Imposition of Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern, 35665-35671 [2016-13037]

Agencies

• DEPARTMENT OF THE TREASURY
• Financial Crimes Enforcement Network

[Federal Register Volume 81, Number 107 (Friday, June 3, 2016)]
[Proposed Rules]
[Pages 35665-35671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13037]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB35


Imposition of Special Measure Against North Korea as a 
Jurisdiction of Primary Money Laundering Concern

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: In a finding, notice of which was published elsewhere in this 
issue of the Federal Register (``Notice of Finding''), the Director of 
FinCEN found that the Democratic People's Republic of Korea (``North 
Korea'') is a jurisdiction of primary money laundering concern. FinCEN 
is issuing this notice of proposed rulemaking (``NPRM'') to propose to 
prohibit covered financial institutions from opening or maintaining a 
correspondent account in the United States for or on behalf of a North 
Korean banking institution and to prohibit the use of foreign banking 
institutions' correspondent accounts at covered U.S. financial 
institutions to process transactions involving North Korean financial 
institutions.

DATES: Written comments on the notice of proposed rulemaking must be 
submitted on or before August 2, 2016.

ADDRESSES: You may submit comments, identified by 1506-AB35, by any of 
the following methods:
     Federal E-rulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. Include 1506-AB35 in 
the submission.
     Mail: The Financial Crimes Enforcement Network, P.O. Box 
39, Vienna, VA 22183. Include RIN 1506-AB35 in the body of the text. 
Please submit comments by one method only.
     Comments submitted in response to this NPRM will become a 
matter of public record. Therefore, you should submit only information 
that you wish to make publicly available.
     Inspection of comments: FinCEN uses the electronic, 
Internet-accessible dockets at Regulations.gov as its complete, 
official-record docket; all hard copies of materials that should be in 
the docket, including public comments, are electronically scanned and 
placed there. Federal Register notices published by FinCEN are 
searchable by docket number, RIN, or document title, among other 
things, and the docket number, RIN, and title may be found at the 
beginning of such notices. In general, FinCEN will make all comments 
publicly available by posting them on https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800) 
949-2732.

SUPPLEMENTARY INFORMATION: 

I. Statutory Provisions

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (the 
``USA PATRIOT Act''). Title III of the USA PATRIOT Act amended the 
anti-money laundering 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

[[Page 35666]]

Chapter X. The authority of the Secretary of the Treasury (the 
``Secretary'') to administer the BSA and its implementing regulations 
has been delegated to the Director of FinCEN.\1\
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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 FinCEN.
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    Section 311 of the USA PATRIOT Act (``Section 311''), codified at 
31 U.S.C. 5318A, grants the Director of FinCEN the authority, upon 
finding that reasonable grounds exist for concluding that a foreign 
jurisdiction, 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.

II. Imposition of a Special Measure Against North Korea as a 
Jurisdiction of Primary Money Laundering Concern

A. Proposed Imposition of Special Measure Five

    As noticed in the June 2, 2016 Federal Register, on May 27, 2016, 
the Director of FinCEN found that North Korea is a jurisdiction of 
primary money laundering concern (the ``Finding'').\2\ Based upon that 
Finding, the Director of FinCEN is authorized to impose one or more 
special measures. Following the consideration of all factors relevant 
to the Finding and to selecting the special measure proposed in this 
NPRM, the Director of FinCEN proposes to impose the fifth special 
measure authorized by section 5318A(b)(5), (the ``fifth special 
measure''). This special measure would prohibit covered financial 
institutions from opening or maintaining a correspondent account in the 
United States for or on behalf of a North Korean banking institution. 
Covered financial institutions would also be prohibited from processing 
a transaction involving a North Korean financial institution through 
the United States correspondent account of a foreign banking 
institution.
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    \2\ Classified information used in support of a section 311 
finding and special measure(s) may be submitted by FinCEN to a 
reviewing court ex parte and in camera. See section 376 of the 
Intelligence Authorization Act for fiscal year 2004, Public Law 108-
177 (amending U.S.C. 5318A by adding new paragraph (f)).
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    In addition, covered financial institutions would be required under 
the BSA to apply special due diligence to their foreign correspondent 
accounts that is reasonably designed to guard against their use to 
process transactions involving North Korean financial institutions. 
These proposed requirements are discussed in more detail below. In 
connection with this action, FinCEN consulted with the Federal Reserve, 
representatives of the Federal functional regulators, the Department of 
Justice, and the Department of State, among others.
    FinCEN requests comments on all aspects of its proposal to impose 
the fifth special measure, to include comments on the proposed 
prohibition on covered financial institutions from opening or 
maintaining a correspondent account in the United States for or on 
behalf of a North Korean banking institution.

B. Discussion of Section 311 Factors

    In determining which special measures to implement to address the 
primary money laundering concern described in the associated Notice of 
Finding, FinCEN considered the following factors.
1. Whether Similar Action Has Been or Will Be Taken by Other Nations or 
Multilateral Groups Against North Korea
    The international community has taken steps to address North 
Korean's illicit financial activity. Between 2006 and 2016 the United 
Nations Security Council has adopted multiple resolutions, 1718,\3\ 
1874,\4\ 2087,\5\ 2094,\6\ and 2270 \7\ which generally restrict North 
Korea's financial and operational activities related to its nuclear and 
missile programs and conventional arms sales. Most recently, in March 
2016, the United Nations adopted United Nations Security Council 
Resolution (UNSCR) 2270, which imposes additional sanctions on North 
Korea in response to a January 6, 2016 nuclear test and February 7, 
2016 launch using ballistic missile technology. This UNSCR contains 
provisions that generally require nations to: (i) Prohibit North Korean 
banks from opening branches in their territory or engaging in certain 
correspondent relationships with these banks; (ii) terminate existing 
representative offices or subsidiaries, branches, and correspondent 
accounts with North Korean financial institutions; (iii) prohibit their 
financial institutions from opening new representative offices or 
subsidiaries, branches, or bank accounts in North Korea; and (iv) to 
close existing representative offices or subsidiaries, branches, or 
bank accounts in North Korea if reasonable grounds exist to believe 
such financial services could contribute to North Korea's nuclear or 
missile programs, or UNSCR violations.
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    \3\ See United Nations Security Council Resolution (``UNSCR'') 
1718 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1718(2006)).
    \4\ See UNSCR 1874 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1874(2009).
    \5\ See UNSCR 2087 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2087(2013)).
    \6\ See UNSCR 2094 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2094(2013)).
    \7\ See UNSCR 2270 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2270(2016)).
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    The Financial Action Task Force (``FATF'') has issued a series of 
public statements expressing its concern that North Korea's lack of a 
comprehensive AML/CFT regime represents a significant vulnerability 
within the international financial system. The statements further 
called upon North Korea to address those deficiencies with urgency, and 
called upon FATF members and urged all jurisdictions to advise their 
financial institutions to give special attention to business 
relationships and transactions with North Korea, to protect their 
correspondent accounts from being used to evade countermeasures and 
risk mitigation practices. Starting in February 2011, the FATF called 
upon its members and urged all jurisdictions to apply effective 
counter-measures to protect their financial sectors from the money 
laundering and financing of terrorism risks emanating from North 
Korea.\8\
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    \8\ See ``FATF Public Statement--19 February 2016,'' Financial 
Action Task Force (https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
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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 proposed by this rulemaking would, after 
the effective date of the final rule, prohibit covered financial 
institutions from opening or maintaining a correspondent account in the 
United States for or on behalf of a North Korean banking institution. 
It would also prohibit the use of a foreign banking institution's U.S. 
correspondent account to process a transaction involving a North Korean 
financial institution. As noted in FinCEN's Notice of Finding, none of 
North Korea's financial institutions currently maintain correspondent 
accounts directly with U.S. banks. Further, as noted above, U.S. 
financial institutions are currently subject to a range of prohibitions 
related to sanctions concerning North Korea, which has generally 
limited their direct exposure to the North Korean financial system. 
Therefore, FinCEN believes this

[[Page 35667]]

action will not present an undue regulatory burden.
    Covered financial institutions would also potentially be required 
to apply special due diligence to their foreign correspondent accounts 
that is reasonably designed to guard against their use to process 
transactions involving North Korean financial institutions. For direct 
correspondent relationships, this would involve a minimal burden in 
transmitting a one-time notice to certain foreign correspondent account 
holders concerning the prohibition on processing transactions involving 
a North Korean financial institution through the U.S. correspondent 
account. U.S. financial institutions generally apply some level of 
screening and, when required, conduct some level of reporting of 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 Office of Foreign Assets Control 
(``OFAC'') of the Department of the Treasury and to detect potential 
suspicious activity. To ensure that U.S. financial institutions are not 
being used unwittingly to process payments for, or on behalf of, a 
North Korean financial institution, directly or indirectly, some 
marginal additional burden will be incurred by U.S. financial 
institutions to be vigilant in their suspicious activity monitoring 
procedures. As explained in more detail in the section-by-section 
analysis below, financial institutions should be able to leverage these 
current screening and reporting procedures to detect transactions 
involving a North Korean financial institution.
3. The Extent to Which the Proposed Action or Timing of the Action Will 
Have a Significant Adverse Systemic Impact on the International 
Payment, Clearance, and Settlement System, or on Legitimate Business 
Activities of North Korea
    Financial institutions in North Korea are generally not major 
participants in the international payment system and are not relied 
upon by the international banking community for clearance or settlement 
services. In addition, given existing domestic and multilateral 
sanctions, coupled with the FATF calls for countermeasures to address 
North Korea's AML/CFT deficiencies, it is unlikely that the imposition 
of the fifth special measure against North Korea would have a 
significant adverse systemic impact on the international payment, 
clearance, and settlement system. In light of the reasons for imposing 
this special measure, and based on available information, FinCEN does 
not believe that it would impose an undue burden on legitimate business 
activities.
4. The Effect of the Proposed Action on United States National Security 
and Foreign Policy
    The exclusion from the U.S. financial system of jurisdictions that 
serve as conduits for significant money laundering activity, for the 
financing of weapons of mass destruction or their delivery systems, and 
for other financial crimes enhances national security by making it more 
difficult for terrorists, proliferators, and money launderers to access 
the U.S. financial system. To the extent that this action serves as an 
additional tool in preventing North Korea from accessing the U.S. 
financial system, the proposed action would support and uphold U.S. 
national security and foreign policy goals. The imposition of the fifth 
special measure also would complement the U.S. Government's worldwide 
efforts to expose and disrupt international money laundering.
    Therefore, pursuant to the Finding that North Korea is a 
jurisdiction of primary money laundering concern, and after conducting 
the required consultations and weighing the relevant factors, the 
Director of FinCEN proposes to impose the fifth special measure.

C. Consideration of Alternative Special Measures

    As noted above, and in FinCEN's Notice of Finding, North Korea is 
subject to numerous United Nations Security Council Resolutions \9\ and 
U.S. sanctions authorities,\10\ and it has been consistently identified 
by the FATF for its AML deficiencies.\11\ The U.N. has specifically 
called for enhanced monitoring of financial transactions to prevent the 
financing of North Korea's nuclear and ballistic missile programs and 
the freezing of any assets suspected of supporting these illicit 
programs. Additionally, FinCEN has issued three advisories since 2005 
detailing specific concerns of the deceptive financial practices used 
by North Korea and North Korean entities and calling on U.S. financial 
institutions to take appropriate risk mitigation measures. However, 
North Korea has not taken any substantial action to address the range 
of concerns and continues to be involved in an array of illicit 
activities, as reflected in the Notice of Finding.
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    \9\ See UNSCRs 1718, 1874, 2087, 2094, and 2270.
    \10\ See, e.g., Executive Order (``E.O.'') 13382 ``Blocking 
Property of Weapons of Mass Destruction Proliferators and Their 
Supporters'' (2005) (https://www.federalregister.gov/articles/2005/07/01/05-13214/blocking-property-of-weapons-of-mass-destruction-proliferators-and-their-supporters); E.O. 13551 ``Blocking Property 
of Certain Persons with Respect to North Korea'' (2010) (https://www.gpo.gov/fdsys/pkg/FR-2010-09-01/pdf/X10-10901.pdf); E.O. 13687 
``Imposing Additional Sanctions with Respect to North Korea'' (2015) 
(https://www.federalregister.gov/articles/2015/01/06/2015-00058/imposing-additional-sanctions-with-respect-to-north-korea); E.O. 
13722 ``Blocking Property of the Government of North Korea and the 
Workers' Party of Korea, and Prohibiting Certain Transactions with 
Respect to North Korea,'' (2016) (https://www.gpo.gov/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf).
    \11\ See ``FATF Public Statement--19 February 2016,'' Financial 
Action Task Force (https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
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    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 a range of these special 
measures in order to protect the U.S. financial system from these 
threats. To that end, special measures one through four impose 
additional recordkeeping, information collection, and information 
reporting requirements on covered U.S. financial institutions. The 
fifth special measure establishes prohibitions or conditions on opening 
or maintaining certain correspondent or payable-through accounts. North 
Korea's complicity in money laundering and illicit financial activity, 
and flagrant disregard for multiple UN resolutions related to the 
proliferation of weapons of mass destruction, constitute a threat to 
the integrity of the U.S. financial system. Further, in light of 
existing sanctions on North Korea, FinCEN is concerned that any 
condition, additional recordkeeping, or reporting requirement would not 
be an effective measure to safeguard the U.S. financial system. In the 
case of the jurisdiction of North Korea, FinCEN views the fifth special 
measure, with its prohibitions on the opening or maintenance of a 
correspondent account for or on behalf of a North Korean banking 
institution, and on the use of a foreign correspondent account to 
process a transaction involving a North Korean financial institution, 
as the special measure that can adequately protect the U.S. financial 
system from North Korean illicit financial activity.

III. Section-by-Section Analysis for Imposition of the Fifth Special 
Measure

    The proposed rule would prohibit covered financial institutions 
from opening or maintaining in the United States a correspondent 
account for or on behalf of a North Korean banking institution. It 
would also prohibit the use of a foreign banking institution's

[[Page 35668]]

U.S. correspondent account to process a transaction involving a North 
Korean financial institution. As a corollary to this prohibition, 
covered financial institutions would be required to screen their 
correspondents in a manner that is reasonably designed to guard against 
use by foreign banking institutions to process transactions on behalf 
of a North Korean financial institution, including access through the 
use of indirect correspondent accounts held by those foreign 
institutions. A violation of the special measure could result in the 
imposition of civil monetary or criminal penalties.

A. 1010.659(a)--Definitions

1. North Korean Financial Institution
    A North Korean financial institution would mean any branch, office, 
or subsidiary of any foreign financial institution, as defined at 31 
CFR 1010.605(f), chartered or licensed by North Korea, including any 
branches, offices, or subsidiaries of such financial institution 
operating in any jurisdiction, and any branch or office within North 
Korea of any foreign financial institution.
2. Foreign Banking Institution
    Foreign banking institution has the same meaning as provided in 31 
CFR 1010.100(u).
3. Correspondent Account
    Section 1010.659(a)(3) of the proposed rule would define the term 
``correspondent account'' by reference to the definition contained in 
31 CFR 1010.605(c)(1)(i). Section 1010.605(c)(1)(i) defines a 
correspondent account to mean an account established to receive 
deposits from, or make payments or other disbursements on behalf of, a 
foreign financial institution, or to handle other financial 
transactions related to the foreign financial institution. 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 definition of ``account'' for purposes of this proposed rule as 
was established for depository institutions in the final rule 
implementing the provisions of section 312 of the USA PATRIOT Act 
requiring enhanced due diligence for correspondent accounts maintained 
for certain foreign banks.\12\
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    \12\ See 31 CFR 1010.605(c)(2)(i).
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    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers-commodities, and investment companies 
that are open-end companies (``mutual funds''), FinCEN is also using 
the same definition of ``account'' for purposes of this proposed rule 
as was established for these entities in the final rule implementing 
the provisions of section 312 of the USA PATRIOT Act requiring enhanced 
due diligence for correspondent accounts maintained for certain foreign 
banks.\13\
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    \13\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
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4. Covered Financial Institution
    Section 1010.659(a)(4) of the proposed rule would define ``covered 
financial institution'' with the same definition used in the final rule 
implementing the provisions of section 312 of the USA PATRIOT Act,\14\ 
which in general includes the following:
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    \14\ See 31 CFR 1010.605(e)(1).
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     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.
5. Subsidiary
    Section 1010.659(a)(5) of the proposed rule would define 
``subsidiary'' as a company of which more than 50 percent of the voting 
stock or analogous equity interest is owned by another company.

B. 1010.659(b)--Prohibition on Accounts and Due Diligence Requirements 
for Covered Financial Institutions

1. Prohibition on Opening or Maintaining Correspondent Accounts
    Section 1010.659(b)(1) and (2) of the proposed rule would prohibit 
covered financial institutions from establishing, maintaining, 
administering, or managing in the United States any correspondent 
account for or on behalf of a North Korean banking institution. It 
would also prohibit processing of a transaction involving a North 
Korean financial institution through the U.S. correspondent account of 
a foreign banking institution. These prohibitions would not supersede 
the blocking of property under any Executive order issued pursuant to 
the International Emergency Economic Powers Act (50 U.S.C. 1701 et 
seq.) (IEEPA) or 31 CFR Chapter V.
2. Special Due Diligence for Correspondent Accounts To Prohibit Use
    As a corollary to the prohibitions set forth in section 
1010.659(b)(1) and (2), section 1010.659(b)(3) of the proposed rule 
would require a covered financial institution to apply special due 
diligence to all of its foreign correspondent accounts that is 
reasonably designed to guard against processing transactions involving 
North Korean financial institutions. As part of that special due 
diligence, covered financial institutions must notify those foreign 
correspondent account holders that the covered financial institutions 
know or have reason to believe provide services to a North Korean 
financial institution that such correspondents may not provide a North 
Korean financial institution with access to the correspondent account 
maintained at the covered financial institution. A covered financial 
institution may satisfy this notification requirement using the 
following notice:

    Notice: Pursuant to U.S. regulations issued under Section 311 of 
the USA PATRIOT Act, see 31 CFR 1010.659, we are prohibited from 
establishing, maintaining, administering, or managing a 
correspondent account for, or on behalf of, a North Korean financial 
institution. The regulations also require us to notify you that you 
may not provide a North Korean financial institution, including 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 a 
North Korean financial institution, including any of its branches, 
offices, or subsidiaries, we will be required to take appropriate 
steps to prevent such access, including terminating your account.

    Covered financial institutions should implement appropriate risk-
based procedures to identify transactions involving a North Korean 
financial institution. A covered financial institution may, for 
example, have knowledge through transaction screening software that a 
correspondent processes transactions for a North Korean financial 
institution. The purpose of the notice requirement is to aid 
cooperation with correspondent

[[Page 35669]]

account holders in preventing transactions involving a North Korean 
financial institution from accessing the U.S. financial system. 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.
    Methods of compliance with the notice requirement could include, 
for example, transmitting a one-time notice by mail, fax, or email. The 
notice should be transmitted whenever a covered financial institution 
knows or has reason to believe that a foreign correspondent account 
holder provides services to a North Korean financial institution. 
FinCEN specifically solicits comments on the form and scope of the 
notice that would be required under the rule.
    The special due diligence would also include implementing risk-
based procedures designed to identify any use of correspondent accounts 
to process transactions involving North Korean financial institutions. 
A covered financial institution would be expected to apply an 
appropriate screening mechanism to identify a funds transfer order that 
on its face listed a North Korean financial institution as the 
financial institution of the originator or beneficiary, or otherwise 
referenced a North Korean financial institution in a manner detectable 
under the financial institution's normal screening mechanisms. An 
appropriate screening mechanism could be the mechanisms used by a 
covered financial institution to comply with various legal 
requirements, such as the commercially available software programs used 
to comply with the economic sanctions programs administered by OFAC.
    A covered financial institution would also be required to implement 
risk-based procedures to identify indirect use of its correspondent 
accounts, including through methods used to disguise the originator or 
originating institution of a transaction. Specifically, FinCEN is 
concerned that a North Korean financial institution may attempt to 
disguise its transactions by relying on types of payments and accounts, 
including the use of front companies, which would not explicitly 
identify the North Korean institution as an involved party in the 
transaction. A financial institution may develop a suspicion of such 
misuse based on other information in its possession, patterns of 
transactions, or any other method available to it based on its existing 
systems. Under the proposed rule, a covered financial institution that 
suspects or has reason to suspect use of a correspondent account to 
process a transaction involving a North Korean financial institution 
must take all appropriate steps to attempt to verify and prevent such 
use, including a notification to its correspondent account holder 
requesting further information regarding a transaction, requesting 
corrective action to address the perceived risk and, where necessary, 
terminating the correspondent account. A covered financial institution 
may re-establish an account closed under the rule if it determines that 
the account will not be used to process transactions involving North 
Korean financial institutions. FinCEN specifically solicits comments on 
the requirement under the proposed rule that covered financial 
institutions take reasonable steps to prevent any processing of 
transactions involving North Korean financial institutions.
3. Recordkeeping and Reporting
    Section 1010.659(b)(4) of the proposed rule would clarify that 
paragraph (b) of 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 notification requirement 
under section 1010.659(b)(3)(i)(A).

IV. Request for Comments

    FinCEN invites comments on all aspects of the proposal to impose 
the fifth special measure against North Korea and specifically invites 
comments on the following matters:
    1. The finding that North Korea is a jurisdiction of primary money 
laundering concern;
    2. The form and scope of the notice to certain correspondent 
account holders that would be required under the rule;
    3. The appropriate scope of the proposed requirement for a covered 
financial institution to take reasonable steps to identify any use of 
its foreign correspondent accounts to process transactions involving 
North Korean financial institutions; and
    4. The appropriate steps a covered financial institution should 
take once it identifies use of one of its foreign correspondent 
accounts to process transactions involving a North Korean financial 
institution.

V. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (``RFA'') requires the agency to ``prepare and make 
available for public comment an initial regulatory flexibility 
analysis'' that will ``describe the impact of the proposed rule on 
small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA allows an 
agency to certify a rule, in lieu of preparing an analysis, if the 
proposed rulemaking is not expected to have a significant economic 
impact on a substantial number of small entities.

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.\15\ Of the estimated 6,192 banks, 80 percent have less than 
$550,000,000 in assets and are considered small entities.\16\ Of the 
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000 
in assets.\17\
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    \15\ 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'']. (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf).
    \16\ Federal Deposit Insurance Corporation, Find an Institution, 
https://www2.fdic.gov/idasp/main.asp; select Size or Performance: 
Total Assets, type Equal or less than $: ``550000'' and select Find.
    \17\ National Credit Union Administration, Credit Union Data, 
https://webapps.ncua.gov/customquery/; select Search Fields: Total 
Assets, select Operator: Less than or equal to, type Field Values: 
``550000000'' and select Go.
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    Broker-dealers are defined in 31 CFR 1010.100(h) as those broker-
dealers required to register with the Securities and Exchange 
Commission (SEC). For the purposes of the RFA, FinCEN relies on the 
SEC's definition of small business as previously submitted to the Small 
Business Administration (SBA). The SEC has defined the term small 
entity to mean a broker or dealer that: (1) Had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements, 
were prepared pursuant to Rule 17a-5(d) or, if not required to file 
such statements, a broker or dealer that had total capital (net worth 
plus subordinated debt) of less than $500,000 on the last business day 
of the preceding fiscal year (or in the time that it has been in 
business if shorter); and (2) is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization as

[[Page 35670]]

defined in this release.\18\ Based on SEC estimates, 17 percent of 
broker-dealers are classified as small entities for purposes of the 
RFA.\19\
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    \18\ 17 CFR 240.0-10(c).
    \19\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871 
small broker-dealers of the 5,063 total registered broker-dealers).
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    Futures commission merchants (FCMs) are defined in 31 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.\20\ The CFTC's determination in this regard was 
based, in part, upon the obligation of registered FCMs to meet the 
capital requirements established by the CFTC.
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    \20\ 47 FR 18618, 18619 (Apr. 30, 1982).
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    For purposes of the RFA, an introducing broker-commodities dealer 
is considered small if it has less than $35,500,000 in gross receipts 
annually.\21\ 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.
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    \21\ SBA Size Standards at 28.
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    Mutual funds are defined in 31 CFR 1010.100(gg) as those investment 
companies that are open-end investment companies that are registered or 
are required to register with the SEC. For the purposes of the RFA, 
FinCEN relies on the SEC's definition of small business as previously 
submitted to the SBA. The SEC has defined the term ``small entity'' 
under the Investment Company Act to mean ``an investment company that, 
together with other investment companies in the same group of related 
investment companies, has net assets of $50 million or less as of the 
end of its most recent fiscal year.'' \22\ Based on SEC estimates, 
seven percent of mutual funds are classified as ``small entities'' for 
purposes of the RFA under this definition.\23\
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    \22\ 17 CFR 270.0-10.
    \23\ 78 FR 23637, 23658 (April 19, 2013).
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    As noted above, 80 percent of banks, 92.5 percent of credit unions, 
17 percent of broker-dealers, 95 percent of introducing broker-
commodities dealers, no FCMs, and seven percent of mutual funds are 
small entities.
2. Description of the Projected Reporting and Recordkeeping 
Requirements of the Fifth Special Measure
    The proposed 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 North Korean financial institutions from being processed by 
the U.S. financial system. FinCEN estimates that the burden on 
institutions providing this notice is one hour. Covered financial 
institutions would also be required to take reasonable measures to 
detect use of their correspondent accounts to process transactions 
involving North Korean financial institutions.
    All U.S. persons, including U.S. financial institutions, currently 
must comply with OFAC sanctions, and U.S. financial institutions have 
suspicious activity reporting requirements. U.S. financial institutions 
are currently subject to a range of sanctions prohibitions related to 
North Korea, which has limited their direct exposure to the North 
Korean financial system. More recently, on March 15, 2016, the 
President issued Executive Order 13722, which places additional 
sanctions on North Korea and has the effect of generally prohibiting 
U.S. financial institutions from processing transactions involving 
persons located in North Korea and the North Korean government, unless 
authorized by OFAC.\24\ Therefore, current transactional activity 
between U.S. financial institutions and North Korean banks is very 
constricted. Further, North Korea is subject to a range of United 
Nations sanctions resolutions and it has been consistently called out 
by the FATF for its AML deficiencies. This has limited the number of 
foreign banking institutions that maintain ties or accounts with North 
Korean banks. Thus, the special due diligence that would be required 
under the BSA 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.
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    \24\ See E.O. 13722 ``Blocking Property of the Government of 
North Korea and the Workers Party of Korea, and Prohibiting Certain 
Transactions With Respect to North Korea'' (2016) (https://www.gpo.gov/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf).
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B. Certification

    For these reasons, FinCEN certifies that the proposals contained in 
this rulemaking would not have a significant impact on a substantial 
number of small businesses.
    FinCEN invites comments from members of the public who believe 
there would be a significant economic impact on small entities from the 
imposition of the fifth special measure regarding North Korea.

VI. Paperwork Reduction Act

    The collection of information contained in this proposed rule is 
being submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Desk Officer for the Department of Treasury, Office of Information 
and Regulatory Affairs, Office of Management and Budget, Paperwork 
Reduction Project (1506), Washington, DC 20503 (or by email to oira 
submission@omb.eop.gov) with a copy to FinCEN by mail or email at the 
addresses previously specified. Comments should be submitted by one 
method only. Comments on the collection of information should be 
received by August 2, 2016. In accordance with the requirements of the 
Paperwork Reduction Act and its implementing regulations, 5 CFR 1320, 
the following information concerning the collection of information as 
required by 31 CFR 1010.659 is presented to assist those persons 
wishing to comment on the information collection.

A. Proposed Information Collection Under the Fifth Special Measure

    The notification requirement in section 1010.659(b)(3)(i) is 
intended to aid cooperation from correspondent account holders in 
denying North Korea access to the U.S. financial system. The 
information required to be maintained by section 1010.659(b)(4)(i) 
would be used by federal agencies and certain self-regulatory 
organizations to verify compliance by covered financial institutions 
with the provisions of 31 CFR 1010.659. The collection of information 
would be mandatory.
    Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing 
brokers-

[[Page 35671]]

commodities, money services businesses, 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 proposed rule is one hour per 
affected financial institution.
    Estimated Total Annual Burden: 5,000 hours.
    FinCEN specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, including whether the information would have 
practical utility; (b) the accuracy of FinCEN's estimate of the burden 
of the proposed collection of information; (c) ways to enhance the 
quality, utility, and clarity of the information required to be 
maintained; (d) ways to minimize the burden of the required collection 
of information, including through the use of automated collection 
techniques or other forms of information technology; and (e) estimates 
of capital or start-up costs and costs of operation, maintenance, and 
purchase of services to report the information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
OMB control number.

VII. Executive Order 12866

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. It 
has been determined that the proposed rule is not a ``significant 
regulatory action'' for purposes of Executive Order 12866.

List of Subjects in 31 CFR Part 1010

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

Authority and Issuance

    For the reasons set forth in the preamble, part 1010, chapter X of 
title 31 of the Code of Federal Regulations, is proposed to be amended 
as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 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. Add Sec.  1010.659 to read as follows:


Sec.  1010.659  Special measures against North Korea.

    (a) Definitions. For purposes of this section:
    (1) North Korean financial institution means all branches, offices, 
or subsidiaries of any foreign financial institution, as defined at 
Sec.  1010.605(f), chartered or licensed by North Korea, wherever 
located, including any branches, offices, or subsidiaries of such 
financial institution operating in any jurisdiction, and any branch or 
office within North Korea of any foreign financial institution.
    (2) Foreign banking institution has the same meaning as provided in 
Sec.  1010.100(u).
    (3) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(i).
    (4) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(e)(1).
    (5) Subsidiary means a company of which more than 50 percent of the 
voting stock or analogous equity interest is owned by another company.
    (b) Prohibition on accounts and due diligence requirements for 
covered financial institutions--(1) Opening or maintenance of 
correspondent accounts. A covered financial institution shall not open 
or maintain in the United States a correspondent account for, or on 
behalf of, a North Korean banking institution.
    (2) Prohibition on use of correspondent accounts. A covered 
financial institution shall not process a transaction for the 
correspondent account of a foreign banking institution in the United 
States if such transaction involves a North Korean financial 
institution.
    (3) Special due diligence of correspondent accounts to prohibit 
use. (i) A covered financial institution shall apply special due 
diligence to its foreign correspondent accounts that is reasonably 
designed to guard against their use to process transactions involving 
North Korean financial institutions. At a minimum, that special due 
diligence must include:
    (A) Notifying those foreign correspondent account holders that the 
covered financial institution knows or has reason to believe provide 
services to a North Korean financial institution that such 
correspondents may not provide a North Korean financial institution 
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 a North Korean financial institution, 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 North Korean 
financial institutions.
    (iii) A covered financial institution that knows or has reason to 
believe that a foreign banking institution's correspondent account has 
been or is being used to process transactions involving a North Korean 
financial institution shall take all appropriate steps to further 
investigate and prevent such access, including the notification of its 
correspondent account holder under paragraph (b)(3)(i)(A) of this 
section and, where necessary, termination of the correspondent account.
    (4) Recordkeeping and reporting. (i) A covered financial 
institution is required to document its compliance with the notice 
requirement set forth in paragraph (b)(3)(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.

Jamal El-Hindi,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-13037 Filed 6-2-16; 8:45 am]
 BILLING CODE 4810-02-P