Imposition of Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern, 78715-78722 [2016-27049]

Agencies

• DEPARTMENT OF THE TREASURY
• Financial Crimes Enforcement Network

[Federal Register Volume 81, Number 217 (Wednesday, November 9, 2016)]
[Rules and Regulations]
[Pages 78715-78722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27049]


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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: Final rule.

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SUMMARY: FinCEN is issuing this final rule to prohibit U.S. financial 
institutions from opening or maintaining a correspondent account for, 
or on behalf of, North Korean banking institutions. The rule further 
prohibits U.S. financial institutions from processing transactions for 
the correspondent account of a foreign bank in the United States if 
such a transaction involves a North Korean financial institution, and 
requires institutions to apply special due diligence to guard against 
such use by North Korean financial institutions.

DATES: This final rule is effective December 9, 2016.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center, (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 (AML) provisions of the Bank Secrecy Act (BSA), 
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332, to promote the prevention, detection, and prosecution 
of international money laundering and the financing of terrorism. 
Regulations implementing the BSA appear at 31 CFR Chapter X. The 
authority of the Secretary of the Treasury (the Secretary) to 
administer the BSA and its implementing regulations has been delegated 
to 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 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. The special measures enumerated 
under Section 311 are prophylactic safeguards that defend the U.S. 
financial system from money laundering and terrorist financing. FinCEN 
may impose one or more of these special measures in order to protect 
the U.S. financial system from these threats. Special measures one 
through four, codified at 31 U.S.C. 5318A(b)(1)-(b)(4), impose 
additional recordkeeping, information collection, and reporting 
requirements on covered U.S. financial institutions. The fifth special 
measure, codified at 31 U.S.C. 5318A(b)(5), allows FinCEN to prohibit 
or impose conditions on the opening or maintaining of correspondent or 
payable-through accounts for the identified jurisdiction by U.S. 
financial institutions. Section 311 identifies factors for the 
Secretary to consider and requires consultations with Federal agencies 
before making a finding that reasonable grounds exist for concluding 
that a jurisdiction, institution, class of transactions or type of 
account is of primary money laundering concern. The statute also 
provides similar procedures, including factors to consider and 
consultation requirements for selecting and imposing the fifth special 
measure.

II. FinCEN's Section 311 Rulemaking Regarding North Korea

A. Notice of Finding Regarding North Korea

    In a Notice of Finding (NOF) published in the Federal Register on 
June 2, 2016, FinCEN found that reasonable grounds exist for concluding 
that the Democratic People's Republic of Korea (DPRK or North Korea) is 
a jurisdiction of primary money laundering concern pursuant to 31 
U.S.C. 5318A.\2\ FinCEN's NOF noted four main areas of concern: North 
Korea (1) uses state-controlled financial institutions and front 
companies to conduct international financial transactions that support 
the proliferation of weapons of mass destruction (WMD) and the 
development of ballistic missiles in violation of international and 
U.S. sanctions; (2) is subject to little or no bank supervision or 
anti-money laundering or combating the financing of terrorism (``AML/
CFT'') controls; (3) has no mutual legal assistance treaty with the 
United States; and (4) relies on the illicit and corrupt activity of 
high-level officials to support its government.
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    \2\ 81 FR 35441 (June 2, 2016).
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    In the NOF, FinCEN also noted that the North Korean government 
continues to access the international financial system to support its 
WMD and conventional weapons programs through its use of aliases, 
agents, foreign individuals in multiple jurisdictions, and a long-
standing network of front companies and North Korean embassy personnel 
which support illicit activities through banking, bulk cash, and trade. 
Front company transactions originating in foreign-based banks have been 
processed through correspondent bank accounts in the United States and 
Europe. Further, the enhanced due diligence required by United Nations 
Security Council Resolutions (UNSCRs) related to North Korea is 
undermined by North Korean-linked front companies, which are often 
registered by non-North Korean citizens, and which conceal their 
activity through the use of indirect

[[Page 78716]]

payment methods and circuitous transactions disassociated from the 
movement of goods or services.

B. Notice of Proposed Rulemaking

    In light of this Finding, in a Notice of Proposed Rulemaking (NPRM) 
published in the Federal Register on June 3, 2016, FinCEN (1) proposed 
a 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; (2) proposed a 
prohibition on covered financial institutions from processing a 
transaction involving a North Korean financial institution through the 
United States correspondent account of a foreign banking institution; 
and (3) proposed a requirement for covered financial institutions 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.\3\ The 
comment period for the NPRM closed on August 2, 2016. The final rule is 
largely identical to that found in the June 2016 notice, except that 
the term ``North Korean banking institution'' has been defined in order 
to clarify the types of institutions subject to the prohibition, and 
the term ``foreign banking institution'' has been replaced by ``foreign 
bank,'' with a corresponding change in the term's definition to conform 
with the definition of ``foreign bank'' under 31 CFR 1010.100(u). The 
final rule also explicitly incorporates the special due diligence 
concepts into the prohibition on processing transactions involving 
North Korean financial institutions. By incorporating these due 
diligence requirements into the prohibition, the final rule clarifies 
that if a covered financial institution suspects transactions involve a 
North Korean financial institution, then the covered financial 
institution shall take steps to further investigate and prevent such 
transactions, including steps that do not necessarily lead to the 
closing of the account.
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    \3\ 81 FR 35665 (June 3, 2016).
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    As further described below, FinCEN is adopting this proposal as a 
final rule. In so doing, FinCEN considered public comment and the 
relevant statutory factors, and engaged in the required consultations 
prescribed by 31 U.S.C. 5318A.

III. Consideration of Comment

    In response to the NPRM and NOF, FinCEN received only one comment. 
The comment agreed with FinCEN's proposal of a prohibition under the 
fifth special measure, but recommended that FinCEN also impose an 
additional special measure under 31 U.S.C. 5318A(b)(2) to require 
domestic financial institutions to obtain beneficial ownership 
information of ``property'' held by nationals of North Korea or their 
representatives that is located in North Korea or that otherwise 
involves North Korea. The comment explained that such a requirement 
would help identify and expose networks of non-bank institutions and 
agents that establish and manage shell or front companies on behalf of 
the North Korean government.
    As described above and in the NOF, FinCEN shares the concerns 
raised by the comment regarding North Korea's extensive use of 
deceptive financial practices, including the use of shell and front 
companies to obfuscate the true originator, beneficiary, and purpose 
behind its transactions. However, FinCEN's authority, as granted by 
Congress in 31 U.S.C. 5318A(b)(2), applies only to information 
concerning the beneficial ownership of ``account[s] opened or 
maintained in the United States'' and thus would not extend to 
information relating to the beneficial ownership of property writ 
large, or to property outside the United States as the comment 
suggested. Nonetheless, FinCEN believes that the risks to the U.S. 
financial system posed by North Korea can be addressed through the 
prohibition on correspondent accounts and the related due diligence. 
Taken together, these requirements should, by and large, help prevent 
the flow of illicit funds from North Korea from entering the U.S. 
financial system. Accordingly, FinCEN believes that the prohibition and 
due diligence requirements imposed under the fifth special measure 
sufficiently address both FinCEN's concerns and the concerns raised by 
the comment.

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

    In light of the Finding as detailed in the NOF, and based upon 
additional consultations with required Federal agencies and 
departments, and the consideration of public comments, the statutory 
factors discussed below, and all relevant factors, FinCEN has concluded 
that the prohibition under the fifth special measure as proposed in the 
NPRM is the appropriate course of action.\4\
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    \4\ Throughout the rulemaking process, FinCEN has consulted with 
relevant departments and agencies in accordance with 5318A.
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    The prohibition on the opening or maintaining of correspondent 
accounts imposed by the fifth special measure will help guard against 
the money laundering and WMD proliferation finance risks to the U.S. 
financial system posed by North Korean financial institutions and their 
front companies. Imposing a prohibition under the fifth special measure 
also complements U.S. efforts to satisfy the requirement under UNSCR 
2270 Paragraph 33, discussed in section IV.A.1 below, for all UN member 
states to sever correspondent relationships with North Korean banks.

A. Discussion of Section 311 Factors

    In determining which special measures to implement to address the 
finding that DPRK is of primary money laundering concern described in 
the NOF, FinCEN considered the following factors:
1. Whether Similar Action Has Been or Will Be Taken by Other Nations or 
Multilateral Groups Against North Korea
    FinCEN's action is consistent with steps taken by the international 
community to address North Korea's illicit financial activity. Between 
2006 and 2016, the United Nations Security Council has adopted multiple 
resolutions, 1718,\5\ 1874,\6\ 2087,\7\ 2094,\8\ and 2270,\9\ 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 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: (1) Prohibit North Korean banks from 
opening branches in their territory or engaging in certain 
correspondent relationships with these banks; (2) terminate existing 
representative offices or subsidiaries, branches, and correspondent 
accounts with North Korean banks; (3) prohibit their financial 
institutions from opening new representative offices or subsidiaries, 
branches, or bank accounts in North Korea; and (4) close existing

[[Page 78717]]

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.\10\
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    \5\ See United Nations Security Council Resolution (``UNSCR'') 
1718 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1718(2006)).
    \6\ See UNSCR 1874 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1874(2009).
    \7\ See UNSCR 2087 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2087(2013)).
    \8\ See UNSCR 2094 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2094(2013)).
    \9\ See UNSCR 2270 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2270(2016)).
    \10\ See UNSCR 2270.
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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 in order 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.\11\
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    \11\ See ``Public Statement--21 October 2016,'' Financial Action 
Task Force (https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-october-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 prohibition under the fifth special measure imposed by this 
rulemaking prohibits 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 also prohibits the 
use of a foreign bank's U.S. correspondent account to process a 
transaction involving a North Korean financial institution. As noted in 
FinCEN's NOF, 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 action will not 
present an undue regulatory burden on U.S. financial institutions.
    Under this final rule, covered financial institutions are also 
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. 
U.S. financial institutions may satisfy their due diligence requirement 
by transmitting a 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) and to detect potential suspicious activity. FinCEN believes 
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 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 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's calls for countermeasures to address North 
Korea's AML/CFT deficiencies, it is unlikely that the imposition of a 
prohibition under the fifth special measure with respect to North Korea 
would have a significant adverse systemic impact on the international 
payment, clearance, and settlement system. In light of the reasons 
described in this rulemaking for imposing the fifth special measure, 
and based on available information, FinCEN believes that the need to 
protect the U.S. financial system outweighs any burden on legitimate 
North Korean business activity, and, therefore, the imposition of a 
prohibition under the fifth special measure would not impose an undue 
burden on such activities.
4. The Effect of the 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 WMD or their delivery systems, and for other financial 
crimes enhances national security by making it more difficult for 
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, this 
action supports and upholds U.S. national security and foreign policy 
goals. Further, imposing a prohibition under the fifth special measure 
both complements the U.S. Government's worldwide efforts to expose and 
disrupt international money laundering, and satisfies the requirement 
under UNSCR 2270 Paragraph 33 for all UN member states to sever 
correspondent relationships with North Korean banks.

B. Consideration of Alternative Special Measures

    FinCEN concludes that a prohibition under the fifth special measure 
is the only viable measure to protect the U.S. financial system against 
the money laundering threats posed by the DPRK. In making this 
determination, FinCEN considered alternatives to a prohibition under 
the fifth special measure, including the first four special measures 
and imposing conditions on the opening or maintaining of correspondent 
accounts. For the reasons explained below, FinCEN believes that a 
prohibition under the fifth special measure would be the most effective 
and practical measure to employ to safeguard the U.S. financial system 
from the risks of illicit finance involving the DPRK.
    As noted above, and in the NOF, North Korea is subject to numerous 
UNSCRs \12\ and U.S. sanctions authorities,\13\ and it has been

[[Page 78718]]

consistently identified by the FATF for its AML deficiencies.\14\ 
Additionally, the UN has specifically called for enhanced monitoring of 
financial transactions to prevent the financing of North Korea's 
nuclear and ballistic missile programs and for the freezing of any 
assets suspected of supporting these illicit programs. Further, as 
noted in the NOF and NPRM, 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.\15\ 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 NOF. Although North 
Korea is subject to wide-ranging bilateral and multilateral sanctions, 
it continues to access the international financial system to support 
its WMD and conventional weapons programs through its use of aliases, 
agents, foreign individuals in multiple jurisdictions, and a long-
standing network of front companies. As such, FinCEN believes that only 
the most stringent measure--a prohibition under the fifth special 
measure--would be effective in mitigating the illicit finance risks 
associated with North Korea.
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    \12\ See UNSCRs 1718, 1874, 2087, 2094, and 2270.
    \13\ 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).
    \14\ See ``Public Statement--21 October 2016,'' Financial Action 
Task Force (https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-october-2016.html).
    \15\ See ``Guidance to Financial Institutions on the Provision 
of Banking Services to North Korean Government Agencies and 
Associated Front Companies Engaged in Illicit Activities,'' FinCEN 
(2005) (https://www.fincen.gov/statutes_regs/guidance/pdf/advisory.pdf); ``North Korea Government Agencies' and Front 
Companies' Involvement in Illicit Financial Activities,'' FinCEN 
(2009) (https://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a002.pdf); ``Update on the Continuing Illicit Finance Threat 
Emanating from North Korea,'' FinCEN (2013) (https://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A005.pdf).
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    Special measures one through four enable FinCEN to impose 
additional recordkeeping, information collection, and information 
reporting requirements on covered U.S. financial institutions. Special 
measure five enables FinCEN to impose conditions as an alternative to a 
prohibition on the opening or maintaining of correspondent accounts. 
Given North Korea's flagrant disregard for multiple UN resolutions 
related to the proliferation of WMD, FinCEN does not believe that any 
condition, additional recordkeeping, or reporting requirement would be 
an effective measure to safeguard the U.S. financial system. Such 
measures would not prevent North Korea from accessing directly or 
indirectly the correspondent accounts of U.S. financial institutions, 
thus leaving the U.S. financial system vulnerable to processing the 
types of illicit transfers described in the NOF. Moreover, as OFAC 
sanctions prohibit a variety of financial transactions with the DPRK, 
recordkeeping related to transactions with the DPRK would be 
impractical as would conditioning the opening or maintaining of 
correspondent accounts. As noted above, because North Korea has a 
history of engaging in deceptive financial practices to evade 
international sanctions and is known to utilize networks of front 
companies to engage in illicit activity, any conditions that would 
continue to allow the opening or maintaining of correspondent accounts 
for North Korean banks would not sufficiently protect the U.S. 
financial system. Therefore, in the case of the jurisdiction of North 
Korea, FinCEN views a prohibition under the fifth special measure as 
the only special measure that can adequately protect the U.S. financial 
system from North Korean illicit financial activity.

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

A. 1010.659(a)--Definitions

1. North Korean Banking Institution
    Section 1010.659(a)(1) of the rule defines a ``North Korean banking 
institution'' as any bank organized under North Korean law, or any 
agency, branch, or office located outside the United States of such a 
bank. This definition is consistent with the definition of ``foreign 
bank'' at 31 CFR 1010.100(u).
2. North Korean Financial Institution
    Section 1010.659(a)(2) of this rule defines a ``North Korean 
financial institution'' as all branches, offices, or subsidiaries of 
any foreign financial institution, as defined at 31 CFR 1010.605(f), 
chartered or licensed by North Korea, wherever located, including any 
branches, offices, or subsidiaries of such a financial institution 
operating in any jurisdiction, and any branch or office within North 
Korea of any foreign financial institution.
3. Foreign Bank
    Section 1010.659(a)(3) of this rule states that ``foreign bank'' 
has the same meaning as provided in 31 CFR 1010.100(u).
4. Correspondent Account
    Section 1010.659(a)(4) of this rule defines 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 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.\16\
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    \16\ 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 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.\17\
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    \17\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
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5. Covered Financial Institution
    Section 1010.659(a)(5) of this rule defines ``covered financial 
institution'' with the same definition used in the final rule 
implementing the provisions of section 312 of the USA PATRIOT Act,\18\ 
which in general includes the following:
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    \18\ 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;

[[Page 78719]]

     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.
6. Subsidiary
    Section 1010.659(a)(6) of this rule defines ``subsidiary'' as a 
company of which more than 50 percent of the voting stock or analogous 
equity interest is owned by another company.

B. 1010.659(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 this rule prohibits 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 also requires covered financial institutions to take 
reasonable steps to not process a transaction for the correspondent 
account of a foreign bank in the United States if such a transaction 
involves a North Korean financial institution. Such reasonable steps 
are described in 1010.659(b)(3), which sets forth the special due 
diligence requirements a covered financial institution must take when 
it knows or has reason to believe a transaction involves a North Korean 
financial institution. By expressly incorporating these due diligence 
requirements into the prohibition, the final rule clarifies that if a 
covered financial institution suspects transactions involve a North 
Korean financial institution, then the covered financial institution 
shall take steps to further investigate and prevent such transactions, 
including steps that do not necessarily lead to the closing of the 
account.
2. Special Due Diligence for Correspondent Accounts To Prohibit Use
    As a corollary to the prohibition set forth in section 
1010.659(b)(1) and (2), section 1010.659(b)(3) of this rule requires 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 
opening or maintaining in the United States a correspondent account 
for, or on behalf of, a North Korean banking 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 account processes transactions for a North Korean 
financial institution. The purpose of the notice requirement is to aid 
cooperation with correspondent account holders in preventing 
transactions involving a North Korean financial institution from 
accessing the U.S. financial system. FinCEN does 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 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.
    Special due diligence also includes implementing risk-based 
procedures designed to identify any use of correspondent accounts to 
process transactions involving North Korean financial institutions. A 
covered financial institution is 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 is also 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. As noted above, and in the 
NOF, FinCEN is concerned that a North Korean financial institution may 
attempt to disguise its transactions through 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 this rule, 
a covered financial institution that knows or has reason to believe 
that a foreign bank's correspondent account is being used to process a 
transaction involving a North Korean financial institution must take 
all appropriate steps to attempt to verify and prevent such use. Such 
steps may include 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. If a covered financial 
institution deems it appropriate to terminate a correspondent account, 
it may re-establish such an account if it determines that the account 
will not be used to process transactions involving North Korean 
financial institutions.
3. Recordkeeping and Reporting
    Section 1010.659(b)(4) of this rule clarifies 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

[[Page 78720]]

covered financial institution must, however, document its compliance 
with the notification requirement under section 1010.659(b)(3)(i)(A).

VI. Regulatory Flexibility Act

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

A. Prohibition on 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 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.\19\ Of the estimated 6,192 banks, 80 percent have less than 
$550,000,000 in assets and are considered small entities.\20\ Of the 
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000 
in assets.\21\
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    \19\ 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).
    \20\ 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.
    \21\ 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: 
``550,000,000'' 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 defined in this release.\22\ Based on SEC estimates, 17 
percent of broker-dealers are classified as small entities for purposes 
of the RFA.\23\
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    \22\ 17 CFR 240.0-10(c).
    \23\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871 
small broker-dealers of the 5,063 total registered broker-dealers).
---------------------------------------------------------------------------

    Futures commission merchants (FCMs) are defined in 31 CFR 
1010.100(x) as those FCMs that are registered or required to be 
registered as a FCM with the Commodity Futures Trading Commission 
(CFTC) under the Commodity Exchange Act (CEA), except persons who 
register pursuant to section 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2). 
Because FinCEN and the CFTC regulate substantially the same population, 
for the purposes of the RFA, FinCEN relies on the CFTC's definition of 
small business as previously submitted to the SBA. In the CFTC's 
``Policy Statement and Establishment of Definitions of `Small Entities' 
for Purposes of the Regulatory Flexibility Act,'' the CFTC concluded 
that registered FCMs should not be considered to be small entities for 
purposes of the RFA.\24\ 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.
---------------------------------------------------------------------------

    \24\ 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.\25\ Based on information provided by the National Futures 
Association, 95 percent of introducing brokers-commodities dealers have 
less than $35.5 million in adjusted net capital and are considered to 
be small entities.
---------------------------------------------------------------------------

    \25\ SBA Size Standards at 28.
---------------------------------------------------------------------------

    Mutual funds are defined in 31 CFR 1010.100(gg) as those investment 
companies that are open-end investment companies that are registered or 
are required to register with the SEC. 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.'' \26\ Based on SEC estimates, 
seven percent of mutual funds are classified as ``small entities'' for 
purposes of the RFA under this definition.\27\
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    \26\ 17 CFR 270.0-10.
    \27\ 78 FR 23637, 23658 (April 19, 2013).
---------------------------------------------------------------------------

    As noted above, 80 percent of banks, 92.5 percent of credit unions, 
17 percent of broker-dealers, 95 percent of introducing broker-
commodities dealers, no FCMs, and seven percent of mutual funds are 
small entities.

B. Description of the Projected Reporting and Recordkeeping 
Requirements of the Fifth Special Measure

    The imposition of the fifth special measure requires 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 are also 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 or exempt.\28\ 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 recognized 
by the FATF for its AML deficiencies. The special due diligence that is 
required

[[Page 78721]]

under this rule--i.e., the 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--will not 
impose a significant additional economic burden upon small U.S. 
financial institutions.
---------------------------------------------------------------------------

    \28\ 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).
---------------------------------------------------------------------------

C. Certification

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

VII. Paperwork Reduction Act

    The collection of information contained in this 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)), and has been assigned OMB Control Number 1506-0071. 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.

A. Information Collection Under the Fifth Special Measure

    The notification requirement in section 1010.659(b)(3)(i)(A) 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) will 
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 is 
mandatory.
    Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing 
brokers-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 rule is one hour per affected 
financial institution.
    Estimated Total Annual Burden: 5,000 hours.

VIII. 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 this 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 amended as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 continues 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; sec. 
701 Pub. L. 114-74, 129 Stat. 599.


0
2. Subpart F of part 1010 is amended by adding 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 banking institution means any bank organized under 
North Korean law, or any agency, branch, or office located outside the 
United States of such a bank.
    (2) 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 a 
financial institution operating in any jurisdiction, and any branch or 
office within North Korea of any foreign financial institution.
    (3) Foreign bank has the same meaning as provided in Sec.  
1010.100(u).
    (4) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(i).
    (5) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(e)(1).
    (6) 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 for a North Korean banking institution. 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 involving North 
Korean financial institutions. A covered financial institution shall 
take reasonable steps to not process a transaction for the 
correspondent account of a foreign bank in the United States if such a 
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 bank'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

[[Page 78722]]

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.

    Dated: November 4, 2016.
Jamal El-Hindi,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-27049 Filed 11-8-16; 8:45 am]
 BILLING CODE 4810-02-P