures); and 31 CFR 
1010.820, 1010.840 (implementing regulations for civil and criminal 
penalties for BSA violations).
---------------------------------------------------------------------------

     FBME argues that the mere fact that FBME transacted with 
shell or holding companies is not a basis to conclude that FBME is of 
primary money laundering concern. FinCEN's finding that FBME is of 
primary money laundering concern is not based solely on the fact that 
FBME transacts with shell companies, but rather is based on all of the 
information FinCEN considered when issuing the NOF. The formation and 
operation of shell companies can allow the owners of these companies to 
disguise their identity and purpose. With respect to FBME, FinCEN 
considered all of the relevant information and is particularly 
concerned with: (1) The large number of FBME customers that are either 
shell companies or that conduct transactions with shell companies; (2) 
the lack of transparency with respect to beneficial ownership or 
legitimate business purposes of many of FBME's shell company customers; 
(3) the location of many of its shell company customers in other high-
risk money laundering jurisdictions outside of Cyprus; (4) the high 
volume of U.S. dollar transactions conducted by these shell companies 
with no apparent business purpose; and (5) FBME's longtime facilitation 
of its shell company customers' anonymity by allowing thousands of 
customers to use the bank's physical address in lieu of their own.
     FBME argues that FinCEN failed to explain why it finds 
FBME to be of primary money laundering concern. The NOF and this rule 
provide an explanation as to the basis for FinCEN's conclusion that 
there are reasonable grounds to find that FBME is of primary money 
laundering concern and to impose a special measure to address that 
concern.
    Fourth, FBME argues that there are several alternatives to a 
prohibition of correspondent accounts under the fifth special measure. 
This issue is addressed below in Part VI.
    FinCEN notes that FBME's January 26, 2016 comment includes 67 
separate exhibits consisting of over 1,100 pages of documents, many of 
which are declarations, emails, letters, comments or information 
previously considered and evaluated in this record. FinCEN reviewed the 
exhibits as part of its consideration of FBME's comments and, if 
appropriate, addressed the exhibits elsewhere in this document.

B. Other Comments Received From the Public During Both Comment Periods

    FinCEN received three comments in addition to the comment received 
from FBME during the initial comment period that opened on July 22, 
2014 and closed on September 22, 2014.
    FinCEN considered a comment received from the American Bankers' 
Association (ABA), dated September 22, 2014; a joint comment received 
from the Securities Industry and Financial Markets Association (SIFMA) 
and The Clearing House (TCH), dated September 22, 2014; and a separate 
comment received from SIFMA, dated September 22, 2014. FinCEN notes 
that these comments are procedural in nature and do not address the 
underlying conclusion surrounding the risk of money laundering and 
terrorist financing through FBME. FinCEN addresses the comments from 
the ABA, SIFMA, and TCH in the section-by-section analysis in Part VII 
below.
    During the re-opened comment period that opened on November 27, 
2015 and closed on January 26, 2016, in addition to FBME's comment, 
FinCEN received twelve comments \16\ that generally raise the following 
issues: (1) FinCEN's purported use of unreliable, misleading, or 
inaccurate information to support its NOF and NPRM, (2) APA or 
Constitutional due process requirements, (3) concerns about the CBC's 
impartiality with respect to FBME, and (4) concerns that FinCEN is 
unfairly focusing on FBME as opposed to U.S. persons or other financial 
institutions. These comments are addressed below.
---------------------------------------------------------------------------

    \16\ Thirteen comments were submitted during the re-opened 
comment period that opened on November 27, 2015 and closed on 
January 26, 2016. In advance of publicly posting one of those 
comments received on January 18, 2016, the agency provided it to 
legal counsel for FBME to request redactions as appropriate. Legal 
counsel for FBME claimed that the comment contained privileged and 
confidential information and objected to the agency's consideration 
of that comment and to any public posting. While the agency does not 
concede that the comment is privileged, it has not publicly posted 
the comment and has not considered the comment as part of this 
rulemaking.
---------------------------------------------------------------------------

1. FinCEN's Purported Use of Unreliable, Misleading, or Inaccurate 
Information To Support Its NOF and NPRM
    Multiple comments raise concerns regarding FinCEN's purported use 
of unreliable, misleading, or inaccurate information to support its NOF 
and NPRM. Multiple comments state that FinCEN's reliance on articles 
available on the Internet is concerning because they consider the 
articles unreliable sources of information.
    FinCEN relies on a variety of information sources to support its 
rulemaking, including government-published material and press articles 
that may be found on the Internet. FinCEN assesses the credibility and 
weight to be given to Internet sources on a case-by-case basis, as it 
does with respect to all of its sources of information. FinCEN has 
continued to vet articles in the administrative record and when 
inaccuracies are identified, they are corrected. As discussed 
previously in Part V Section A(1), FinCEN corrected two inaccuracies, 
which FinCEN is publishing in this rule. FinCEN reviewed the remaining 
articles identified in these comments and finds that they provide 
valuable context and information about the background and history of 
FBME and its role in the Cypriot financial system.
2. APA and Constitutional Due Process Requirements
    Multiple commenters state that FinCEN's actions violates the APA 
and are unconstitutional for reasons similar to those FBME asserted in 
its comments. FinCEN has reviewed the comments and believes the 
processes followed in this action were lawful and an appropriate 
exercise of FinCEN's authority. FinCEN notes that this issue is 
addressed above in Part V Section A(2) above.
3. Concerns About the CBC's Impartiality With Respect to FBME
    Several commenters raise concerns with the CBC. Specifically, the 
commenters state that the CBC has provided FinCEN with misleading 
information, that CBC is incompetent, inefficient, and corrupt, and 
that FBME is in litigation with the CBC at the International Chamber of 
Commerce in Paris.
    As part of this rulemaking, FinCEN has reviewed a significant 
amount of information, including information related to fines that the 
CBC imposed on FBME and CBC examinations of FBME's Cyprus branch. As 
with any information available to the agency, FinCEN makes an 
independent assessment of its credibility and relevance. FinCEN 
assesses that the CBC is a government authority with relevant 
information related to the finding that FBME is of primary money 
laundering concern. The CBC has received positive reviews that cite the 
CBC's adequate monitoring of the Cypriot financial system for money 
laundering and terrorist financing issues from MONEYVAL, an inter-

[[Page 18488]]

governmental organization established to set standards and promote 
effective implementation of measures for combating money laundering and 
terrorist financing.\17\
---------------------------------------------------------------------------

    \17\ See Committee of Experts on the Evaluation of Anti-Money 
Laundering and the Financing of Terrorism (MONEYVAL) supra note 13.
---------------------------------------------------------------------------

    As part of this rulemaking, FinCEN reviewed a significant amount of 
information, to include information related to fines and audits 
conducted by the CBC. FinCEN's consideration of information and actions 
related to the CBC's supervisory role over FBME is not improper, but 
rather reflects FinCEN's consideration of the totality of information 
relevant to FBME as part of the agency's own rulemaking. FinCEN notes 
that this issue is also addressed above in Part V Section A(2).
4. Concerns That FinCEN Is Unfairly Focusing on FBME as Opposed to U.S. 
Persons or Other Financial Institutions
    Three comments asserted that FinCEN treated FBME differently than 
other foreign financial institutions or U.S. persons and financial 
institutions. Specifically, the commenters identify other foreign banks 
involved in money laundering that were not the subject of a Section 311 
rulemaking. In addition, a commenter notes that the involvement of U.S. 
persons and financial institutions in criminal activity was identified 
and questions what FinCEN has done about the criminal activity in the 
United States.
    FinCEN may find only financial institutions operating outside of 
the United States to be of primary money laundering concern under 
Section 311. FinCEN continues to monitor for other instances of money 
laundering by foreign financial institutions and executes its 
authorities as appropriate.

VI. Imposition of Special Measure Against FBME as a Financial 
Institution of Primary Money Laundering Concern

    As described in the NOF, NPRM, and as described in this document, 
FinCEN continues to find that reasonable grounds exist for concluding 
that FBME is a financial institution of primary money laundering 
concern. Based upon that finding, FinCEN is authorized to impose one or 
more special measures. Following the required consultations and the 
consideration of all relevant factors discussed in the NOF, FinCEN 
proposed the imposition of a prohibition under the fifth special 
measure in an NPRM published on July 22, 2014. The fifth special 
measure authorizes a prohibition against the opening or maintaining of 
correspondent accounts by any domestic financial institution or agency 
for, or on behalf of, a financial institution found to be of primary 
money laundering concern.
    After re-opening the comment period, FinCEN considered all of the 
special measures, as well as measures short of a prohibition, and 
concluded that a prohibition under the fifth special measure is still 
the appropriate choice. Consistent with the finding that FBME is a 
financial institution of primary money laundering concern and in 
consideration of additional relevant factors, this final rule imposes a 
prohibition on the opening or maintaining of correspondent accounts by 
covered financial institutions for, or on behalf of, FBME under the 
fifth special measure. The prohibition on the opening or maintenance of 
correspondent accounts imposed by the fifth special measure will help 
guard against the money laundering and terrorist financing risks that 
FBME presents to the U.S. financial system as identified in the NOF, 
NPRM, and this final rule.

A. Discussion of Section 311 Factors

1. Whether Similar Actions Have Been or Will Be Taken by Other Nations 
or Multilateral Groups Against FBME
    Given the interconnectedness of the global financial system, the 
potential for FBME to access the U.S. financial system indirectly, 
including through the use of nested correspondent accounts, exposes the 
U.S. financial system to FBME's risks. Accordingly, FinCEN concludes 
that it is necessary to restrict both direct and indirect access to the 
U.S. financial system by FBME, particularly since FinCEN does not have 
information suggesting that any other country has prohibited FBME from 
accessing its financial system in the same manner as this rule, based 
on the information available to FinCEN.
    Moreover, despite measures that the CBC and the BoT have taken to 
protect the bank's depositors, FinCEN has reason to believe that those 
measures do not fully address the money laundering and terrorist 
financing risks associated with FBME. The continuation of illicit 
activity at the bank's Tanzanian headquarters even after the BoT 
appointed a statutory manager on July 24, 2014, bolsters FinCEN's 
concern. Specifically, in early 2015, an alleged Hezbollah associate 
and the Tanzanian company he managed owned accounts at FBME.
2. Whether the Imposition of the Fifth Special Measure Would Create a 
Significant Competitive Disadvantage, Including Any Undue Cost or 
Burden Associated With Compliance, for Financial Institutions Organized 
or Licensed in the United States
    The fifth special measure imposed by this rulemaking prohibits 
covered financial institutions from opening or maintaining a 
correspondent account for, or on behalf of, FBME. As a corollary to 
this measure, covered financial institutions are also required to take 
reasonable steps to apply special due diligence, as set forth below, to 
all of their correspondent accounts to help ensure that no such account 
is being used indirectly to provide services to FBME. FinCEN does not 
expect the burden associated with these requirements to be significant. 
There is only a minimal burden involved in transmitting a onetime 
notice to correspondent account holders concerning the prohibition on 
indirectly providing services to FBME. U.S. financial institutions 
generally apply some level of transaction and account screening, often 
through the use of commercially available software. Financial 
institutions should, if necessary, be able to easily adapt their 
current screening procedures to support compliance with this final 
rule. Thus, the prohibition on the opening or maintenance of 
correspondent accounts required by this rulemaking is not expected to 
impose a significant additional burden upon U.S. financial 
institutions.
3. The Extent to Which the 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 
Involving FBME
    FBME 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 FBME will not have a 
significant adverse systemic impact on the international payment, 
clearance, and settlement system.
    While this action could affect FBME's legitimate business 
activities in the jurisdictions in which it operates, FinCEN believes 
that the need to protect U.S. financial institutions from the money 
laundering and terrorist financing risks presented by FBME outweighs 
any of those potential effects. Also, FinCEN believes that a not 
insignificant amount of FBME's

[[Page 18489]]

business activities are illegitimate. For example, as explained in the 
NOF, wire transfers related to suspected shell company activity 
accounted for hundreds of millions of dollars of FBME's financial 
activity between 2006 and 2014. In just the year from April 2013 
through April 2014, FBME conducted at least $387 million in wire 
transfers through the U.S. financial system that had indicators of 
high-risk money laundering typologies, including shell company 
activity. FinCEN recognizes that shell companies are sometimes used for 
legitimate business activity, but notes that they are also commonly 
used on behalf of high-risk customers as vehicles to obscure 
transactions and launder money.
4. The Effect of the Action on United States National Security and 
Foreign Policy
    Imposing a prohibition under the fifth special measure complements 
the U.S. Government's foreign policy efforts to expose and disrupt 
international money laundering and to encourage other nations to do the 
same. The United States has been a leader in combating money laundering 
and terrorist financing not only through action with regard to specific 
institutions, but also through participation in international 
operational and standard-setting bodies such as the Egmont Group and 
the Financial Action Task Force.
    Excluding FBME and other banks that serve as conduits for money 
laundering, terrorist financing, and other financial crimes from the 
U.S. financial system will enhance U.S. national security by making it 
more difficult for terrorists, sanctions evaders, and money launderers 
to access the substantial resources of the U.S. financial system. As 
discussed in the NOF, NPRM, as well as herein, FBME facilitates money 
laundering, terrorist financing, transnational organized crime, fraud 
schemes, sanctions evasion, weapons proliferation, corruption by 
politically exposed persons, and other financial crimes. FinCEN is 
concerned that this activity, which has occurred at FBME for many 
years, persists. As of early 2015, an alleged Hezbollah associate and 
the Tanzanian company he managed owned accounts at FBME. This is not 
the first episode of the bank's involvement in financial activity 
possibly connected to Hezbollah, an organization designated by the U.S. 
government as a Foreign Terrorist Organization. As discussed in the 
NOF, in 2008, an FBME customer received a deposit of hundreds of 
thousands of dollars from a financier for Hezbollah.

B. Consideration of Alternatives to a Prohibition Under the Fifth 
Special Measure

    FinCEN concludes that a prohibition under the fifth special measure 
is the only viable measure to protect the U.S. financial system against 
the money laundering and terrorist financing threats posed by FBME. In 
making this determination, FinCEN considered alternatives to a 
prohibition under the fifth special measure, including the first four 
special measures, imposing conditions on the opening or maintaining of 
correspondent accounts for, or on behalf of, FBME, and the alternatives 
suggested by FBME. For the reasons explained below, FinCEN concludes 
that none of these alternatives would sufficiently safeguard the U.S. 
financial system from the risks posed by FBME.
1. Special Measures One Through Four and Conditions Under the Fifth 
Special Measure
    The first four special measures are focused on gathering additional 
information, and include (1) requiring additional recordkeeping and 
reporting of certain transactions, (2) requiring information related to 
beneficial ownership information, (3) requiring information related to 
certain payable-through accounts, and (4) requiring correspondent 
account customer information.\18\ Also, under the fifth special 
measure, FinCEN can impose conditions--rather than a prohibition--on 
the opening or maintaining of correspondent accounts for FBME.\19\
---------------------------------------------------------------------------

    \18\ 31 U.S.C. 5318A(b)(1)-(4)
    \19\ 31 U.S.C. 5318A(b)(5)
---------------------------------------------------------------------------

    There could be any number of conditions imposed under the fifth 
special measure, including those suggested by FBME in its January 26, 
2016 comment. The parties responsible for assuring compliance with 
these conditions could include FinCEN and/or U.S. financial 
institutions. However, any condition, and any of the first four special 
measures, inherently rely on FBME to provide accurate, credible, and 
reliable information to the party responsible for assuring compliance. 
Given FBME's extensive history of AML deficiencies, including ignoring 
its own AML regulator's directives, and its active efforts to evade AML 
regulations, including advertising the bank to potential customers as 
being willing to facilitate the evasion of AML regulations, FinCEN has 
a reasonable basis to doubt the accuracy, credibility, or reliability 
of any information that FBME would provide in connection with 
compliance with any condition on the maintenance of correspondent 
accounts or the other four special measures available under Section 
311.
    Specifically, the CBC concluded that FBME's Cyprus branch failed to 
remedy AML weaknesses identified in previous CBC exams, despite the 
CBC's instructions to do so. FinCEN is also particularly concerned that 
FBME continued to take measures to evade regulatory oversight even 
after FinCEN highlighted its concerns in the NOF. In late 2014, FBME 
employees took various measures to obscure information. FinCEN finds 
this behavior may have been part of an effort to reduce scrutiny by its 
regulators over FBME's operations. In light of all of these factors, 
FinCEN is not assured that FBME will implement appropriate and 
necessary safeguards to ensure that it provides accurate, credible, and 
reliable information to the entities tasked with ensuring compliance 
with any alternative special measure or any condition under the fifth 
special measure.
    Moreover, the ``serious and systemic'' AML deficiencies identified 
by the CBC during its 2014 AML examination of the bank's Cyprus branch 
inform FinCEN's concern that FBME would provide incomplete or erroneous 
information to FinCEN and/or U.S. financial institutions. As described 
above, the CBC found, in part, that FBME failed to apply enhanced due 
diligence to high-risk customers, allowed customers to obfuscate key 
identifying information and transactional details, and failed to 
maintain complete customer due diligence information. Accordingly, 
FinCEN assesses that any customer or transactional information provided 
by FBME would likely reflect these deficiencies.
2. Alternative Remedies Suggested by FBME
    In its January 26, 2016 comment, FBME suggested multiple 
alternatives that it argued would be less damaging and still ensure 
that FBME poses no danger to the U.S. financial system. As noted above, 
FBME asserts that these alternatives could be conditions to FBME's 
eligibility to maintain correspondent accounts. To the extent that the 
alternatives depend on additional reporting or recordkeeping, FinCEN 
maintains that they would not protect the U.S. financial system from 
the risks posed by FBME because they would depend on FBME to provide 
accurate, credible, and reliable information, which FinCEN does not 
believe FBME will provide. As described above and as reflected in the 
record, FBME previously disregarded

[[Page 18490]]

the instructions of its AML regulator; engaged in opaque and suspicious 
money transfers; maintains deficient AML controls; and its employees 
took various measures to obscure information. Given this past behavior, 
FinCEN cannot reasonably rely on a proposed resolution that depends on 
FBME's candid provision of complete, credible, and accurate 
information.
    FBME has also suggested as alternatives to a prohibition under the 
fifth special measure the imposition of an independent monitor to 
oversee and report on FBME's operations, making periodic reports to 
FinCEN regarding FBME's operations, placing appropriate conditions on 
the use of correspondent accounts, and consulting with FinCEN, or an 
expert chosen by FinCEN, to adopt specific and detailed policies to 
supplement FBME's existing compliance program. Like the first four 
special measures, the effectiveness of these alternatives to safeguard 
the U.S. financial system from the risks posed by FBME inherently 
depends on FBME to provide accurate, reliable, and credible 
information. In order for a monitor to work effectively, that monitor 
would have to have access to reliable, credible, and accurate customer 
and transactional information. But as noted above, FinCEN has a 
reasonable basis to doubt the accuracy, credibility or reliability of 
any such information provided by FBME, given FBME's history of ignoring 
its own AML regulator's directives and its active efforts to evade AML 
regulations. And with respect to FBME's suggestion to consult with 
FinCEN, or an expert chosen by FinCEN, to adopt specific policies and 
procedures, FinCEN remains concerned that FBME would not effectively 
implement any such policies given FBME's history of ignoring 
recommendations from its regulator to improve its AML controls.
    FBME suggests two other alternatives that would not mitigate 
FinCEN's concerns regarding the bank's AML program for different 
reasons. FBME suggests that FinCEN should consider requiring FBME to 
pay a monetary fine for any historical shortcoming in FBME's AML 
compliance. By way of example, FBME cites to the civil money penalties 
that FinCEN imposed on a domestic bank and a domestic casino for 
violating certain U.S. AML laws. But the payment of a fine does not 
achieve the very purpose of the special measures available under 
Section 311, namely, to protect the U.S. financial system against risks 
posed by foreign financial institutions found to be of primary money 
laundering concern. Payment of a fine would not ameliorate the concerns 
that FinCEN has regarding FBME's deficient AML controls, which present 
risks to the U.S. financial system.
    FBME also suggests that FinCEN require FBME to refrain from 
transactions that FinCEN deems most ``worrisome.'' Given the lack of 
transparency surrounding many of FBME's transactions, FinCEN is not 
confident that it would be able to identify all of the potentially 
``worrisome'' transactions in which FBME might engage. And even 
assuming the ability to enforce such a provision, and the ability to 
identify these transactions, refraining from these transactions alone 
would not address all of the broader concerns regarding the bank's 
deficient AML controls.
    Finally, just as none of FBME's suggested alternatives would 
sufficiently address FinCEN's concerns, no combination of these 
alternatives would do so either. Because such alternatives ultimately 
depend on FBME to provide accurate, reliable, and credible information, 
FinCEN concludes that no combination of these alternatives could 
overcome that fundamental deficiency.
    In its January 26, 2016 comment, FBME also compares this matter to 
FinCEN's Section 311 action regarding Multibanka, a Latvia-based bank. 
In that matter, FinCEN withdrew a finding and an NPRM proposing the 
fifth special measure prohibiting the opening or maintaining of 
correspondent accounts for, or on behalf of, Multibanka after the bank 
took certain remedial measures to address FinCEN's concerns.\20\ FBME 
argues that FinCEN should similarly withdraw the NPRM here.
---------------------------------------------------------------------------

    \20\ 71 FR 39,606.
---------------------------------------------------------------------------

    FinCEN determines the appropriate outcome of a Section 311 action 
on a case-by-case basis. The matter of Multibanka is not analogous to 
the one here. At the time FinCEN withdrew the finding and NPRM 
regarding Multibanka, the bank had significantly revised its AML 
policies and procedures, and importantly, FinCEN found that Multibanka 
was working to ensure that its improved AML procedures were 
``translated effectively into practice.'' \21\ In contrast, FBME has 
not demonstrated any AML improvements with respect to its headquarters 
in Tanzania. And with respect to FBME's Cyprus branch, FinCEN remains 
concerned that FBME would not effectively implement new AML policies 
and procedures given FBME's history of ignoring instructions from its 
AML regulator and its past willingness to actively evade AML 
regulations. Indeed, because of the serious concerns that FinCEN has 
about FBME, as described in this document, FinCEN finds that FBME 
continues to be a financial institution of primary money laundering 
concern.
---------------------------------------------------------------------------

    \21\ Id.
---------------------------------------------------------------------------

    As in other cases, FinCEN will continue to assess developments with 
respect to FBME, its regulators, and the jurisdictions in which it 
operates in determining whether it remains of primary money laundering 
concern.

VII. Section-by-Section Analysis for Imposition of a Prohibition Under 
the Fifth Special Measure

A. 1010.658(a)--Definitions

1. FBME
    Section 1010.658(a)(1) of the rule defines FBME to include all 
branches, offices, and subsidiaries of FBME operating in any 
jurisdiction, including Tanzania and Cyprus. Financial institutions 
should take commercially reasonable measures to determine whether a 
customer is a branch, office, or subsidiary of FBME. Currently, FBME's 
bank branches are located in Tanzania and Cyprus, with a representative 
office in Moscow, Russian Federation.
    SIFMA, TCH, and the ABA noted that it would be useful for FinCEN to 
provide a list of FBME's subsidiaries; however, because subsidiary 
relationships can change frequently, covered financial institutions 
should use commercially-reasonable tools to determine the current 
subsidiaries of FBME.
2. Correspondent Account
    Section 1010.658(a)(2) of the rule defines the term ``correspondent 
account'' by reference to the definition contained in 31 CFR 
1010.605(c)(1)(ii). Section 1010.605(c)(1)(ii) defines a correspondent 
account to mean an account established to receive deposits from, or 
make payments or other disbursements on behalf of, a foreign bank, or 
to handle other financial transactions related to the foreign bank. 
Under this definition, ``payable through accounts'' are a type of 
correspondent account.
    In the case of a U.S. depository institution, this broad definition 
includes most types of banking relationships between a U.S. depository 
institution and a foreign bank that are established to provide regular 
services, dealings, and other financial transactions, including a 
demand deposit, savings deposit, or other transaction or asset account, 
and a credit account or other extension of credit. FinCEN is using the 
same

[[Page 18491]]

definition of ``account'' for purposes of this 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.\22\
---------------------------------------------------------------------------

    \22\ See 31 CFR 1010.605(c)(2)(i).
---------------------------------------------------------------------------

    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 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.\23\
---------------------------------------------------------------------------

    \23\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
---------------------------------------------------------------------------

3. Covered Financial Institution
    Section 1010.658(a)(3) of the rule defines ``covered financial 
institution'' with the same definition used in the final rule 
implementing Section 312 of the USA PATRIOT Act,\24\ which, in general, 
includes the following:
---------------------------------------------------------------------------

    \24\ See 31 CFR 1010.605(e)(1).
---------------------------------------------------------------------------

     An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h));
     A commercial bank;
     An agency or branch of a foreign bank in the United 
States;
     A Federally insured credit union;
     A savings association;
     a corporation acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611);
     A trust bank or trust company;
     A broker or dealer in securities;
     A futures commission merchant or an introducing broker-
commodities; and
     A mutual fund.
4. Subsidiary
    Section 1010.658(a)(4) of the rule defines ``subsidiary'' as a 
company of which more than 50 percent of the voting stock or analogous 
equity interest is owned by another company.

B. 1010.658(b)--Requirements for Covered Financial Institutions With 
Regard to the Fifth Special Measure

    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, FBME, covered financial institutions should take 
such steps as 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.

C. Prohibition on Opening or Maintaining Correspondent Accounts

    Section 1010.658(b)(1) of the rule imposing the fifth special 
measure prohibits all covered financial institutions from opening or 
maintaining a correspondent account in the United States for, or on 
behalf of, FBME.
    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, FBME.

D. Special Due Diligence of Correspondent Accounts To Prohibit Indirect 
Use

    As a corollary to the prohibition on opening or maintaining 
correspondent accounts directly for FBME, section 1010.658(b)(2) of the 
rule imposing a prohibition under the fifth special measure requires a 
covered financial institution to apply special due diligence to its 
correspondent accounts that is reasonably designed to guard against 
processing transactions involving FBME. As part of that special due 
diligence, covered financial institutions must notify those foreign 
correspondent account holders that covered financial institutions know 
or have reason to know provide services to FBME that such 
correspondents may not provide FBME with access to the correspondent 
account maintained at the covered financial institution. Covered 
financial institutions should implement appropriate risk-based 
procedures to identify transactions involving FBME.
    A covered financial institution may satisfy the notification 
requirement by transmitting the following notice to its foreign 
correspondent account holders that it knows or has reason to know 
provide services to FBME:

    Notice: Pursuant to U.S. regulations issued under Section 311 of 
the USA PATRIOT Act, see 31 CFR 1010.658, we are prohibited from 
opening or maintaining a correspondent account for, or on behalf of, 
FBME Bank, Ltd., or any of its branches, offices or subsidiaries. 
The regulations also require us to notify you that you may not 
provide FBME Bank, Ltd., or any of its branches, offices or 
subsidiaries with access to the correspondent account you hold at 
our financial institution. If we become aware that the correspondent 
account you hold at our financial institution has processed any 
transactions involving FBME Bank, Ltd., or any of its branches, 
offices or subsidiaries, we will be required to take appropriate 
steps to prevent such access, including terminating your account.

    A covered financial institution may, for example, have knowledge 
through transaction screening software that a correspondent account 
processes transactions for FBME. The purpose of the notice requirement 
is to aid cooperation with correspondent account holders in preventing 
transactions involving FBME from accessing the U.S. financial system. 
However, FinCEN would not require or expect a covered financial 
institution to obtain a certification from any of its correspondent 
account holders that access will not be provided to comply with this 
notice requirement. Instead, methods of compliance with the notice 
requirement could include, for example, transmitting a one-time notice 
by mail, fax, or email to appropriate correspondent account holders of 
the covered financial institution, informing them that they may not 
provide FBME with access to the covered financial institution's 
correspondent account, or including such information in the next 
regularly occurring transmittal from the covered financial institution 
to those correspondent account holders.
    In its comment to the NPRM, SIFMA requested reconsideration of the 
notice provision, specifically regarding the meaning of ``one-time 
notice,'' and further objected to the requirement to send such a notice 
as overly burdensome and possibly duplicative. SIFMA also requested 
further clarification with regard to the timing of the required notice. 
FinCEN emphasizes that the scope of the notice requirement is targeted 
toward those correspondent account holders that the covered financial 
institution knows or has reason to know provide services to FBME, not 
to all correspondent account holders. The term ``one-time notice'' 
means that a financial institution should provide notice to all 
existing correspondent account holders who the covered financial 
institution knows or has reason to know provide services to FBME, 
within a reasonably short time after this final rule is published, and 
to new correspondent account holders during the account opening process 
who the covered financial institution knows or has reason to know 
provide services to FBME. It is not necessary for the notice to be 
provided in any particular form. It may be provided electronically, 
orally (with documentation), or as part of the standard paperwork 
involved in opening or maintaining a correspondent account. Given the 
limited nature of FBME's correspondent relationships, FinCEN does not 
expect this requirement to be burdensome.
    A covered financial institution is also required to take reasonable 
steps to identify any indirect use of its correspondent accounts by 
FBME, to the extent that such indirect use can be

[[Page 18492]]

determined from transactional records maintained by the covered 
financial institution in the normal course of business. Covered 
financial institutions are expected to apply an appropriate screening 
mechanism to be able to identify a funds transfer order that on its 
face lists FBME as the financial institution of the originator or 
beneficiary, or otherwise references FBME. An appropriate screening 
mechanism could be the mechanism 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 the Office of Foreign 
Assets Control (OFAC).
    Notifying certain correspondent account holders and taking 
reasonable steps to identify any indirect use of its correspondent 
accounts by FBME in the manner discussed above are the minimum due 
diligence requirements under the rule imposing a prohibition under the 
fifth special measure. Beyond these minimum steps, a covered financial 
institution must adopt a risk-based approach for determining what, if 
any, additional due diligence measures are appropriate to guard against 
the risk of indirect use of its correspondent accounts by FBME, based 
on risk factors such as the type of services it offers and the 
geographic locations of its correspondent account holders.
    Under this rule imposing a prohibition under the fifth special 
measure, a covered financial institution that obtains knowledge that a 
correspondent account is being used by a foreign bank to provide 
indirect access to FBME must take all appropriate steps to prevent such 
indirect access, including the notification of its correspondent 
account holder per section 1010.658(b)(2)(i)(A) and, where necessary, 
terminating the correspondent account. A covered financial institution 
may afford the foreign bank a reasonable opportunity to take corrective 
action prior to terminating the correspondent account. Should the 
foreign bank refuse to comply, or if the covered financial institution 
cannot obtain adequate assurances that the account will no longer be 
available to FBME, the covered financial institution must terminate the 
account within a commercially reasonable time. This means that the 
covered financial institution may 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 the rule 
if it determines that the account will not be used to provide banking 
services indirectly to FBME.

E. Reporting Not Required

    Section 1010.658(b)(3) of the rule imposing a prohibition under the 
fifth special measure 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. A covered 
financial institution must, however, document its compliance with the 
requirement that it notify those correspondent account holders that the 
covered financial institution knows or has reason to know provide 
services to FBME, that such correspondents may not process any 
transaction involving FBME through the correspondent account maintained 
at the covered financial institution.

VIII. Regulatory Flexibility Act

    When an agency issues a final rule, 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 final 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 final rule is not expected to 
have a significant economic impact on a substantial number of small 
entities.

A. Proposal to Prohibit Covered Financial Institutions From Opening or 
Maintaining Correspondent Accounts With Certain Foreign Banks Under the 
Fifth Special Measure

1. Estimate of the Number of Small Entities to Whom the Proposed Fifth 
Special Measure Will Apply
    For purposes of the RFA, both banks and credit unions are 
considered small entities if they have less than $550,000,000 in 
assets.\25\ Of the estimated 6,192 banks, 80 percent have less than 
$550,000,000 in assets and are considered small entities.\26\ Of the 
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000 
in assets.\27\
---------------------------------------------------------------------------

    \25\ Table of Small Business Size Standards Matched to North 
American Industry Classification System Codes, Small Business 
Administration Size Standards (SBA Feb. 26, 2016) [hereinafter ``SBA 
Size Standards''].
    \26\ 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.
    \27\ National Credit Union Administration, Credit Union Data, 
http://webapps.ncua.gov/customquery/; select Search Fields: Total 
Assets, select Operator: Less than or equal to, type Field Values: 
``550000000'' and select Go.
---------------------------------------------------------------------------

    Broker-dealers are defined in 31 CFR 1010.100(h) as those broker-
dealers required to register with the Securities and Exchange 
Commission (SEC). Because FinCEN and the SEC regulate substantially the 
same population, 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.\28\ Based on SEC estimates, 17 
percent of broker-dealers are classified as small entities for purposes 
of the RFA.\29\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.0-10(c).
    \29\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871 
small broker-dealers of the 5,063 total registered broker-dealers).
---------------------------------------------------------------------------

    Futures commission merchants (FCMs) are defined in 31 CFR 
1010.100(x) as those FCMs that are registered or required to be 
registered as a FCM with the Commodity Futures Trading Commission 
(CFTC) under the Commodity Exchange Act (CEA), except persons who 
register pursuant to section 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2). 
Because FinCEN and the CFTC regulate substantially the same population, 
for the purposes of the RFA, FinCEN relies on the CFTC's definition of 
small business as previously submitted to the SBA. In the CFTC's 
``Policy Statement and Establishment of Definitions of `Small Entities' 
for Purposes of the Regulatory Flexibility Act,'' the CFTC concluded 
that registered FCMs should not be considered to be small entities for 
purposes of the RFA.\30\ 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.
---------------------------------------------------------------------------

    \30\ 47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------

    For purposes of the RFA, an introducing broker-commodities dealer 
is considered small if it has less than $35,500,000 in gross receipts

[[Page 18493]]

annually.\31\ Based on information provided by the National Futures 
Association (NFA), 95 percent of introducing brokers-commodities 
dealers have less than $35.5 million in adjusted net capital and are 
considered to be small entities.
---------------------------------------------------------------------------

    \31\ SBA Size Standards at 28.
---------------------------------------------------------------------------

    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. Because FinCEN and the SEC 
regulate substantially the same population, 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.'' \32\ Based on SEC 
estimates, seven percent of mutual funds are classified as ``small 
entities'' for purposes of the RFA under this definition.\33\
---------------------------------------------------------------------------

    \32\ 17 CFR 270.0-10.
    \33\ 78 FR 23637, 23658 (April 19, 2013).
---------------------------------------------------------------------------

    As noted above, 80 percent of banks, 92.5 percent of credit unions, 
17 percent of broker-dealers, 95 percent of introducing brokers-
commodities, no FCMs, and seven percent of mutual funds are small 
entities. The limited number of foreign banking institutions with which 
FBME maintains or will maintain accounts will likely limit the number 
of affected covered financial institutions to the largest U.S. banks, 
which actively engage in international transactions. Thus, the 
prohibition on maintaining correspondent accounts for foreign banking 
institutions that engage in transactions involving FBME under the fifth 
special measure would not impact a substantial number of small 
entities.
2. Description of the Projected Reporting and Recordkeeping 
Requirements of the Prohibition Under the Fifth Special Measure
    The 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 FBME from accessing the U.S. 
financial system. FinCEN estimates that the time it takes institutions 
to provide 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 FBME. 
All U.S. persons, including U.S. financial institutions, currently must 
exercise some degree of due diligence to comply with OFAC sanctions and 
suspicious activity reporting requirements. The tools used for such 
purposes, including commercially available software used to comply with 
the economic sanctions programs administered by OFAC, can easily be 
modified to identify correspondent accounts with foreign banks that 
involve FBME. Thus, the special due diligence that would be required by 
the imposition of the fifth special measure--i.e., the one-time 
transmittal of notice to certain correspondent account holders, the 
screening of transactions to identify any use of correspondent 
accounts, and the implementation of risk-based measures to detect use 
of correspondent accounts--would not impose a significant additional 
economic burden upon small U.S. financial institutions.

B. Certification

    For these reasons, FinCEN certifies that this final rulemaking 
would not have a significant impact on a substantial number of small 
businesses.

IX. Paperwork Reduction Act

    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- AB19. 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.
    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: 5,000.
    Estimated Average Annual Burden in Hours per Affected Financial 
Institution: The estimated average burden associated with the 
collection of information in this rule is one hour per affected 
financial institution.
    Estimated Total Annual Burden: 5,000 hours.

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 final rule is not a ``significant 
regulatory action'' for purposes of Executive Order 12866.

List of Subjects in 31 CFR Part 1010

    Administrative practice and procedure, Banks and banking, Brokers, 
Counter-money laundering, Counter-terrorism, Foreign banking.

Authority and Issuance

    For the reasons set forth in the preamble, chapter X of title 31 of 
the Code of Federal Regulations is amended as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 is revised to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314, 
5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.


0
2. Revise Sec.  1010.658 to read as follows:


Sec.  1010.658  Special measures against FBME Bank, Ltd.

    (a) Definitions. For purposes of this section:
    (1) FBME Bank, Ltd. means all branches, offices, and subsidiaries 
of FBME Bank, Ltd. operating in any jurisdiction.
    (2) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(ii).
    (3) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(e)(1).
    (4) 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) Prohibition on use of correspondent 
accounts. A covered financial institution shall not open or maintain a 
correspondent account in the United States for, or on behalf of, FBME 
Bank, Ltd.
    (2) 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 
FBME Bank, Ltd. At a

[[Page 18494]]

minimum, that special due diligence must include:
    (A) Notifying those correspondent account holders that the covered 
financial institution knows or has reason to know provide services to 
FBME Bank, Ltd., that such correspondents may not provide FBME Bank, 
Ltd. 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 FBME Bank, Ltd., 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 FBME Bank, 
Ltd.
    (iii) A covered financial institution that obtains knowledge that a 
foreign correspondent account may be being used to process transactions 
involving FBME Bank, Ltd. shall take all appropriate steps to further 
investigate and prevent such access, including the notification of its 
correspondent account holder under paragraph (b)(2)(i)(A) of this 
section and, where necessary, termination of 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 FBME Bank Ltd.
    (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 paragraph (b) shall require a covered 
financial institution to report any information not otherwise required 
to be reported by law or regulation.

    Dated: March 25, 2016.
Jamal El-Hindi,
Deputy Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-07210 Filed 3-30-16; 8:45 am]
 BILLING CODE 4810-02-P