Proposal of Special Measure Against Bank of Dandong as a Financial Institution of Primary Money Laundering Concern, 31537-31545 [2017-14026]

Agencies

• DEPARTMENT OF THE TREASURY
• Financial Crimes Enforcement Network

[Federal Register Volume 82, Number 129 (Friday, July 7, 2017)]
[Proposed Rules]
[Pages 31537-31545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14026]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB38


Proposal of Special Measure Against Bank of Dandong as a 
Financial Institution of Primary Money Laundering Concern

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: FinCEN is issuing a notice of proposed rulemaking (NPRM), 
pursuant to section 311 of the USA PATRIOT Act, to prohibit the opening 
or maintaining of a correspondent account in the United States for, or 
on behalf of, Bank of Dandong.

DATES: Written comments on the notice of proposed rulemaking must be 
submitted on or before September 5, 2017.

ADDRESSES: You may submit comments, identified by 1506-AB38, by any of 
the following methods:
     Federal E-rulemaking Portal: https://www.regulations.gov. 
Follow the

[[Page 31538]]

instructions for submitting comments. Include Docket Number FinCEN-
2017-0010 and RIN 1506-AB38 in the submission.
     Mail: The Financial Crimes Enforcement Network, P.O. Box 
39, Vienna, VA 22183. Include RIN 1506-AB38 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 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 FUTHER 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 amends the anti-
money laundering (AML) provisions of the Bank Secrecy Act (BSA), 
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332, to promote the prevention, detection, and prosecution 
of international money laundering and the financing of terrorism. 
Regulations implementing the BSA appear at 31 CFR chapter X. The 
authority of the Secretary of the Treasury (the Secretary) to 
administer the BSA and its implementing regulations has been delegated 
to FinCEN.
    Section 311 of the USA PATRIOT Act (section 311), codified at 31 
U.S.C. 5318A, grants FinCEN the authority, upon finding that reasonable 
grounds exist for concluding that a jurisdiction outside of the United 
States, one or more financial institutions operating outside of the 
United States, one or more classes of transactions within or involving 
a jurisdiction outside of the United States, or one or more types of 
accounts is of primary money laundering concern, to require domestic 
financial institutions and domestic financial agencies to take certain 
``special measures.'' The five special measures enumerated in 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 in the United States of correspondent or 
payable-through accounts for, or on behalf of, a foreign banking 
institution, if such correspondent account or payable-through account 
involves the foreign financial institution found to be of primary money 
laundering concern.
    Before making a finding that reasonable grounds exist for 
concluding that a financial institution is of primary money laundering 
concern, the Secretary is required to consult with both the Secretary 
of State and the Attorney General.\1\ The Secretary shall also consider 
such information as the Secretary determines to be relevant, including 
the following potentially relevant factors:
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    \1\ 31 U.S.C. 5318A(c)(1).
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     The extent to which such a financial institution is used 
to facilitate or promote money laundering in or through the 
jurisdiction, including any money laundering activity by organized 
criminal groups, international terrorists, or entities involved in the 
proliferation of weapons of mass destruction (WMD) or missiles;
     the extent to which such a financial institution is used 
for legitimate business purposes in the jurisdiction; and
     the extent to which such action is sufficient to ensure 
that the purposes of section 311 are fulfilled, and to guard against 
international money laundering and other financial crimes.\2\
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    \2\ 31 U.S.C. 5318A(c)(2)(B).
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    Upon finding that a financial institution is of primary money 
laundering concern, the Secretary may require covered financial 
institutions to take one or more special measures. In selecting which 
special measure(s) to take, the Secretary ``shall consult with the 
Chairman of the Board of Governors of the Federal Reserve System, any 
other appropriate Federal banking agency (as defined in Section 3 of 
the Federal Deposit Insurance Act), the Secretary of State, the 
Securities and Exchange Commission, the Commodity Futures Trading 
Commission, the National Credit Union Administration Board, and in the 
sole discretion of the Secretary, such other agencies and interested 
parties as the Secretary [of the Treasury] may find appropriate.'' \3\ 
In imposing the fifth special measure, the Secretary must do so ``in 
consultation with the Secretary of State, the Attorney General, and the 
Chairman of the Board of Governors of the Federal Reserve System.'' \4\
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    \3\ 31 U.S.C. 5318A(a)(4)(A).
    \4\ 31 U.S.C. 5318A(b)(5).
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    In addition, in selecting which special measure(s) to take, the 
Secretary shall consider the following factors:
     Whether similar action has been or is being taken by other 
nations or multilateral groups;
     whether the imposition of any particular special measure 
would create a significant competitive disadvantage, including any 
undue cost or burden associated with compliance, for financial 
institutions organized or licensed in the United States;
     the extent to which the action or the timing of the action 
would have a significant adverse systemic impact on the international 
payment, clearance, and settlement system, or on legitimate business 
activities involving the particular jurisdiction, institution, class of 
transactions, or type of account; and
     the effect of the action on United States national 
security and foreign policy.\5\
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    \5\ 31 U.S.C. 5318A(a)(4)(B).
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II. Summary of Notice of Proposed Rulemaking

    This NPRM sets forth 1. FinCEN's finding that Bank of Dandong, a 
commercial bank located in Dandong, China, is a financial institution 
of primary money laundering concern pursuant to Section 311, and 2. 
FinCEN's proposal of a prohibition under the fifth special measure on 
the opening or maintaining in the United States of a correspondent 
account for, or on behalf of, Bank of Dandong. As described more fully 
below, FinCEN finds that Bank of Dandong is a financial institution of 
primary money laundering concern because it serves as a conduit for 
North Korea to access the U.S. and international financial systems, 
including by facilitating millions of dollars of transactions for 
companies involved in North Korea's WMD and

[[Page 31539]]

ballistic missile programs. Having made such a finding and having 
performed the requisite consultations set forth in the statute, FinCEN 
proposes a prohibition on covered U.S. financial institutions from 
opening or maintaining a correspondent account in the United States 
for, or on behalf of, Bank of Dandong.

III. Background on North Korea Sanctions Evasion and Bank of Dandong

1. North Korea's Evasion of Sanctions

    North Korea continues to advance its nuclear and ballistic missile 
programs despite international censure and U.S. and international 
sanctions. In response to North Korea's continued actions to 
proliferate WMDs, the United Nations Security Council (UNSC) has issued 
a number of United Nations Security Council resolutions (UNSCRs), 
including 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 
(2016), and 2321 (2016), that restrict North Korea's financial and 
operational activities related to its nuclear and ballistic missile 
programs. Additionally, the President of the United States has issued 
Executive Orders 13466, 13551, 13570, 13687, and 13722 to impose 
economic sanctions on North Korea pursuant to the International 
Emergency Economic Powers Act,\6\ and the U.S. Department of the 
Treasury has designated North Korean persons for asset freezes pursuant 
to other Executive Orders, such as Executive Order 13382, which targets 
WMD proliferators worldwide.
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    \6\ Title II of Public Law 95-223, 91 Stat. 1626 (October 28, 
1977).
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    According to the February 2016 annual report by the UN Panel of 
Experts, established pursuant to UNSCR 1874, although international 
sanctions have served to significantly isolate North Korean banks from 
the international financial system, 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 embassy personnel that support 
illicit activities through banking, bulk cash, and trade.\7\
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    \7\ United Nations Security Council, Report of the Panel of 
Experts established pursuant to resolution 1874 (2009). February 24, 
2016. S/2016/157, available at https://www.un.org/ga/search/view_doc.asp?symbol=S/2016/157.
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    According to that report, transactions for front companies for 
North Korea have been processed through correspondent bank accounts in 
the United States and Europe. Further, the enhanced vigilance required 
under the relevant UNSCRs is frustrated by the fact that North Korea-
linked companies are often registered by third-country nationals who 
also use indirect payment methods and circuitous transactions 
disassociated from the movement of goods or services to conceal their 
activity.
    Additionally, according to the February 2017 annual report produced 
by the same body, despite expanded financial sanctions adopted by the 
Security Council in UNSCRs 2270 and 2321, North Korea has continued to 
access the international financial system to support its activities.\8\ 
Financial networks of North Korea have adapted to these sanctions, 
using evasive methods to maintain access to formal banking channels and 
bulk cash transfers to facilitate prohibited activities. According to 
the report, one way that North Korean financial institutions and 
networks access the international banking system is through trading 
companies, including designated entities, that are linked to North 
Korea. These trading companies open bank accounts that perform the same 
financial services as banks, such as maintaining funds on deposit and 
providing indirect correspondent bank account services.
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    \8\ United Nations Security Council, Report of the Panel of 
Experts established pursuant to resolution 1874 (2009). February 27, 
2017. S/2017/150, available at https://www.un.org/ga/search/view_doc.asp?symbol=S/2017/150.
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    To further protect the United States from North Korea's illicit 
financial activity, FinCEN has issued three advisories since 2005 
detailing its concerns surrounding 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. 
Moreover, on November 9, 2016, FinCEN finalized a rule under section 
311 prohibiting the opening or maintaining of correspondent accounts in 
the United States by covered financial institutions for, or on behalf 
of, North Korean banks.\9\ The final rule also requires U.S. financial 
institutions to apply additional due diligence measures in order to 
prevent North Korean financial institutions from gaining improper 
indirect access to U.S. correspondent accounts. The notice of finding 
associated with the final rule highlighted North Korea's use of state-
controlled financial institutions and front companies to conduct 
international financial transactions that, among other things, support 
the proliferation of its WMD and conventional weapons programs.\10\ As 
explained below, Bank of Dandong facilitates such activity through the 
U.S. financial system.
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    \9\ 81 FR 78715 (November 9, 2016).
    \10\ 81 FR 35441 (June 2, 2016).
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2. Bank of Dandong

    Established in 1997, Bank of Dandong is a small commercial bank 
located in Dandong, China that offers domestic and international 
financial services to both individuals and businesses. According to 
commercial database research, Bank of Dandong is ranked as the 148th-
largest financial institution out of a total of 196 financial 
institutions in China's banking sector. As discussed further below, 
FinCEN is concerned that Bank of Dandong serves as a financial conduit 
between North Korea and the U.S. and international financial systems in 
violation of U.S. and UN sanctions.

IV. Finding Bank of Dandong To Be a Financial Institution of Primary 
Money Laundering Concern

    Based on information available to the agency, including both public 
and non-public reporting, and after performing the requisite 
interagency consultations and considering each of the factors discussed 
below, FinCEN finds that reasonable grounds exist for concluding that 
Bank of Dandong is a financial institution of primary money laundering 
concern.

1. The Extent to Which Bank of Dandong Has Been Used To Facilitate or 
Promote Money Laundering, Including by Entities Involved in the 
Proliferation of Weapons of Mass Destruction or Missiles

    Bank of Dandong serves as a gateway for North Korea to access the 
U.S. and international financial systems despite U.S. and UN sanctions. 
Increasing U.S. and international sanctions on North Korea have caused 
most banks worldwide to sever their ties with North Korean banks, 
impeding North Korea's ability to gain direct access to the global 
financial system. As a result, North Korea uses front companies and 
banks outside North Korea to conduct financial transactions, including 
transactions in support of its WMD and conventional weapons programs. 
For example, as of mid-February 2016, North Korea was using bank 
accounts under false names and conducting financial transactions 
through banks located in China, Hong Kong, and various southeast Asian 
countries. The

[[Page 31540]]

primary bank in China was Bank of Dandong.
    In early 2016, accounts at Bank of Dandong were used to facilitate 
millions of dollars of transactions on behalf of companies involved in 
the procurement of ballistic missile technology. Bank of Dandong also 
facilitates financial activity for North Korean entities designated by 
the United States and listed by the United Nations for WMD 
proliferation, as well as for front companies acting on their behalf.
    In particular, Bank of Dandong has facilitated financial activity 
for Korea Kwangson Banking Corporation (KKBC), a North Korean bank 
designated by the United States and listed by the United Nations for 
providing financial services in support of North Korean WMD 
proliferators. As of May 2012, KKBC had a representative embedded at 
Bank of Dandong. Moreover, Bank of Dandong maintained a direct 
correspondent banking relationship with KKBC since approximately 2013, 
when another Chinese bank ended a similar correspondent relationship. 
As of early 2016, KKBC maintained multiple bank accounts with Bank of 
Dandong.
    Bank of Dandong has also facilitated financial activity for the 
Korea Mining Development Trading Corporation (KOMID), a U.S.- and UN-
designated entity. As of early 2016, a front company for KOMID 
maintained multiple bank accounts with Bank of Dandong. The President 
subjected KOMID to an asset blocking by listing it in the Annex of 
Executive Order 13382 in 2005, and the United States designated KOMID 
pursuant to Executive Order 13687 in January 2015 for being North 
Korea's primary arms dealer and its main exporter of goods and 
equipment related to ballistic missiles and conventional weapons.
    FinCEN is concerned that Bank of Dandong uses the U.S. financial 
system to facilitate financial activity for KKBC and KOMID, as well as 
other entities connected to North Korea's WMD and ballistic missile 
programs. Based on FinCEN's analysis of financial transactional data 
provided to FinCEN by U.S. financial institutions pursuant to the BSA 
as well as other information available to the agency, FinCEN assesses 
that at least 17 percent of Bank of Dandong customer transactions 
conducted through the bank's U.S. correspondent accounts from May 2012 
to May 2015 were conducted by companies that have transacted with, or 
on behalf of, U.S.- and UN-sanctioned North Korean entities, including 
designated North Korean financial institutions and WMD proliferators. 
In addition, U.S. banks have identified a substantial amount of 
suspicious activity processed by Bank of Dandong, including: 1. 
Transactions that have no apparent economic, lawful, or business 
purpose and may be tied to sanctions evasion; 2. transactions that have 
a possible North Korean nexus and include activity between unidentified 
companies and individuals and behavior indicative of shell company 
activity; and 3. transactions that include transfers from offshore 
accounts with apparent shell companies that are domiciled in financial 
secrecy jurisdictions and banking in another country.
    FinCEN is also concerned that, until recently, an entity designated 
by the United States for its ties to North Korea's WMD proliferation 
maintained an ownership stake in Bank of Dandong. Specifically, this 
entity, Dandong Hongxiang Industrial Development Co. Ltd. (DHID), 
maintained a minority ownership interest in Bank of Dandong until 
December 2016. The United States designated DHID in 2016 for acting 
for, or on behalf of, KKBC, the U.S.- and UN-designated North Korean 
bank with which Bank of Dandong maintained a direct relationship since 
approximately 2013. FinCEN believes that DHID's ownership stake in Bank 
of Dandong allowed DHID to access the U.S. financial system through the 
bank. Based on FinCEN's analysis of financial transactional data 
provided to FinCEN by U.S. financial institutions pursuant to the BSA, 
Bank of Dandong processed approximately $56 million through U.S. banks 
for DHID between October 2012 and December 2014. Even though DHID may 
no longer maintain an ownership stake in Bank of Dandong, FinCEN is 
concerned that the close relationship between the two entities helped 
establish Bank of Dandong as a prime conduit for North Korean activity.
    Moreover, FinCEN believes that illicit financial activity involving 
North Korea continues to infiltrate the U.S. and international 
financial systems through Bank of Dandong.

2. The Extent to Which Bank of Dandong Is Used for Legitimate Business 
Purposes

    According to commercial database research, Bank of Dandong is 
ranked as the 148th-largest financial institution out of a total of 196 
financial institutions in China's banking sector. Based on FinCEN's 
analysis of financial transactional data provided to FinCEN by U.S. 
financial institutions pursuant to the BSA, Bank of Dandong processed 
over $2.5 billion in U.S. dollar transactions between May 2012 and May 
2015 through its U.S. correspondent accounts, including at least $786 
million in customer transactions for businesses and individuals (the 
remaining transactions comprised bank-to-bank transactions). This $786 
million in financial activity consisted largely of letters of credit 
satisfaction, invoice payments, currency exchange activity, and 
transfers between individuals, which could be indicative of legitimate 
business activity. Nonetheless, FinCEN assesses that the $786 million 
in financial activity includes transactions conducted by companies that 
have transacted with, or on behalf of, U.S.- and UN-sanctioned North 
Korean entities. FinCEN is concerned that the existence of 
relationships between designated North Korean entities and Bank of 
Dandong suggests that the bank likely processes more transactions for 
North Korean-related front companies than what FinCEN is currently able 
to identify. Consequently, the exposure of U.S. financial institutions 
to North Korea's illicit financial activity via Bank of Dandong 
outweighs concerns for any legitimate business activity at the bank.
    Moreover, Bank of Dandong maintains euro, Japanese yen, Hong Kong 
dollar, pound sterling, and Australian dollar correspondent accounts 
that would not be affected by this action. A prohibition under the 
fifth special measure would not prevent Bank of Dandong from conducting 
legitimate business activities in other foreign currencies so long as 
such activity does not involve a correspondent account maintained in 
the United States. Bank of Dandong would, therefore, still have other 
avenues through which it could provide services.

3. The Extent to Which This Action is Sufficient To Guard Against 
International Money Laundering and Other Financial Crimes

    A prohibition under the fifth special measure would sufficiently 
guard against international money laundering and other financial crimes 
related to Bank of Dandong by restricting the ability of Bank of 
Dandong to access the U.S. financial system to process transactions for 
entities connected to the proliferation of WMDs and ballistic missiles. 
Given the national security threat posed by such activity, FinCEN views 
this action as necessary to prevent Bank of Dandong from continuing to 
access the U.S. financial system.

[[Page 31541]]

V. Proposed Prohibition on Covered Financial Institutions From Opening 
or Maintaining Correspondent Accounts in the United States for Bank of 
Dandong

    After performing the requisite interagency consultations, 
considering the relevant factors, and making a finding that Bank of 
Dandong is a financial institution of primary money laundering concern, 
FinCEN proposes a prohibition under the fifth special measure. A 
prohibition under the fifth special measure is the most effective and 
practical measure to safeguard the U.S. financial system from the 
illicit finance risks posed by Bank of Dandong.

1. Factors Considered in Proposing a Prohibition Under the Fifth 
Special Measure

    Below is a discussion of the relevant factors FinCEN considered in 
proposing a prohibition under the fifth special measure with respect to 
Bank of Dandong.
A. Whether Similar Action Has Been or Will Be Taken by Other Nations or 
Multilateral Groups Against Bank of Dandong
    FinCEN is not aware of any other nation or multilateral group that 
has taken or is taking similar action regarding Bank of Dandong. The 
international community has, however, taken a series of steps to 
address the illicit financial threats emanating from North Korea, for 
which Bank of Dandong serves as a conduit. Between 2006 and 2016, the 
UNSC adopted multiple resolutions that generally restrict North Korea's 
financial activities related to its nuclear and missile programs and 
conventional arms sales. In March 2016, the UNSC unanimously adopted 
UNSCR 2270, which 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 financial 
institutions; and 3. prohibit their financial institutions from opening 
new representative offices or subsidiaries, branches, or bank accounts 
in North Korea. Additionally, UNSCR 2321, unanimously adopted by the 
UNSC in November 2016, requires nations to close existing 
representative offices or subsidiaries, branches, or bank accounts in 
North Korea within 90 days and expel individuals working on behalf of, 
or at the direction of, a North Korean bank or financial institution.
    Similarly, the Financial Action Task Force (FATF) has emphasized 
its concerns regarding the threat posed by North Korea's illicit 
activities related to the proliferation of WMDs and related financing. 
Reiterating the UNSCR requirements, the FATF called upon its members 
and urged all jurisdictions to take the necessary measures to close 
existing branches, subsidiaries, and representative offices of North 
Korean banks within their territories and terminate correspondent 
relationships with North Korean banks, where required by relevant UNSC 
Resolutions.
    Despite these measures, North Korea continues to use the U.S. and 
international financial systems through front companies and other 
surreptitious means. It is necessary to protect the U.S. financial 
system, directly and indirectly, from banks like Bank of Dandong that 
facilitate such access. Moreover, given the interconnectedness of the 
global financial system, the potential for Bank of Dandong to access 
the U.S. financial system indirectly, including through the use of 
nested correspondent accounts, exposes the U.S. financial system to the 
risks associated with conducting transactions with entities operating 
for, or on behalf of, North Korea.
B. 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
    A prohibition under the fifth special measure would not cause a 
significant competitive disadvantage or place an undue cost or burden 
on U.S. financial institutions. Pursuant to sanctions administered by 
OFAC, U.S. financial institutions are currently subject to a range of 
prohibitions related to financial activity involving North Korea. 
Accordingly, a prohibition on covered financial institutions from 
opening or maintaining correspondent accounts for, or on behalf of, a 
bank that facilitates North Korean financial activity would not create 
any competitive disadvantage for U.S. financial institutions.
    Similarly, the proposed due diligence obligations would not create 
any undue costs or burden on U.S. financial institutions. U.S. 
financial institutions already generally have systems in place to 
screen transactions in order to identify and report suspicious activity 
and comply with the sanctions programs administered by OFAC. 
Institutions can modify these systems to detect transactions involving 
Bank of Dandong. While there may be some additional burden in 
conducting due diligence on foreign correspondent account holders and 
notifying them of the prohibition (as described below), any such burden 
will likely be minimal, and certainly not undue, given the national 
security threat posed by Bank of Dandong's facilitation of activity for 
front companies associated with North Korea, some of which are involved 
in activities that support the proliferation of WMD or missiles.
C. 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 Bank of Dandong
    Bank of Dandong is a relatively small financial institution in 
China's banking sector, is not a major participant in the international 
payment system, and is not relied upon by the international banking 
community for clearance or settlement services. Therefore, a 
prohibition under the fifth special measure with respect to Bank of 
Dandong will not have an adverse systemic impact on the international 
payment, clearance, and settlement system.
    FinCEN also considered the extent to which this action could have 
an impact on the legitimate business activities of Bank of Dandong and 
has concluded that the need to protect the U.S. financial system from 
banks that facilitate North Korea's illicit financial activity strongly 
outweighs any such impact. Financial transactional data provided to 
FinCEN by U.S. financial institutions pursuant to the BSA indicates 
that Bank of Dandong's financial activity conducted through its U.S. 
correspondent accounts has consisted largely of letters of credit 
satisfaction, invoice payments, currency exchange activity, and 
transfers between individuals, which could be indicative of legitimate 
business activity. Nonetheless, FinCEN assesses that this financial 
activity also includes transactions conducted by companies that have 
transacted with, or on behalf of, entities that threaten the national 
security of the United States.
    As stated above, Bank of Dandong maintains euro, Japanese yen, Hong 
Kong dollar, pound sterling, and Australian dollar correspondent 
accounts. A prohibition under the fifth special measure would not 
prevent Bank of Dandong from conducting legitimate business activities 
in other foreign currencies so long as such activity does not involve a 
correspondent account maintained in the United States. Bank of Dandong

[[Page 31542]]

would, therefore, still have other avenues through which it could 
provide legitimate services.
D. The Effect of the Proposed Action on United States National Security 
and Foreign Policy
    Excluding from the U.S. financial system foreign banks that serve 
as conduits for significant money laundering activity, for the 
financing of WMDs 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. 
As Bank of Dandong has been used to facilitate financial activity 
related to North Korean entities designated by the United States and 
United Nations for WMD proliferation, the proposed rule, if finalized, 
would serve as an additional measure to prevent North Korea from 
accessing the U.S. financial system and would both support and uphold 
U.S. national security and foreign policy goals. A prohibition under 
the fifth special measure would also complement the U.S. Government's 
worldwide efforts to expose and disrupt international money laundering.

2. Consideration of Alternative Special Measures

    Under Section 311, special measures one through four enable FinCEN 
to impose additional recordkeeping, information collection, and 
information reporting requirements on covered financial institutions. 
The fifth special measure enables FinCEN to impose conditions as an 
alternative to a prohibition on the opening or maintaining of 
correspondent accounts. FinCEN considered these alternatives to a 
prohibition under the fifth special measure, but believes that a 
prohibition under the fifth special measure would most effectively 
safeguard the U.S. financial system from the illicit finance risks 
posed by Bank of Dandong.
    North Korea is subject to numerous U.S. and UN sanctions, and it 
has also been consistently identified by the Financial Action Task 
Force for its anti-money laundering deficiencies. Further, FinCEN has 
issued three advisories since 2005 detailing its concerns surrounding 
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.
    Despite these measures, North Korea 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. Given Bank of Dandong's apparent disregard for 
numerous international calls to prevent North Korean illicit financial 
activity, FinCEN does not believe that any condition, additional 
recordkeeping requirement, or reporting requirement would be an 
effective measure to safeguard the U.S. financial system. Such measures 
would not prevent Bank of Dandong from accessing, directly or 
indirectly, the correspondent accounts of U.S. financial institutions, 
thus leaving the U.S. financial system vulnerable to processing illicit 
transfers that pose a national security risk. In addition, no 
recordkeeping requirement or conditions on correspondent accounts would 
be sufficient to guard against the risks posed by a bank that processes 
transactions that are designed to obscure their involvement with North 
Korea, and are ultimately for the benefit of sanctioned entities. 
Therefore, a prohibition under the fifth special measure is the only 
special measure that can adequately protect the U.S. financial system 
from the illicit finance risks posed by Bank of Dandong.

VI. Section-by-Section Analysis for the Proposal of a Prohibition Under 
the Fifth Special Measure

1010.660(a)--Definitions

1. Bank of Dandong
    The proposed rule defines ``Bank of Dandong'' to mean all 
subsidiaries, branches, offices, and agents of Bank of Dandong Co., 
Ltd. operating in any jurisdiction.
2. Correspondent Account
    The proposed rule defines ``Correspondent account'' to have the 
same meaning as the definition contained in 31 CFR 1010.605(c)(1)(ii). 
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.\11\ Under this definition, ``payable through 
accounts'' are a type of correspondent account.
---------------------------------------------------------------------------

    \11\ See 31 CFR 1010.605(c)(2)(i).
---------------------------------------------------------------------------

    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers-commodities, and investment companies 
that are open-end companies (``mutual funds''), FinCEN is also using 
the same definition of ``account'' for purposes of this 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.\12\
---------------------------------------------------------------------------

    \12\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
---------------------------------------------------------------------------

3. Covered Financial Institution
    The proposed 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, which in general includes the 
following:
     An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)));
     a commercial bank;
     an agency or branch of a foreign bank in the United 
States;
     a Federally insured credit union;
     a savings association;
     a corporation acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611);
     a trust bank or trust company;
     a broker or dealer in securities;
     a futures commission merchant or an introducing broker-
commodities; and
     a mutual fund.
4. Foreign Banking Institution
    The proposed rule defines ``foreign banking institution'' to mean a 
bank organized under foreign law, or an agency, branch, or office 
located outside the United States of a bank. The term does not include 
an agent, agency, branch, or office within the United States of a bank 
organized under foreign law. This is consistent with the definition of 
``foreign bank'' under 31 CFR 1010.100(u).
5. Subsidiary
    The proposed rule defines ``subsidiary'' to mean a company of which 
more than 50 percent of the voting stock or analogous equity interest 
is owned by another company.

[[Page 31543]]

1010.660(b)--Prohibition on Accounts and Due Diligence Requirements for 
Covered Financial Institutions

1. Prohibition on Opening or Maintaining Correspondent Accounts
    Section 1010.660(b)(1) and (2) of this proposed rule would prohibit 
covered financial institutions from opening or maintaining in the 
United States a correspondent account for, or on behalf of, Bank of 
Dandong. It would also require covered financial institutions to take 
reasonable steps to not process a transaction for the correspondent 
account of a foreign banking institution in the United States if such a 
transaction involves Bank of Dandong. Such reasonable steps are 
described in 1010.660(b)(3), which sets forth the special due diligence 
requirements a covered financial institution would be required to take 
when it knows or has reason to believe that a transaction involves Bank 
of Dandong.
2. Special Due Diligence for Correspondent Accounts
    As a corollary to the prohibition set forth in section 
1010.660(b)(1) and (2), section 1010.660(b)(3) of the proposed rule 
would require covered financial institutions to apply special due 
diligence to all of their foreign correspondent accounts that is 
reasonably designed to guard against such accounts being used to 
process transactions involving Bank of Dandong. As part of that special 
due diligence, covered financial institutions would be required to 
notify those foreign correspondent account holders that the covered 
financial institutions know or have reason to believe provide services 
to Bank of Dandong that such correspondents may not provide Bank of 
Dandong 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 1010.660, we are prohibited from 
opening or maintaining in the United States a correspondent account 
for, or on behalf of, Bank of Dandong. The regulations also require 
us to notify you that you may not provide Bank of Dandong, including 
any of its subsidiaries, branches, offices, or agents 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 Bank 
of Dandong, including any of its subsidiaries, branches, offices, or 
agents, we will be required to take appropriate steps to prevent 
such access, including terminating your account.

    The purpose of the notice requirement is to aid cooperation with 
correspondent account holders in preventing transactions involving Bank 
of Dandong 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 Bank of Dandong.
    Special due diligence also includes implementing risk-based 
procedures designed to identify any use of correspondent accounts to 
process transactions involving Bank of Dandong. A covered financial 
institution would be expected to apply an appropriate screening 
mechanism to identify a funds transfer order that on its face listed 
Bank of Dandong as the financial institution of the originator or 
beneficiary, or otherwise referenced Bank of Dandong 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.
3. Recordkeeping and Reporting
    Section 1010.660(b)(4) of the proposed rule would clarify that the 
proposed 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 
described above.

VII. Request for Comments

    FinCEN invites comments on all aspects of the proposal to impose a 
prohibition under the fifth special measure with respect to Bank of 
Dandong and specifically invites comments on the following matters:
    1. FinCEN's proposal of a prohibition under the fifth special 
measure under 31 U.S.C. 5318A(b), as opposed to special measures one 
through four or imposing conditions under the fifth special measure;
    2. The form and scope of the notice to certain correspondent 
account holders that would be required under the rule; and
    3. The appropriate scope of the due diligence requirements in this 
proposed rule.

VIII. 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.

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

A. 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.\13\ Of the estimated 6,192 banks, 80 percent have less than 
$550,000,000 in assets and are considered small entities.\14\ Of the 
estimated 6,021 credit unions, 92.5 percent have less than $550,000,000 
in assets.\15\
---------------------------------------------------------------------------

    \13\ 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).
    \14\ 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.
    \15\ 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.
---------------------------------------------------------------------------

    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

[[Page 31544]]

$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.\16\ Based on SEC 
estimates, 17 percent of broker-dealers are classified as small 
entities for purposes of the RFA.\17\
---------------------------------------------------------------------------

    \16\ 17 CFR 240.0-10(c).
    \17\ 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.\18\ 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.
---------------------------------------------------------------------------

    \18\ 47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------

    For purposes of the RFA, an introducing broker-commodities dealer 
is considered small if it has less than $38,500,000 in gross receipts 
annually.\19\ Based on information provided by the National Futures 
Association (NFA), 95 percent of introducing brokers-commodities 
dealers have less than $38.5 million in adjusted net capital and are 
considered to be small entities.
---------------------------------------------------------------------------

    \19\ SBA, Size Standards to Define Small Business Concerns, 13 
CFR 121.201 (2016), 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.'' \20\ Based on SEC estimates, 
seven percent of mutual funds are classified as ``small entities'' for 
purposes of the RFA under this definition.\21\
---------------------------------------------------------------------------

    \20\ 17 CFR 270.0-10.
    \21\ 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 a Prohibition Under the Fifth Special Measure
    The proposed prohibition under the fifth special measure could 
require covered financial institutions to provide a notification 
intended to aid cooperation from foreign correspondent account holders 
in preventing transactions involving Bank of Dandong 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 Bank of Dandong. 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. The systems that U.S. financial institutions 
have in place to comply with these requirements can easily be modified 
to adapt to this proposed rule. Thus, the special due diligence that 
would be required under the proposed rule--i.e., preventing the 
processing of transactions involving Bank of Dandong and the 
transmittal of notice to certain correspondent account holders--would 
not impose a significant additional economic burden upon small U.S. 
financial institutions.

2. 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 a prohibition under the fifth special measure regarding 
Bank of Dandong.

IX. 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 the Treasury, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Paperwork Reduction Project (1506), Washington, DC 20503 (or by email 
to oirasubmission@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 September 5, 2017. 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 1010.660 is presented to assist those 
persons wishing to comment on the information collection.
    The notification requirement in section 1010.660(b)(3)(i)(A) is 
intended to aid cooperation from correspondent account holders in 
denying Bank of Dandong access to the U.S. financial system. The 
information required to be maintained by that section would be used by 
federal agencies and certain self-regulatory organizations to verify 
compliance by covered financial institutions with the provisions of 31 
CFR 1010.660. The collection of information would be 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 proposed rule is one hour per 
affected financial institution.
    Estimated Total Annual Burden: 5,000 hours.
    FinCEN specifically invites comments on: 1. Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, including whether the information would have 
practical

[[Page 31545]]

utility; 2. the accuracy of FinCEN's estimate of the burden of the 
proposed collection of information; 3. ways to enhance the quality, 
utility, and clarity of the information required to be maintained; 4. 
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 5. 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.

X. Executive Order 12866

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. It 
has been determined that the 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 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. Add Sec.  1010.660 to read as follows:


Sec.  1010.660  Special measures against Bank of Dandong.

    (a) Definitions. For purposes of this section:
    (1) Bank of Dandong means all subsidiaries, branches, offices, and 
agents of Bank of Dandong Co., Ltd. operating in any jurisdiction.
    (2) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(ii).
    (3) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(e)(1).
    (4) Foreign banking institution means a bank organized under 
foreign law, or an agency, branch, or office located outside the United 
States of a bank. The term does not include an agent, agency, branch, 
or office within the United States of a bank organized under foreign 
law.
    (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 maintaining 
correspondent accounts for Bank of Dandong. A covered financial 
institution shall not open or maintain in the United States a 
correspondent account for, or on behalf of, Bank of Dandong.
    (2) Prohibition on use of correspondent accounts involving Bank of 
Dandong. A covered financial institution shall take reasonable steps to 
not process a transaction for the correspondent account of a foreign 
banking institution in the United States if such a transaction involves 
Bank of Dandong.
    (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 
Bank of Dandong. 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 Bank of Dandong that such correspondents may not provide 
Bank of Dandong 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 Bank of Dandong, 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 Bank of 
Dandong.
    (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 Bank of Dandong 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 this section.
    (ii) Nothing in this section shall require a covered financial 
institution to report any information not otherwise required to be 
reported by law or regulation.

     Dated: June 29, 2017.
Jamal El-Hindi,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2017-14026 Filed 7-6-17; 8:45 am]
 BILLING CODE 4810-02-P