Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations-Imposition of Special Measure Against VEF Banka, as a Financial Institution of Primary Money Laundering Concern, 39554-39561 [E6-11043]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 71, Number 134 (Thursday, July 13, 2006)]
[Rules and Regulations]
[Pages 39554-39561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-11043]



[[Page 39554]]

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA82


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Imposition of Special Measure Against VEF 
Banka, as a Financial Institution of Primary Money Laundering Concern

AGENCY: Financial Crimes Enforcement Network, Department of the 
Treasury.

ACTION: Final rule.

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SUMMARY: The Financial Crimes Enforcement Network is issuing a final 
rule imposing a special measure against joint stock company VEF Banka 
(``VEF'', ``VEF Bank'', or the ``bank'') as a financial institution of 
primary money laundering concern, pursuant to the authority contained 
in 31 U.S.C. 5318A of the Bank Secrecy Act.

DATES: This final rule is effective on August 14, 2006.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Provisions

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (``USA 
PATRIOT Act''). Title III of the USA PATRIOT Act amends the anti-money 
laundering provisions of the Bank Secrecy Act, codified at 12 U.S.C. 
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and 5316-5332, to 
promote the prevention, detection, and prosecution of money laundering 
and the financing of terrorism. Regulations implementing the Bank 
Secrecy Act appear at 31 CFR part 103. The authority of the Secretary 
of the Treasury (the ``Secretary'') to administer the Bank Secrecy Act 
and its implementing regulations has been delegated to the Director of 
the Financial Crimes Enforcement Network (the ``Director'').\1\ The 
Bank Secrecy Act authorizes the Director to issue regulations requiring 
all financial institutions defined as such in the Bank Secrecy Act to 
maintain or file certain reports or records that have been determined 
to have a high degree of usefulness in criminal, tax, or regulatory 
investigations or proceedings, or in the conduct of intelligence or 
counter-intelligence activities, including analysis, to protect against 
international terrorism, and to implement anti-money laundering 
programs and compliance procedures.\2\
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    \1\ Therefore, references to the authority of the Secretary of 
the Treasury under section 311 of the USA PATRIOT Act apply equally 
to the Director of the Financial Crimes Enforcement Network.
    \2\ Language expanding the scope of the Bank Secrecy Act to 
intelligence or counter-intelligence activities to protect against 
international terrorism was added by section 358 of the USA PATRIOT 
Act.
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    Section 311 of the USA PATRIOT Act added section 5318A to the Bank 
Secrecy Act, granting the Secretary the authority, after finding that 
reasonable grounds exist for concluding that a foreign jurisdiction, 
foreign financial institution, international class of transactions, or 
type of account is of ``primary money laundering concern,'' to require 
domestic financial institutions and domestic financial agencies to take 
certain ``special measures'' against the primary money laundering 
concern. Section 311 identifies factors for the Secretary to consider 
and Federal agencies to consult before he may find that reasonable 
grounds exist for concluding that a jurisdiction, financial 
institution, class of transactions, or type of account is of primary 
money laundering concern. The statute also provides similar procedures, 
including factors and consultation requirements, for selecting the 
specific special measures to be imposed against the primary money 
laundering concern.
    Taken as a whole, section 311 provides the Secretary with a range 
of options that can be adapted to target specific money laundering and 
terrorist financing concerns most effectively. These options provide 
the authority to bring additional and useful pressure on those 
jurisdictions and institutions that pose money laundering threats and 
the ability to take steps to protect the U.S. financial system. Through 
the imposition of various special measures, we can: Gain more 
information about the concerned jurisdictions, financial institutions, 
transactions, and accounts; monitor more effectively the respective 
jurisdictions, financial institutions, transactions, and accounts; and 
ultimately protect U.S. financial institutions from involvement with 
jurisdictions, financial institutions, transactions, or accounts that 
pose a money laundering concern.
    Before making a finding that reasonable grounds exist for 
concluding that a foreign financial institution is of primary money 
laundering concern, the Secretary is required by the Bank Secrecy Act 
to consult with both the Secretary of State and the Attorney General.
    In addition to these consultations, when finding that a foreign 
financial institution is of primary money laundering concern, the 
Secretary is required by section 311 to consider ``such information as 
the Secretary determines to be relevant, including the following 
potentially relevant factors:''
     The extent to which such financial institution is used to 
facilitate or promote money laundering in or through the jurisdiction;
     The extent to which such financial institution is used for 
legitimate business purposes in the jurisdiction; and
     The extent to which such action is sufficient to ensure, 
with respect to transactions involving the institution operating in the 
jurisdiction, that the purposes of the Bank Secrecy Act continue to be 
fulfilled, and to guard against international money laundering and 
other financial crimes.
    If we determine that reasonable grounds exist for concluding that a 
foreign financial institution is of primary money laundering concern, 
we must determine the appropriate special measure(s) to address the 
specific money laundering risks. Section 311 provides a range of 
special measures that can be imposed, individually or jointly, in any 
combination, and in any sequence.\3\ In the imposition of special 
measures, we follow procedures similar to those for finding a foreign 
financial institution to be of primary money laundering concern, but we 
also engage in additional consultations and consider additional 
factors. Section 311 requires us to consult with other appropriate 
Federal agencies and parties \4\ and to consider the following specific 
factors:
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    \3\ Available special measures include requiring: (1) 
Recordkeeping and reporting of certain financial transactions; (2) 
collection of information relating to beneficial ownership; (3) 
collection of information relating to certain payable-through 
accounts; (4) collection of information relating to certain 
correspondent accounts; and (5) prohibition or conditions on the 
opening or maintaining of correspondent or payable-through accounts. 
31 U.S.C. 5318A(b)(1)-(5). For a complete discussion of the range of 
possible countermeasures, see 68 FR 18917 (April 17, 2003) 
(proposing to impose special measures against Nauru).
    \4\ Section 5318A(a)(4)(A) requires the Secretary to consult 
with the Chairman of the Board of Governors of the Federal Reserve 
System, any other appropriate Federal banking agency, the Secretary 
of State, the U.S. Securities and Exchange Commission, the Commodity 
Futures Trading Commission, the National Credit Union 
Administration, and, in our sole discretion, ``such other agencies 
and interested parties as the Secretary may find to be 
appropriate.'' The consultation process must also include the 
Attorney General, if the Secretary is considering prohibiting or 
imposing conditions upon the opening or maintaining of a 
correspondent account by any domestic financial institution or 
domestic financial agency for the foreign financial institution of 
primary money laundering concern.

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[[Page 39555]]

     Whether similar action has been or is being taken by other 
nations or multilateral groups;
     Whether the imposition of any particular special measure 
would create a significant competitive disadvantage, including any 
undue cost or burden associated with compliance, for financial 
institutions organized or licensed in the United States;
     The extent to which the action or the timing of the action 
would have a significant adverse systemic impact on the international 
payment, clearance, and settlement system, or on legitimate business 
activities involving the particular institution; and
     The effect of the action on U.S. national security and 
foreign policy.\5\
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    \5\ Classified information used in support of a section 311 
finding of primary money laundering concern and imposition of 
special measure(s) may be submitted by the Department of the 
Treasury to a reviewing court ex parte and in camera. See section 
376 of the Intelligence Authorization Act for Fiscal Year 2004, Pub. 
L. 108-177 (amending 31 U.S.C. 5318A by adding new paragraph (f)).
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    In this final rule, we are imposing the fifth special measure (31 
U.S.C. 5318A(b)(5)) against VEF, a commercial bank in the Republic of 
Latvia (``Latvia''). The fifth special measure allows for the 
imposition of conditions upon, or the prohibition of, the opening or 
maintaining of correspondent or payable-through accounts in the United 
States for or on behalf of a foreign financial institution of primary 
money laundering concern. Unlike the other special measures, this 
special measure may be imposed only through the issuance of a 
regulation.

B. VEF

    VEF is headquartered in Riga, the capital of Latvia. VEF is one of 
the smallest of Latvia's 23 banks, and in 2004 was reported to have 
approximately $80 million in assets and 87 employees. Total assets for 
the bank as of June 30, 2005 were 27.3 million LATS, equivalent to 
approximately $47.4 million. For the first six months of 2005, the bank 
made a profit of 288,410 LATS, equivalent to over $501,000. The bank 
has one subsidiary, Veiksmes lizings, which offers financial leasing 
and factoring services. In addition to its headquarters in Riga, VEF 
has one branch in Riga and one representative office in the Czech 
Republic. VEF offers corporate and private banking services, issues a 
variety of credit cards for non-Latvians, and provides currency 
exchange through Internet banking services, i.e., virtual currencies. 
In addition, according to VEF's financial statements, VEF maintains 
correspondent accounts in countries worldwide, but currently reports 
none in the United States.\6\ However, many of the foreign financial 
institutions from which VEF obtains financial services in turn maintain 
correspondent accounts with financial institutions in the United 
States. Accordingly, it appears that VEF may still have indirect access 
to the U.S. financial system.
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    \6\ Some covered financial institutions closed their 
correspondent accounts with VEF before, and another closed its 
account with VEF after, the issuance of the notice of proposed 
rulemaking in April 2005.
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II. The 2005 Finding and Subsequent Developments

A. The 2005 Finding

    Based upon review and analysis of pertinent information, 
consultations with relevant Federal agencies and parties, and after 
consideration of the factors enumerated in section 311, in April 2005 
the Secretary, through his delegate, the Director of the Financial 
Crimes Enforcement Network, found that reasonable grounds exist for 
concluding that VEF is a financial institution of primary money 
laundering concern. This finding was published in a notice of proposed 
rulemaking, which proposed prohibiting covered financial institutions 
from, directly or indirectly, opening or maintaining correspondent 
accounts in the United States for VEF or any of its branches, offices, 
or subsidiaries, pursuant to the authority under 31 U.S.C. 5318A.\7\
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    \7\ See 70 FR 21369 (April 26, 2005).
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    The notice of proposed rulemaking outlined the various factors 
supporting the finding and proposed prohibition. In finding VEF to be 
of primary money laundering concern, we determined that:
     VEF was used by criminals to facilitate or promote money 
laundering. In particular, we determined that VEF was an important 
banking resource for illicit shell companies and financial fraud rings, 
allowing criminals to pursue illegal financial activities. VEF 
permitted ATM withdrawals in significant amounts, an essential 
component to the execution of large financial fraud schemes typically 
associated with carding networks.
     Any legitimate business use of VEF appeared to be 
significantly outweighed by its use to promote or facilitate money 
laundering and other financial crimes.
     A finding that VEF is of primary money laundering concern 
and prohibiting the maintenance of correspondent accounts for that 
institution would prevent suspect accountholders at VEF from accessing 
the U.S. financial system to facilitate money laundering and would 
bring criminal conduct occurring at or through VEF to the attention of 
the international financial community and thus serve the purposes of 
the Bank Secrecy Act as well as guard against international money 
laundering and other financial crime.
    We determined, based on a variety of sources, that VEF Bank has 
been used to facilitate or promote money laundering based in part on 
its lax identification and verification of accountholders and on its 
weak internal controls. In addition, the proceeds of alleged illicit 
activity have been transferred to or through accounts held by VEF Bank 
at covered financial institutions.

B. Jurisdictional Developments

    Latvia's geographical position, situated by the Baltic Sea and 
bordering Russia, Estonia, Belarus, and Lithuania, makes it an 
attractive transit country for both legitimate and illegitimate trade. 
Sources of illegitimate trade include counterfeiting, arms trafficking, 
contraband smuggling, and other crimes. It is believed that most of 
Latvia's narcotics trafficking is conducted by organized crime groups 
that began with cigarette and alcohol smuggling and then progressed to 
narcotics. Latvian authorities recently have sought tighter legislative 
controls designed to fight money laundering and other financial crime. 
However, Latvia's role as a regional financial center, the number of 
commercial banks (23), and those banks' sizeable non-resident deposit 
base continue to make it vulnerable to money laundering.
    Latvia has taken a number of significant steps to address the 
reported money laundering risks and corruption highlighted in the 
notice of proposed rulemaking. The Parliament of Latvia recently passed 
a new law, On the Declaration of Cash on the State Border, which will 
go into effect on July 1, 2006.\8\ The law is aimed at preventing money 
laundering consistent with the United Nations Convention Against 
Transnational Organized Crime and the European Union draft regulation 
on the control of cash leaving and entering the European Community. In 
2005, Latvian law was amended to broaden

[[Page 39556]]

supervisory authority to revoke banking licenses and to allow 
enforcement agencies greater access to bank account information. The 
amendments also provide for fines of between 5,000 and 100,000 LATS 
(equivalent to over $8,687.50 and over $173,750.00, respectively) 
against banks in violation of the anti-money laundering laws; include a 
definition of and procedures for determining who qualifies as a ``true 
beneficiary''; and introduce criminal liability for providing false 
information to banks. Additionally, Latvia has: Banned the 
establishment of shell banks; clarified the authority of Latvian 
financial institutions to demand customer disclosure regarding the 
source of funds; and allowed for the sharing of information between 
financial institutions on suspicious activities.
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    \8\ The law requires that individuals crossing the Latvian 
border with the equivalent of 10,000 Euros ([euro]10,000) in coins, 
cash, and/or certain monetary instruments to complete a form stating 
the origin of the currency or monetary instruments, the purpose or 
use of the currency or monetary instruments, and the receiver of the 
currency or monetary instruments.
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    In terms of implementation, the Latvian authorities have made 
strides in strengthening their anti-money laundering regulation and 
supervision and in developing more robust anti-money laundering 
examination procedures. To ensure proper protection of Latvia's 
financial sector, authorities will need to continue their efforts to 
effectively implement and enforce their strengthened anti-money 
laundering regime.

C. VEF's Subsequent Developments

    We acknowledge that VEF has taken steps to address many of the 
money laundering concerns that we previously identified. For example, 
the bank revised its policies and procedures, including training 
procedures; created an Anti-Money Laundering Manual; closed 
approximately 600 questionable accounts; changed some of its management 
personnel; \9\ and retained the services of an independent 
international accounting firm to identify weaknesses in its anti-money 
laundering program and to assist the bank in its goal of reaching a 
best practices standard for its anti-money laundering program and 
controls.
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    \9\ In September 2005, VEF removed its Head of Department for 
the Supervision of Clients and its Chief Manager for Remote 
Attraction of Clients, as well as dismissed some of the members of 
its Board and appointed new members.
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    Despite the steps VEF has taken, based on a variety of sources 
including classified information, we continue to have serious concerns 
about the commitment of the bank to implement its revised policies and 
procedures. Specifically, we have continued concern with reported links 
between the bank's ownership and organized crime groups that reportedly 
facilitate money laundering. Accordingly, we find that VEF continues to 
be a financial institution of primary money laundering concern.

III. Imposition of the Fifth Special Measure

    Consistent with the finding that VEF is a financial institution of 
primary money laundering concern, and based upon additional 
consultations with required Federal agencies and parties as well as 
consideration of additional relevant factors, including the comments 
received on the proposed rule, we are imposing the special measure 
authorized by 31 U.S.C. 5318A(b)(5) with regard to VEF.\10\ That 
special measure authorizes the prohibition of, or the imposition of 
conditions upon, the opening or maintaining of correspondent or 
payable-through accounts \11\ by any domestic financial institution or 
domestic financial agency for, or on behalf of, a foreign financial 
institution found to be of primary money laundering concern. A 
discussion of the additional section 311 factors relevant to the 
imposition of this particular special measure follows.
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    \10\ Supra footnote 3.
    \11\ For purposes of the rule, a correspondent account is 
defined as an account established to receive deposits from, or make 
payments or other disbursements on behalf of, a foreign bank, or 
handle other financial transactions related to the foreign bank (see 
31 U.S.C. 5318A(e)(1)(B) as implemented in 31 CFR 
103.175(d)(1)(ii)).
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A. Similar Actions Have Not Been or May Not Be Taken by Other Nations 
or Multilateral Groups Against VEF Bank

    At this time, other countries and multilateral groups have not 
taken any action similar to the imposition of the fifth special measure 
pursuant to section 311, which allows the prohibition of U.S. financial 
institutions and financial agencies from opening or maintaining a 
correspondent account in the United States for or on behalf of VEF and 
requires those institutions and agencies to guard against indirect use 
by VEF. We are encouraging other countries to take similar action based 
on our finding that VEF is a financial institution of primary money 
laundering concern.

B. The Imposition of the Fifth Special Measure Would Not Create a 
Significant Competitive Disadvantage, Including Any Undue Cost or 
Burden Associated With Compliance, for Financial Institutions Organized 
or Licensed in the United States

    The fifth special measure imposed by this rule prohibits covered 
financial institutions from opening or maintaining correspondent 
accounts in the United States for, or on behalf of, VEF. As a corollary 
to this measure, covered financial institutions also are required to 
take reasonable steps to apply due diligence to all of their 
correspondent accounts to ensure that no such account is being used 
indirectly to provide services to VEF. The burden associated with these 
requirements is not expected to be significant, given that we are not 
aware of any covered financial institution that maintains a 
correspondent account directly for VEF. Moreover, there is a minimal 
burden involved in transmitting a one-time notice to all correspondent 
accountholders concerning the prohibition on indirectly providing 
services to VEF. In addition, covered financial institutions generally 
apply some degree of due diligence in screening their transactions and 
accounts, often through the use of commercially available software, 
such as that used for compliance with the economic sanctions programs 
administered by the Department of the Treasury's Office of Foreign 
Assets Control. As explained in more detail in the section-by-section 
analysis below, financial institutions should be able to adapt their 
existing screening procedures to comply with this special measure. 
Thus, the due diligence that is required by this rule is not expected 
to impose a significant additional burden upon covered financial 
institutions.

C. The Action or Timing of the Action Will Not Have a Significant 
Adverse Systemic Impact on the International Payment, Clearance, and 
Settlement System, or on Legitimate Business Activities Involving VEF 
Bank

    VEF is not a major participant in the international payment system 
and is not relied upon by the international banking community for 
clearance or settlement services. Thus, the imposition of the fifth 
special measure against VEF will not have a significant adverse 
systemic impact on the international payment, clearance, and settlement 
system. In addition, we believe that any legitimate use of VEF is 
significantly outweighed by its reported use to promote or facilitate 
money laundering. Moreover, in light of the existence of approximately 
15 larger banks in Latvia, we believe that imposition of the fifth 
special measure against VEF will not impose an undue burden on 
legitimate business activities in Latvia.

D. The Action Enhances U.S. National Security and Complements U.S. 
Foreign Policy

    The exclusion from the U.S. financial system of banks such as VEF 
that serve

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as conduits for significant money laundering activity and that 
participate in other financial crime enhances U.S. national security by 
making it more difficult for criminals to access the substantial 
resources and services of the U.S. financial system. In addition, the 
imposition of the fifth special measure against VEF complements the 
U.S. Government's overall foreign policy strategy of making entry into 
the U.S. financial system more difficult for high-risk financial 
institutions.

IV. Notice of Proposed Rulemaking and Comments

    We received 13 comment letters on the notice of proposed 
rulemaking: Three on behalf of VEF; \12\ one comment letter from a 
securities industry trade association; one from a U.S. firm providing 
search software to U.S. financial institutions; one from Latvia's 
banking regulator, the Financial and Capital Markets Commission; five 
comment letters from VEF accountholders; and two comment letters from 
foreign companies that do business with VEF accountholders. 
Additionally, we met with representatives of VEF on several occasions.
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    \12\ One comment letter is from VEF, through its U.S. legal 
counsel, and two comment letters are from the chairman of the 
Supervisory Council, who owns between 33 and 50 percent of VEF.
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    Most of the comments raised by VEF were unrelated to our request 
for comment on the proposed imposition of the fifth special measure. 
VEF claims: That it was unaware of accountholders funneling illicit 
proceeds through its accounts; that the references in the notice of 
proposed rulemaking were too vague to rebut; and that we did not 
provide the bank notice before issuing the proposed rule.
    The bank also claims that we did not respond fully to certain 
statutory criteria. VEF asserts that we did not address whether the 
imposition of the fifth special measure would have a significant 
adverse systemic impact on the international payment, clearance, and 
settlement system. However, we addressed this issue when we stated in 
the notice of proposed rulemaking that VEF is not a major participant 
in the international payment system and is not relied upon by the 
international banking community for clearance or settlement services 
and, therefore, imposing the fifth special measure would not have a 
significant adverse impact on the international payment, settlement, 
and clearance system.\13\ Furthermore, although we recognize that 
certain current accountholders at VEF will be affected by this final 
rule, Latvia has 22 other banks that can meet their legitimate business 
needs. The statutory criteria for finding VEF to be a financial 
institution of primary money laundering concern and for imposing the 
fifth special measure have been fully addressed.\14\
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    \13\ See 70 FR at 21373.
    \14\ See note 7, supra.
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    The Latvian regulator commented on representations that we made 
about Latvian financial institutions. In response to our concern that 
Latvian financial institutions did not appear to serve the Latvian 
community, it stated that foreign deposits have always been a central 
feature in Latvia, which is a regional financial center due to its 
geographic location. The regulator also took issue with our 
representation that Latvia had material weaknesses in the 
implementation and enforcement of its anti-money laundering laws. As 
previously stated in section II.B., supra, Latvia has significantly 
enhanced its anti-money laundering laws.
    The remaining commenters were companies that were accountholders at 
VEF (five commenters), companies that conducted business with 
accountholders at VEF (two commenters), a trade association, and a U.S. 
search software solutions company. The VEF accountholders and the 
companies that conducted business with VEF accountholders maintained 
that VEF operated lawfully and professionally and that the issuance of 
the proposed rule adversely impacted them. Some of the accountholders 
expressed concern that the closure of correspondent accounts held by 
VEF at covered financial institutions might require accountholders to: 
(1) Open new accounts with other banks that are unfamiliar with their 
businesses and products; and (2) revise many contracts that include 
banking details for the parties involved. We specifically solicited 
comment on the impact of the fifth special measure on legitimate 
business involving VEF, and we understand that the measure may require 
legitimate businesses to make alternative banking arrangements with any 
one of the other 22 available Latvian banking institutions. Despite the 
difficulty this may pose for some businesses, we continue to believe 
that legitimate business use involving VEF is outweighed by its use to 
promote or facilitate money laundering and other financial crimes.

V. Section-by-Section Analysis

    The final rule prohibits covered financial institutions from 
opening or maintaining any correspondent account for, or on behalf of, 
VEF. Covered financial institutions are required to apply due diligence 
to their correspondent accounts to guard against their indirect use by 
VEF. At a minimum, that due diligence must include two elements. First, 
a covered financial institution must notify its correspondent 
accountholders that the account may not be used to provide VEF with 
access to the covered financial institution. Second, a covered 
financial institution must take reasonable steps to identify any 
indirect use of its correspondent accounts by VEF, to the extent that 
such indirect use can be determined from transactional records 
maintained by the covered financial institution in the normal course of 
business. A covered financial institution must take a risk-based 
approach when deciding what, if any, additional due diligence measures 
it should adopt to guard against the indirect use of correspondent 
accounts by VEF, based on risk factors such as the type of services 
offered by, and geographic locations of, its correspondents.

A. Section 103.192(a)--Definitions

1. VEF
    Section 103.192(a)(4) of the rule defines VEF to include all 
branches, offices, and subsidiaries of VEF operating in the Republic of 
Latvia or in any other jurisdiction. The one known VEF subsidiary, 
Veiksmes lizings, and any of its branches or offices, is included in 
the definition. We will provide information regarding the existence or 
establishment of any other subsidiaries as it becomes available; 
however, covered financial institutions should take commercially 
reasonable measures to determine whether a customer is a branch, 
office, or subsidiary of VEF.
2. Correspondent Account
    Section 103.192(a)(1) defines the term ``correspondent account'' by 
reference to the definition contained in 31 CFR 103.175(d)(1)(ii). 
Section 103.175(d)(1)(ii) defines a correspondent account to mean an 
account established for a foreign bank to receive deposits from, or 
make payments or other disbursements on behalf of the foreign bank, or 
to handle other financial transactions related to the foreign bank.
    In the case of a depository institution in the United States, this 
broad definition of account includes most types of banking 
relationships between the depository institution and a foreign bank 
that are established to provide regular services, dealings, and other

[[Page 39558]]

financial transactions including a demand deposit, savings deposit, or 
other transaction or asset account, and a credit account or other 
extension of credit.
    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers in commodities, and investment companies 
that are open-end companies (``mutual funds''), we are using the same 
definition of ``account'' for purposes of this rule that was 
established in the final rule implementing section 312 of the USA 
PATRIOT Act.\15\
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    \15\ See 31 CFR 103.175(d)(2)(ii)-(iv).
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3. Covered Financial Institution
    Section 103.192(a)(2) of the rule defines covered financial 
institution to include the following:
     An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h));
     A commercial bank;
     An agency or branch of a foreign bank in the United 
States;
     A federally insured credit union;
     A savings association;
     A corporation acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611 et seq.);
     A trust bank or trust company that is federally regulated 
and is subject to an anti-money laundering program requirement;
     A broker or dealer in securities registered, or required 
to be registered, with the U.S. Securities and Exchange Commission 
under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), 
except persons who register pursuant to section 15(b)(11) of the 
Securities Exchange Act of 1934;
     A futures commission merchant or an introducing broker 
registered, or required to be registered, with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.), except persons who register pursuant to section 4(f)(a)(2) of 
the Commodity Exchange Act; and
     A mutual fund, which means an investment company (as 
defined in section 3(a)(1) of the Investment Company Act of 1940 
((``Investment Company Act'') (15 U.S.C. 80a-3(a)(1)) that is an open-
end company (as defined in section 5(a)(1) of the Investment Company 
Act (15 U.S.C. 80a-5(a)(1)) and that is registered, or is required to 
register, with the U.S. Securities and Exchange Commission pursuant to 
the Investment Company Act.

In the notice of proposed rulemaking, we defined ``covered financial 
institution'' by reference to 31 CFR 103.175(f)(2), the operative 
definition of that term for purposes of the rules implementing sections 
313 and 319 of the USA PATRIOT Act, and we also included in the 
definition futures commission merchants, introducing brokers, and 
mutual funds. The definition of ``covered financial institution'' we 
are adopting for purposes of this final rule is substantially the same 
as in 31 CFR 103.175(f)(2).

B. Section 103.192(b)--Requirements for Covered Financial Institutions

    For purposes of complying with the final rule's prohibition on the 
opening or maintaining in the United States of correspondent accounts 
for, or on behalf of, VEF Bank, we expect a covered financial 
institution to take such steps that a reasonable and prudent financial 
institution would take to protect itself from loan or other fraud or 
loss based on misidentification of a person's status.
1. Prohibition of Direct Use of Correspondent Accounts
    Section 103.192(b)(1) of the rule prohibits all covered financial 
institutions from opening or maintaining a correspondent account in the 
United States for, or on behalf of, VEF Bank. The prohibition requires 
all covered financial institutions to review their account records to 
ensure that they maintain no accounts directly for, or on behalf of, 
VEF Bank.
2. Due Diligence Upon Correspondent Accounts To Prohibit Indirect Use
    As a corollary to the prohibition on the opening or maintaining of 
correspondent accounts directly for VEF Bank, Sec.  103.192(b)(2) 
requires a covered financial institution to apply due diligence to its 
correspondent accounts \16\ that is reasonably designed to guard 
against their indirect use by VEF Bank. At a minimum, that due 
diligence must include notifying correspondent accountholders that 
correspondent accounts may not be used to provide VEF Bank with access 
to the covered financial institution. For example, a covered financial 
institution may satisfy this requirement by transmitting the following 
notice to all of its correspondent accountholders:
---------------------------------------------------------------------------

    \16\ Again, for purposes of the final rule, a correspondent 
account is defined as an account established by a covered financial 
institution for a foreign bank to receive deposits from, or to make 
payments or other disbursements on behalf of, a foreign bank, or to 
handle other financial transactions related to the foreign bank. For 
purposes of this definition, the term account means any formal 
banking or business relationship established to provide regular 
services, dealings, and other financial transactions. See 31 CFR 
103.175(d)(2).

    Notice: Pursuant to U.S. regulations issued under section 311 of 
the USA PATRIOT Act, 31 CFR 103.192, we are prohibited from opening 
or maintaining a correspondent account for, or on behalf of, VEF 
Bank (Republic of Latvia) or any of its subsidiaries (including 
Veiksmes lizings). The regulations also require us to notify you 
that your correspondent account with our financial institution may 
not be used to provide VEF Bank or any of its subsidiaries with 
access to our financial institution. If we become aware that VEF 
Bank or any of its subsidiaries is indirectly using the 
correspondent account you hold at our financial institution, we will 
be required to take appropriate steps to prevent such access, 
---------------------------------------------------------------------------
including terminating your account.

    The purpose of the notice requirement is to help ensure that VEF is 
denied access to the U.S. financial system, as well as to increase 
awareness within the international financial community of the risks and 
deficiencies of VEF. However, we do not require or expect a covered 
financial institution to obtain a certification from its correspondent 
accountholders that indirect access will not be provided in order to 
comply with this notice requirement. Instead, methods of compliance 
with the notice requirement could include, for example, transmitting a 
one-time notice by mail, fax, or e-mail to a covered financial 
institution's correspondent accountholders, informing those 
accountholders that their correspondent accounts may not be used to 
provide VEF Bank with indirect access to the covered financial 
institution, or including such information in the next regularly 
occurring transmittal from the covered financial institution to its 
correspondent accountholders.
    In its comment letter, the trade association requested that we 
consider permitting other methods of providing notice to correspondent 
accountholders or allowing sufficient flexibility so that covered 
financial institutions can use systems already established under other 
provisions of the USA PATRIOT Act to provide notice. As we indicated in 
the notice of proposed rulemaking, a covered financial institution is 
not obligated to use any specific form or method in notifying its 
correspondent accountholders of the special measure. We suggested the 
provision of written notice containing certain language as only one 
example of how a covered financial institution could comply with its 
obligation to notify its correspondents. The trade association further 
suggested that we specifically consider means such as including the 
notice within the certificates used by financial institutions to comply 
with the

[[Page 39559]]

rules issued under sections 313 and 319 of the USA PATRIOT Act. 
Although there may be circumstances where this would be appropriate, we 
note that those certificates are renewable only every three years and 
that relying solely on the certification process for notice purposes 
would not be reasonable where a re-certification would not be made 
within a reasonable time following the issuance of this final rule. 
Furthermore, as noted above, we are not requiring that covered 
financial institutions obtain a certification regarding compliance with 
the final rule from each correspondent accountholder.
    This final rule also requires a covered financial institution to 
take reasonable steps to identify any indirect use of its correspondent 
accounts by VEF, to the extent that such indirect use can be determined 
from transactional records maintained by the covered financial 
institution in the normal course of business. For example, a covered 
financial institution is expected to apply an appropriate screening 
mechanism to be able to identify a funds transfer order that, on its 
face, lists VEF as the originator's or beneficiary's financial 
institution, or otherwise references VEF in a manner detectable under 
the financial institution's normal business screening procedures. We 
acknowledge that not all institutions are capable of screening every 
field in a funds transfer message and that the risk-based controls of 
some institutions may not necessitate such comprehensive screening. 
Alternatively, other institutions may perform more thorough screening 
as part of their risk-based determination to perform ``additional due 
diligence,'' as described below. An appropriate screening mechanism 
could be the mechanism currently used by a covered financial 
institution to comply with various legal requirements, such as the 
commercially available software used to comply with the sanctions 
programs administered by the Office of Foreign Assets Control.
    In its letter, the software company commenter sought clarification 
on how covered financial institutions were expected to prevent indirect 
use of correspondent services to VEF. In particular, the software 
company asked if a one-time search was sufficient to determine if the 
financial institution was being used indirectly by a subject to a 
section 311 special measure and whether the proposed rule also extends 
to wire transfer activity, payable-through accounts, debit and credit 
card transactions, and any other financial activities through which a 
U.S. financial institution may eventually directly transact or act as 
an intermediary.
    After we issue a final section 311 rulemaking and impose the fifth 
special measure with regard to a financial institution (``section 311 
institution''), a covered financial institution is required to apply 
due diligence to its correspondent accounts that is reasonably designed 
to guard against their indirect use by the section 311 institution. 
Specifically, a covered financial institution must: (1) Notify its 
correspondent accountholders that the correspondent account may not be 
used to provide the section 311 institution with access to the covered 
financial institution; and (2) take reasonable steps to identify any 
indirect use of its correspondent accounts by the section 311 
institution. We gave an example above of how a one-time transmittal 
notice to correspondent accountholders would satisfy the notification 
requirement. With respect to the second requirement, a covered 
financial institution has an ongoing--as opposed to a one-time--
obligation to take reasonable steps to identify all correspondent 
account services it may directly or indirectly provide to the section 
311 institution.
    This commenter also suggested that section 311 institutions, like 
VEF, be included in the Office of Foreign Assets Control Specially 
Designated Nationals List to avoid compelling covered financial 
institutions to comply with two separate lists and, therefore, 
alleviate regulatory burden.\17\ However, the suggestion is problematic 
given that the Financial Crimes Enforcement Network and the Office of 
Foreign Assets Control are distinct governmental entities with 
different policy objectives. The Office of Foreign Assets Control 
administers and enforces economic and trade sanctions based on U.S. 
foreign policy and national security goals, while the intent of 
imposing the fifth special measure under a section 311 rulemaking is to 
prevent entities of primary money laundering concern from accessing the 
U.S. financial system. The two lists referenced are not comparable and 
have separate statutory criteria and legal bases and are, therefore, 
not equivalent or interchangeable.
---------------------------------------------------------------------------

    \17\ The software company commenter also requested that we 
provide a list of section 311 institutions in an electronic format 
available for download on its Web site in the same formats as our 
section 314(a) (mandatory law enforcement information sharing 
request) lists and lists provided by the Office of Foreign Assets 
Control. This request presupposes that the section 311 list is as 
massive or frequent as the other lists and merits our providing it 
in a downloadable format. However, the number of section 311 
rulemakings issued in one year does not merit such treatment. We 
maintain a list of section 311 rulemakings and withdrawals at http:/
/www.fincen.gov under Regulatory/Section 311.
---------------------------------------------------------------------------

    Nonetheless, as stated above, covered financial institutions may 
seek to monitor for section 311 institutions by using software that 
they are currently using, such as the commercially available software 
used to comply with the sanctions programs administered by the Office 
of Foreign Assets Control to flag certain entities. Using existing 
screening software should alleviate regulatory burden for covered 
financial institutions in complying with this rulemaking. However, each 
covered financial institution has the flexibility to establish and 
apply a screening mechanism appropriate for its business.
    Notifying correspondent accountholders and taking reasonable steps 
to identify any indirect use of correspondent accounts by VEF in the 
manner discussed above are the minimum due diligence requirements under 
this final rule. Beyond these minimum steps, a covered financial 
institution should adopt a risk-based approach for determining what, if 
any, additional due diligence measures it should implement to guard 
against the indirect use of its correspondent accounts by VEF, based on 
risk factors such as the type of services it offers and the geographic 
locations of its correspondent accountholders.
    A covered financial institution that obtains knowledge that a 
correspondent account is being used by a foreign bank to provide 
indirect access to VEF must take all appropriate steps to prevent such 
indirect access, including, when necessary, terminating the 
correspondent account. A covered financial institution may afford such 
foreign bank a reasonable opportunity to take corrective action prior 
to terminating the correspondent account. We have added language in the 
final rule clarifying that, should the foreign bank refuse to comply, 
or if the covered financial institution cannot obtain adequate 
assurances that the account will not be available to VEF, the covered 
financial institution must terminate the account within a commercially 
reasonable time. This means that the covered financial institution 
should not permit the foreign bank to establish any new positions or 
execute any transactions through the account, other than those 
necessary to close the account. A covered financial institution may 
reestablish an account closed under this rule if it determines that the 
account will not be used to provide banking services indirectly to VEF.

[[Page 39560]]

3. Reporting Not Required
    Section 103.192(b)(3) of the rule clarifies that the rule does not 
impose any reporting requirement upon any covered financial institution 
that is not otherwise required by applicable law or regulation. 
However, a covered financial institution must document its compliance 
with the requirement that it notify its correspondent accountholders 
that the accounts may not be used to provide VEF with access to the 
covered financial institution.

VI. Regulatory Flexibility Act

    It is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities. It appears 
that VEF no longer holds correspondent accounts in the United States. 
The correspondent accounts that the bank previously held in the United 
States were closed, and any correspondent accounts that may still be 
held in the United States for foreign banks that still maintain a 
correspondent relationship with VEF are held with large banks. Thus, 
the prohibition on establishing or maintaining such correspondent 
accounts will not have a significant impact on a substantial number of 
small entities. In addition, all covered financial institutions 
currently must exercise some degree of due diligence in order to comply 
with various legal requirements. The tools used for such purposes, 
including commercially available software used to comply with the 
economic sanctions programs administered by the Office of Foreign 
Assets Control, can be modified to monitor for the use of correspondent 
accounts by VEF. Thus, the due diligence that is required by this 
rule--i.e., the one-time transmittal of notice to correspondent 
accountholders and screening of transactions to identify any indirect 
use of a correspondent account--is not expected to impose a significant 
additional economic burden on small covered financial institutions.

VII. Paperwork Reduction Act of 1995

    The collection of information contained in the final rule has been 
approved by the Office of Management and Budget (OMB) in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and has 
been assigned OMB Control Number 1506-0041. An agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless it displays a valid control number assigned by OMB.
    The only requirements in the final rule that are subject to the 
Paperwork Reduction Act are the requirements that a covered financial 
institution notify its correspondent accountholders that the 
correspondent accounts maintained on their behalf may not be used to 
provide VEF with access to the covered financial institution and the 
requirement that a covered financial institution document its 
compliance with this obligation to notify its correspondents. The 
estimated annual average burden associated with this collection of 
information is one hour per affected financial institution. We received 
no comments on this information collection burden estimate.
    Comments concerning the accuracy of this information collection 
estimate and suggestions for reducing this burden should be sent 
(preferably by fax (202-395-6974)) to Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, Office 
of Management and Budget, Washington, DC 20503 (or by the Internet to 
Alexander--T.--Hunt@omb.eop.gov), with a copy to the Financial Crimes 
Enforcement Network by paper mail to FinCEN, P.O. Box 39, Vienna, VA 
22183, ``ATTN: Section 311--Imposition of Special Measure Against VEF'' 
or by electronic mail to regcomments@fincen.treas.gov with the caption 
``ATTN: Section 311--Imposition of Special Measure Against VEF'' in the 
body of the text.

VIII. Executive Order 12866

    This rule is not a significant regulatory action for purposes of 
Executive Order 12866, ``Regulatory Planning and Review.''

List of Subjects in 31 CFR Part 103

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

Authority and Issuance

0
For the reasons set forth in the preamble, part 103 of title 31 of the 
Code of Federal Regulations is amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FINANCIAL TRANSACTIONS

0
1. The authority citation for part 103 continues to read as follows:

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

Subpart I--[Amended]

0
2. Subpart I of part 103 is amended by adding new Sec.  103.192 as 
follows:


Sec.  103.192  Special measures against VEF Bank.

    (a) Definitions. For purposes of this section:
    (1) Correspondent account has the same meaning as provided in Sec.  
103.175(d)(1)(ii).
    (2) Covered financial institution includes:
    (i) An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)));
    (ii) A commercial bank;
    (iii) An agency or branch of a foreign bank in the United States;
    (iv) A federally insured credit union;
    (v) A savings association;
    (vi) A corporation acting under section 25A of the Federal Reserve 
Act (12 U.S.C. 611 et seq.);
    (vii) A trust bank or trust company that is federally regulated and 
is subject to an anti-money laundering program requirement;
    (viii) A broker or dealer in securities registered, or required to 
be registered, with the U.S. Securities and Exchange Commission under 
the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except 
persons who register pursuant to section 15(b)(11) of the Securities 
Exchange Act of 1934;
    (ix) A futures commission merchant or an introducing broker 
registered, or required to be registered, with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.), except persons who register pursuant to section 4(f)(a)(2) of 
the Commodity Exchange Act; and
    (x) A mutual fund, which means an investment company (as defined in 
section 3(a)(1) of the Investment Company Act of 1940 ((``Investment 
Company Act'') (15 U.S.C. 80a-3(a)(1))) that is an open-end company (as 
defined in section 5(a)(1) of the Investment Company Act (15 U.S.C. 
80a-5(a)(1))) and that is registered, or is required to register, with 
the U.S. Securities and Exchange Commission pursuant to the Investment 
Company Act.
    (3) Subsidiary means a company of which more than 50 percent of the 
voting stock or analogous equity interest is owned by another company.
    (4) VEF Bank means any branch, office, or subsidiary of joint stock 
company VEF Banka operating in the Republic of Latvia or in any other 
jurisdiction. The one known VEF Bank subsidiary, Veiksmes lizings, and 
any branches or offices, are included in the definition.
    (b) Requirements for covered financial institutions--(1) 
Prohibition on direct use of correspondent accounts. A covered 
financial institution shall

[[Page 39561]]

terminate any correspondent account that is opened or maintained in the 
United States for, or on behalf of, VEF Bank.
    (2) Due diligence of correspondent accounts to prohibit indirect 
use. (i) A covered financial institution shall apply due diligence to 
its correspondent accounts that is reasonably designed to guard against 
their indirect use by VEF Bank. At a minimum, that due diligence must 
include:
    (A) Notifying correspondent accountholders that the correspondent 
account may not be used to provide VEF Bank with access to the covered 
financial institution; and
    (B) Taking reasonable steps to identify any indirect use of its 
correspondent accounts by VEF Bank, to the extent that such indirect 
use can be determined from transactional records maintained in the 
covered financial institution's normal course of business.
    (ii) A covered financial institution shall take a risk-based 
approach when deciding what, if any, additional due diligence measures 
it should adopt to guard against the indirect use of its correspondent 
accounts by VEF Bank.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to VEF Bank shall take all appropriate steps to prevent 
such indirect access, including, where necessary, terminating the 
correspondent account.
    (iv) A covered financial institution required to terminate a 
correspondent account pursuant to paragraph (b)(2)(iii) of this 
section:
    (A) Should do so within a commercially reasonable time, and should 
not permit the foreign bank to establish any new positions or execute 
any transaction through such correspondent account, other than those 
necessary to close the correspondent account; and
    (B) May reestablish a correspondent account closed pursuant to this 
paragraph if it determines that the correspondent account will not be 
used to provide banking services indirectly to VEF Bank.
    (3) Recordkeeping and reporting. (i) A covered financial 
institution is required to document its compliance with the notice 
requirement set forth in paragraph (b)(2)(i)(A) of this section.
    (ii) Nothing in this section shall require a covered financial 
institution to report any information not otherwise required to be 
reported by law or regulation.

    Dated: July 5, 2006.
Robert W. Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. E6-11043 Filed 7-12-06; 8:45 am]
BILLING CODE 4810-02-P