Imposition of Special Measure Against Bank of Dandong as a Financial Institution of Primary Money Laundering Concern, 51758-51765 [2017-24238]

Agencies

• DEPARTMENT OF THE TREASURY
• Financial Crimes Enforcement Network

[Federal Register Volume 82, Number 215 (Wednesday, November 8, 2017)]
[Rules and Regulations]
[Pages 51758-51765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24238]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB38


Imposition of Special Measure Against Bank of Dandong as a 
Financial Institution 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 covered U.S. 
financial institutions from opening or maintaining a correspondent 
account for, or on behalf of, Bank of Dandong Co., Ltd. (Bank of 
Dandong) as a financial institution of primary money laundering concern 
pursuant to Section 311 of the USA PATRIOT Act (Section 311). The rule 
further requires covered U.S. financial institutions to take reasonable 
steps not to process transactions for the correspondent account of a 
foreign banking institution in the United States if such a transaction 
involves Bank of Dandong. It also requires covered institutions to 
apply special due diligence to their foreign correspondent accounts 
that is reasonably designed to guard against their use to process 
transactions involving Bank of Dandong.

DATES: This final rule is effective December 8, 2017.

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

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory Provisions

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (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 protect 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 institution by U.S. 
financial institutions. Section 311 identifies factors for the 
Secretary to consider and requires consultations with certain 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 special measures.

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

A. 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 weapons of mass destruction (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), 2321 (2016), 2371 (2017), and 2375 
(2017) that restrict North Korea's financial and operational activities 
related to its nuclear and ballistic missile programs. Additionally, 
Executive Orders 13466, 13551, 13570, 13687, 13722, and 13810 have been 
issued to impose economic sanctions on North Korea pursuant to the 
International Emergency Economic Powers Act, 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.
    To further protect the United States from North Korea's illicit 
financial activity, FinCEN has issued multiple advisories since 2005 
detailing its concerns surrounding the deceptive financial practices 
used by North Korea and North Korean entities and called 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.\2\ 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

[[Page 51759]]

front companies to conduct international financial transactions that, 
among other things, support the proliferation of its WMD and 
conventional weapons programs.\3\ As explained below, Bank of Dandong 
facilitates such activity through the U.S. financial system.
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    \2\ 81 FR 78715 (November 9, 2016).
    \3\ 81 FR 35441 (June 2, 2016).
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B. 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.

III. FinCEN's Section 311 Rulemaking Regarding Bank of Dandong

A. Finding Regarding Bank of Dandong

    In a Notice of Proposed Rulemaking (NPRM) published in the Federal 
Register on July 7, 2017, FinCEN found that reasonable grounds exist 
for concluding that Bank of Dandong is a financial institution of 
primary money laundering concern pursuant to 31 U.S.C. 5318A.\4\
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    \4\ 82 FR 31537 (July 7, 2017).
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    As described in the NPRM, FinCEN believes that 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 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. This includes 
facilitating financial activity for North Korean entities designated by 
the United States and listed by the United Nations (UN) for WMD 
proliferation, as well as for front companies acting on their behalf.
    Bank of Dandong has, for example, facilitated financial activity 
for 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 
blocked KOMID by listing it in the Annex of Executive Order 13382 in 
2005, and the Office of Foreign Assets Control (OFAC) 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 Korea Kwangson Banking 
Corporation (KKBC) and KOMID, as well as other entities connected to 
North Korea's WMD and ballistic missile programs. KKBC is a U.S.- and 
UN-designated North Korean bank that has provided financial services in 
support of WMD proliferators. For example, 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 of Dandong'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: (i) Transactions that have no apparent 
economic, lawful, or business purpose and may be tied to sanctions 
evasion; (ii) transactions that have a possible North Korean nexus and 
include activity between unidentified companies and individuals and 
behavior indicative of shell company activity; and (iii) transactions 
that include transfers from offshore accounts with apparent shell 
companies that are domiciled in jurisdictions known for their financial 
secrecy and banking in another country.
    FinCEN is also concerned that, until recently, an entity designated 
by OFAC 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. 
KKBC maintained a direct relationship with Bank of Dandong 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.

B. Notice of Proposed Rulemaking

    In the NPRM, FinCEN (1) proposed to prohibit covered financial 
institutions from opening or maintaining a correspondent account in the 
United States for, or on behalf of, Bank of Dandong; (2) proposed to 
prohibit covered financial institutions from processing a transaction 
involving Bank of Dandong 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 
Bank of Dandong.\5\ The comment period for the NPRM closed on September 
5, 2017.
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    \5\ 82 FR 31543 (July 7, 2017).
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    As further described below, FinCEN is adopting the proposal, with 
one minor definitional change, as a final rule. In so doing, FinCEN has 
considered public comments and the relevant statutory factors, and has 
engaged in the required consultations prescribed by 31 U.S.C. 5318A.

C. Subsequent Developments

    FinCEN is not aware of any steps taken by Bank of Dandong or its 
relevant banking regulators to address the money laundering issues of 
concern at Bank of Dandong that were noted in the NPRM.

[[Page 51760]]

D. Consideration of Comments

    Following the issuance of the NPRM on July 7, 2017, FinCEN opened a 
comment period that closed on September 5, 2017. FinCEN received two 
substantive comments; they are described below, along with FinCEN's 
response.
1. Comment Purporting To Be From Bank of Dandong
    In response to the NPRM, FinCEN received a comment from an 
anonymous submitter that was signed ``Bank of Dandong.'' Because no 
further information was provided, FinCEN is unable to confirm whether 
the comment was, in fact, submitted by Bank of Dandong. The submitter 
disagreed with FinCEN's determination in the NPRM and stated ``we do 
not believe that Bank of Dandong is being used to facilitate or promote 
money laundering, including by entities involved in the proliferation 
of weapons of mass destruction or missiles.'' The submitter claimed to 
take FinCEN's ``allegations very seriously,'' and further stated that 
``we immediately began to research the relevant facts surrounding the 
allegations made in the NPRM.'' The submitter stated that it had found, 
``during our preliminary review that certain key aspects of the 
allegations do not match the reality of the situation.'' For these 
reasons, the submitter requested that FinCEN hold this matter ``in 
abeyance and not act on the NPRM'' until the ``misunderstanding about 
our bank and our business have been corrected.''
    Regardless of the true identity of the commenter, the comment does 
not allay FinCEN's concerns about Bank of Dandong. As outlined in the 
NPRM, FinCEN has a reasonable basis for its concern that Bank of 
Dandong is being used for money laundering and proliferation financing. 
Although the submitter has claimed to have conducted a preliminary 
review that differs from FinCEN's findings in certain key aspects, the 
submitter has not provided any specific information or documentation 
regarding the review, or even identified any of the key aspects that it 
claims to have found to be contrary to the NPRM.
2. Comment From SIFMA
    The Securities and Financial Markets Association (SIFMA) submitted 
a comment that requested several clarifications and modifications to 
the proposed rulemaking with respect to Bank of Dandong. In particular, 
SIFMA requested that FinCEN: (1) Identify all known subsidiaries, 
branches, and offices of Bank of Dandong; (2) modify the proposed rule 
text to explicitly provide that the reasonable, risk-based procedures 
apply to identifying branches, offices, and subsidiaries of Bank of 
Dandong; (3) eliminate the notice provision of the special due 
diligence requirement; and (4) eliminate a reference to ``agent'' from 
the definition of ``Bank of Dandong.''
    SIFMA requested that FinCEN amend the proposed regulatory text to 
explicitly provide that the reasonable, risk-based procedures apply to 
identifying branches, offices, and subsidiaries of Bank of Dandong. 
FinCEN believes that the current regulatory text is sufficient, as the 
definition of Bank of Dandong includes the branches, offices, and 
subsidiaries of Bank of Dandong. While FinCEN does not believe that it 
is necessary to amend the text of the rule, FinCEN agrees that covered 
financial institutions should use reasonable, risk-based procedures in 
identifying branches, offices, and subsidiaries of Bank of Dandong.
    SIFMA has requested that FinCEN eliminate the requirement to 
provide notice to foreign correspondent accounts, arguing that 
compliance with the requirement would require substantial time and 
expense involved in providing notice to foreign banks. While providing 
the required notice does impose a cost on U.S. financial institutions, 
FinCEN assesses this burden at one hour per institution. Additionally, 
FinCEN notes that the requirement applies only to those covered 
financial institutions that know or have reason to believe that their 
foreign correspondents are transacting with Bank of Dandong. FinCEN 
does not consider this to be an undue burden. In the NPRM, FinCEN 
addressed the burden associated with the rule and determined that 
providing the notice to foreign institutions would not impose a 
significant additional economic burden upon small U.S. financial 
institutions. FinCEN believes that the compliance burden associated 
with the rule is justified by the threat Bank of Dandong poses to the 
U.S. financial system.
    Lastly, SIFMA argues that FinCEN has not previously identified 
``agents'' in a special measure currently in effect against a financial 
institution, and that ``agent'' is a legal term with different 
meanings, and its intended use in the context of Bank of Dandong is 
unclear. Additionally, SIFMA argues that it is unclear how financial 
institutions should interpret this definition, or how an agent would be 
identified.
    In connection with finalizing this rulemaking, and in light of the 
robust U.S. and international sanctions targeting illicit North Korean 
activity, FinCEN believes that the prohibitions set forth in the final 
rule are sufficient to protect the U.S. financial system from the 
threat posed by Bank of Dandong. In addition, the U.S. Department of 
the Treasury retains the ability to target any financial institution or 
others that might aid Bank of Dandong in evading the prohibitions set 
forth in the final rule. As such, in this final rule, FinCEN has 
removed ``agents'' from the definition of ``Bank of Dandong.'' 
Therefore, it is not necessary for FinCEN to address the points that 
SIFMA has raised with regard to the use of this term. Regarding SIFMA's 
request that FinCEN provide a list of known subsidiaries, branches, and 
offices of Bank of Dandong, FinCEN notes that commercially available 
information listing the known subsidiaries, branches, and offices of 
Bank of Dandong was provided and posted along with the NPRM for public 
consideration during the comment period. This information appears as 
Exhibits 2 and 41 posted on www.regulations.gov concerning the Bank of 
Dandong NPRM.

E. Summary of FinCEN's Ongoing Concerns Regarding Bank of Dandong

    After considering comments received from the public, as well as 
other information available to the agency, including both public and 
non-public information, FinCEN is issuing this rule imposing a 
prohibition on U.S. financial institutions from opening or maintaining 
a correspondent account for, or on behalf of, Bank of Dandong. The 
information available to FinCEN provides reason to conclude that the 
money laundering risks posed by Bank of Dandong have not been 
mitigated, and that Bank of Dandong has not addressed FinCEN's concerns 
as described in the NPRM. FinCEN thus finds that Bank of Dandong 
continues to be a financial institution of primary money laundering 
concern.

IV. Imposition of a Special Measure Against Bank of Dandong as a 
Financial Institution of Primary Money Laundering Concern

    Based upon this finding, FinCEN is authorized to impose one or more 
special measures. Following the required consultations and the 
consideration of all relevant factors discussed in the NPRM, FinCEN 
proposed a prohibition under the fifth special measure.\6\
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    \6\ Throughout the rulemaking process, including in the issuance 
of this final rule, FinCEN has consulted with relevant departments 
and agencies in accordance with 31 U.S.C. 5318A.
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    After the comment period closed, FinCEN considered all of the 
special

[[Page 51761]]

measures, as well as measures short of a prohibition, and has concluded 
that a prohibition under the fifth special measure is still the 
appropriate choice. Consistent with the finding that Bank of Dandong is 
a financial institution of primary money laundering concern, and in 
consideration of additional relevant factors, this final rule imposes a 
prohibition on the opening or maintaining of correspondent accounts by 
covered financial institutions for, or on behalf of, Bank of Dandong. 
This prohibition will help guard against the money laundering and WMD 
proliferation finance risks to the U.S. financial system posed by Bank 
of Dandong, as identified in the NPRM and this final rule.

A. Discussion of Section 311 Factors

    In determining which special measure to implement to address the 
finding that Bank of Dandong is of primary money laundering concern 
described in the NPRM, FinCEN considered the following factors:
1. Whether Similar Action Has Been or Will Be Taken by Other Nations or 
Multilateral Groups Against Bank of Dandong
    Subsequent to FinCEN's finding on July 7, 2017, the Government of 
Japan designated Bank of Dandong on July 28, 2017. Additionally, the 
Government of South Korea issued an advisory on August 28, 2017, 
warning South Korean firms about the dangers of doing business with 
Bank of Dandong, and that conducting business with the bank may 
restrict their access to the U.S. financial system.
    Furthermore, FinCEN's action is consistent with steps taken by the 
international community to address illicit financial activity tied to 
North Korea. Between 2006 and 2017, the United Nations Security Council 
has adopted multiple resolutions, 1718,\7\ 1874,\8\ 2087,\9\ 2094,\10\ 
2270,\11\ 2321,\12\ 2371,\13\ and 2375 \14\ which generally restrict 
North Korea's financial and operational activities related to its 
nuclear and missile programs and conventional arms sales. In 
particular, 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, 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 
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.\15\ Additionally, UNSCR 2321, unanimously adopted 
by the UNSC in November 2016, requires, among other things, 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.\16\ UNSCR 2371, unanimously adopted by the UNSC 
in August 2017, requires, among other things, nations to prohibit the 
clearing of funds on behalf of North Korea through their 
territories.\17\ UNSCR 2375, unanimously adopted by the UNSC in 
September 2017, prohibits, among other things, the opening, 
maintenance, and operation of all joint ventures or cooperative 
entities, new and existing, with DPRK entities.\18\
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    \7\ See United Nations Security Council Resolution (``UNSCR'') 
1718 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1718(2006)).
    \8\ See UNSCR 1874 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1874(2009)).
    \9\ See UNSCR 2087 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2087(2013)).
    \10\ See UNSCR 2094 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2094(2013)).
    \11\ See UNSCR 2270 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2270(2016)).
    \12\ See UNSCR 2321 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2321(2016)).
    \13\ See UNSCR 2371 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2371(2017)).
    \14\ See UNSCR 2375 (https://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2375(2017)).
    \15\ See UNSCR 2270.
    \16\ See UNSCR 2321.
    \17\ See UNSCR 2371.
    \18\ See UNSCR 2375.
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    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 
UNSCRs.
    Despite these actions, North Korea continues to access 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.
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
    A prohibition under the fifth special measure should 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 should not create 
any competitive disadvantage for U.S. financial institutions.
    Similarly, the final rule's due diligence obligations should 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.

[[Page 51762]]

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 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.
    The NPRM stated that Bank of Dandong maintained euro, Japanese yen, 
Hong Kong dollar, pound sterling, and Australian dollar correspondent 
accounts. Subsequent to the publication of the NPRM, commercially 
available databases indicate that Bank of Dandong may no longer have 
correspondent accounts in any currency. While these accounts may no 
longer continue to exist, the fifth special measure would not prevent 
Bank of Dandong from conducting legitimate business activities in 
foreign currencies so long as such activity does not involve a 
correspondent account maintained in the United States.
4. The Effect of the 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. 
North Korea is a top national security concern, and Bank of Dandong has 
been used to facilitate financial activity related to North Korean 
entities designated by the United States and United Nations for their 
involvement in WMD proliferation. Imposing this rule serves as an 
additional measure to prevent North Korea from accessing the U.S. 
financial system and will both support and uphold U.S. national 
security and foreign policy goals. A prohibition under the fifth 
special measure will also complement the U.S. Government's worldwide 
efforts to expose and disrupt international money laundering.

B. 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 FinCEN believes that a 
prohibition under the fifth special measure will 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. Furthermore, FinCEN 
has issued multiple 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 
will 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 the involvement of 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.

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

1010.660(a)--Definitions

1. Bank of Dandong
    The final rule defines ``Bank of Dandong'' to mean all 
subsidiaries, branches, and offices of Bank of Dandong Co., Ltd. 
operating in any jurisdiction.
2. Correspondent Account
    The final 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 final 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.\19\ Under this definition, ``payable through accounts'' are a 
type of correspondent account.
---------------------------------------------------------------------------

    \19\ 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

[[Page 51763]]

``account'' for purposes of this final 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.\20\
---------------------------------------------------------------------------

    \20\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
---------------------------------------------------------------------------

3. Covered Financial Institution
    The final 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 final 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 final 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.

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 final rule prohibits covered 
financial institutions from opening or maintaining in the United States 
a correspondent account for, or on behalf of, Bank of Dandong. It also 
requires covered financial institutions to take reasonable steps not to 
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 Sec.  
1010.660(b)(3), which sets forth the special due diligence requirements 
a covered financial institution will 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 Sec.  1010.660(b)(1) 
and (2), Sec.  1010.660(b)(3) of the final rule requires 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 are 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, and offices 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, and offices 
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 is 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 final rule clarifies that the rule 
does not impose any reporting requirement upon any covered financial 
institution that is not otherwise required by applicable law or 
regulation. A covered financial institution must, however, document its 
compliance with the notification requirement described above.

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.\21\ Of the

[[Page 51764]]

estimated 5,787 banks, 99 percent of institutions have less than 
$550,000,000 in assets and are considered small entities.\22\ Of the 
estimated 5,696 credit unions, 91 percent have less than $550,000,000 
in assets.\23\
---------------------------------------------------------------------------

    \21\ 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).
    \22\ Federal Deposit Insurance Corporation, Find an Institution, 
https://www5.fdic.gov/idasp/advSearchLanding.asp;select Status Dates 
Financials: Total Assets, type Equal or less than $: ``550000,000'' 
and select Find.
    \23\ 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 $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.\24\ Based on SEC estimates, 17 
percent of broker-dealers are classified as small entities for purposes 
of the RFA.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.0-10(c).
    \25\ 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.\26\ 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.
---------------------------------------------------------------------------

    \26\ 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 $35,500,000 in gross receipts 
annually.\27\ 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.
---------------------------------------------------------------------------

    \27\ 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.'' \28\ Based on SEC estimates, 
seven percent of mutual funds are classified as ``small entities'' for 
purposes of the RFA under this definition.\29\
---------------------------------------------------------------------------

    \28\ 17 CFR 270.0-10.
    \29\ 78 FR 23637, 23658 (April 19, 2013).
---------------------------------------------------------------------------

    As noted above, 99 percent of banks, 91 percent of credit unions, 
17 percent of broker-dealers, 95 percent of introducing broker-
commodities dealers, no FCMs, and seven percent of mutual funds are 
small entities.
2. Description of the Projected Reporting and Recordkeeping 
Requirements of the Fifth Special Measure
    The 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 are also 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 final rule. Thus, the special due diligence that is required 
under the final rule--i.e., preventing the processing of transactions 
involving Bank of Dandong and the transmittal of notice to certain 
correspondent account holders--does not impose a significant additional 
economic burden upon small U.S. financial institutions.

B. Certification

    For these reasons, FinCEN certifies that this final rulemaking 
should 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 (OMB) for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), and has been assigned OMB Control Number 1506-0072. 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 Sec.  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 Sec.  1010.660(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 1010.660. 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: 5,787.
    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: 5,787 hours.

[[Page 51765]]

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 is revised to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314, 
5316-5332; Title III, sec. 314, Pub. L. 107-56, 115 Stat. 307; 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, and offices 
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 
not to 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 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 2, 2017.
Jamal El-Hindi,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2017-24238 Filed 11-7-17; 8:45 am]
BILLING CODE 4810-02-P