Date: April 15, 2016
The United States sanctions regime is not localized exclusively in the US Treasury Department’s Office of Foreign Assets Control. That’s one reason why sanctions compliance officers have a tough job. They must not only keep up with the sanctions programs announced by the president and enforced by the Treasury Department. They must also solely, or in conjunction with fellow compliance officers in the anti-money laundering wing of the organization’s compliance department, comply with “Special Measures” that the same Treasury Department imposes routinely under Section 311 of the USA Patriot Act.
The special measures are the responsibility of a sister agency of the Treasury Department’s Office of Foreign Assets Control (OFAC), which enforces the sanctions programs. Special measures, which are are the responsibility of the Financial Crimes Enforcement Network (FinCEN), address US concerns about sanctions evasions and violations, as well as money laundering and terrorist financing.
USA Patriot Act gave birth to “special measures”
Protecting the United States against illicit financial activity requires FinCEN to ensure that banks and other financial institutions in other countries with severely deficient AML controls do not have access to the US financial system. To achieve this, the US has Section 311, which is codified in the US Bank Secrecy Act. (31 U.S.C. Section 5318A)
This statute grants FinCEN the authority to impose “special measures” on financial institutions in the US and other jurisdictions if it finds that they are of “primary money laundering concern”. Among the harshest “special measures” are those prohibiting or restricting the opening or maintaining of correspondent or payable-through accounts for an identified institution.
Under the latest Special Measures, issued against FBME Bank Llt, of Cyprus on March 31, 2016, FinCEN designated the Cyprus branch of FBME, headquartered in Tanzania, as a Financial Institution of Primary Money Laundering Concern. FinCEN prohibited US financial institutions from opening or maintaining correspondent accounts for, or on behalf of, FBME. The March 31 ruling is in essence a “do-over” of one issued in 2015, which was challenged successfully by FBME in the US federal court in the District of Columbia. This is the reason why FinCEN had to go back to the drawing board and issue a new, similar ruling.
Areas of concern
The 2015 and 2016 FinCEN special measures against FBME identified several areas of concern, including facilitation of sanctions evasion, proliferation of weapons of mass destruction and other financial crimes. According to FinCEN, FBME facilitated US sanctions evasion through its extensive shell company customer base, including at least one FBME customer that was a front for a US-sanctioned Syrian entity, the Scientific Studies and Research Center (SSRC). The customer was alleged to have used its FBME account to process transactions through the US financial system. According to FinCEN, it also held an account for an alleged Hezbollah-linked customer. Hezbollah, which is an organization designated by the US Treasury Department as a Foreign Terrorist Organization.
FinCEN said that financial institutions with weak AML and sanctions controls, such as FBME, can “become a magnet for illicit actors seeking to hide their identity and the illicit nature of their activities.”
Steps imposed by FinCEN
FinCEN imposed several requirements on financial institutions, which would enhance the chance that FBME would not be able to open or maintain correspondent accounts in the United States:
1. Review account records: All covered financial institutions would be required to review their account records to ensure that they maintain no accounts directly for, or on behalf of, FBME.
2. Send a notice to foreign correspondent account holders designed to guard against processing transactions involving FBME: A formal certification is not necessary. Transmitting a one-time notice by mail, fax, or email to foreign correspondents of the US institution informing them that they may not provide FBME access to the US institution’s correspondent account is sufficient. US financial institutions can also include this information in the next regular transmittal from the institution to the correspondent account holders. An example of this notice can look as follows:
“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.”
This notice requirements shows that FinCEN Section 311 designations do not only affect US financial institutions. Foreign institutions will be affected if they maintain correspondent accounts or process transactions for FBME. They are no longer permitted to business with FBME if they wish to maintain their US correspondent accounts.
3. Take reasonable steps to identify any indirect use of its correspondent accounts by FBME: FinCEN requires covered institutions to identify a funds transfer order that on its face lists FBME as the originating or beneficiary financial institution, or otherwise references FBME. They must do so to the extent that such indirect use can be determined from transactional records of the financial institution. Here, a financial institution can use a screening tool, such as commercial software program it uses to comply with economic sanctions programs administered by the Office of Foreign Assets Control (OFAC).
The final rule will take effect on July 29, 2016. FBME Bank Ltd., which is also fighting its bank license revocation by the Cyprus Central Bank, will reportedly challenge the ruling, which accuses it of continuing to serve as a hub for illicit financial activity.