81 FR 78715 - Imposition of Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network Federal Register Volume 81, Issue 217 (November 9, 2016)
Financial Crimes Enforcement Network
Federal Register Volume 81, Issue 217 (November 9, 2016)
| Page Range | 78715-78722 | |
| FR Document | 2016-27049 |
[Federal Register Volume 81, Number 217 (Wednesday, November 9, 2016)] [Rules and Regulations] [Pages 78715-78722] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-27049] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Financial Crimes Enforcement Network 31 CFR Part 1010 RIN 1506-AB35 Imposition of Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: FinCEN is issuing this final rule to prohibit U.S. financial institutions from opening or maintaining a correspondent account for, or on behalf of, North Korean banking institutions. The rule further prohibits U.S. financial institutions from processing transactions for the correspondent account of a foreign bank in the United States if such a transaction involves a North Korean financial institution, and requires institutions to apply special due diligence to guard against such use by North Korean financial institutions. DATES: This final rule is effective December 9, 2016. FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center, (800) 949- 2732. SUPPLEMENTARY INFORMATION: I. Statutory Provisions On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (the USA PATRIOT Act). Title III of the USA PATRIOT Act amended the anti- money laundering (AML) provisions of the Bank Secrecy Act (BSA), codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311- 5314, 5316-5332, to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Regulations implementing the BSA appear at 31 CFR Chapter X. The authority of the Secretary of the Treasury (the Secretary) to administer the BSA and its implementing regulations has been delegated to the Director of FinCEN.\1\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- Section 311 of the USA PATRIOT Act (Section 311), codified at 31 U.S.C. 5318A, grants FinCEN the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, financial institution, class of transactions, or type of account is of ``primary money laundering concern,'' to require domestic financial institutions and financial agencies to take certain ``special measures'' to address the primary money laundering concern. The special measures enumerated under Section 311 are prophylactic safeguards that defend the U.S. financial system from money laundering and terrorist financing. FinCEN may impose one or more of these special measures in order to protect the U.S. financial system from these threats. Special measures one through four, codified at 31 U.S.C. 5318A(b)(1)-(b)(4), impose additional recordkeeping, information collection, and reporting requirements on covered U.S. financial institutions. The fifth special measure, codified at 31 U.S.C. 5318A(b)(5), allows FinCEN to prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts for the identified jurisdiction by U.S. financial institutions. Section 311 identifies factors for the Secretary to consider and requires consultations with Federal agencies before making a finding that reasonable grounds exist for concluding that a jurisdiction, institution, class of transactions or type of account is of primary money laundering concern. The statute also provides similar procedures, including factors to consider and consultation requirements for selecting and imposing the fifth special measure. II. FinCEN's Section 311 Rulemaking Regarding North Korea A. Notice of Finding Regarding North Korea In a Notice of Finding (NOF) published in the Federal Register on June 2, 2016, FinCEN found that reasonable grounds exist for concluding that the Democratic People's Republic of Korea (DPRK or North Korea) is a jurisdiction of primary money laundering concern pursuant to 31 U.S.C. 5318A.\2\ FinCEN's NOF noted four main areas of concern: North Korea (1) uses state-controlled financial institutions and front companies to conduct international financial transactions that support the proliferation of weapons of mass destruction (WMD) and the development of ballistic missiles in violation of international and U.S. sanctions; (2) is subject to little or no bank supervision or anti-money laundering or combating the financing of terrorism (``AML/ CFT'') controls; (3) has no mutual legal assistance treaty with the United States; and (4) relies on the illicit and corrupt activity of high-level officials to support its government. --------------------------------------------------------------------------- \2\ 81 FR 35441 (June 2, 2016). --------------------------------------------------------------------------- In the NOF, FinCEN also noted that the North Korean government continues to access the international financial system to support its WMD and conventional weapons programs through its use of aliases, agents, foreign individuals in multiple jurisdictions, and a long- standing network of front companies and North Korean embassy personnel which support illicit activities through banking, bulk cash, and trade. Front company transactions originating in foreign-based banks have been processed through correspondent bank accounts in the United States and Europe. Further, the enhanced due diligence required by United Nations Security Council Resolutions (UNSCRs) related to North Korea is undermined by North Korean-linked front companies, which are often registered by non-North Korean citizens, and which conceal their activity through the use of indirect [[Page 78716]] payment methods and circuitous transactions disassociated from the movement of goods or services. B. Notice of Proposed Rulemaking In light of this Finding, in a Notice of Proposed Rulemaking (NPRM) published in the Federal Register on June 3, 2016, FinCEN (1) proposed a prohibition on covered financial institutions from opening or maintaining a correspondent account in the United States for, or on behalf of, a North Korean banking institution; (2) proposed a prohibition on covered financial institutions from processing a transaction involving a North Korean financial institution through the United States correspondent account of a foreign banking institution; and (3) proposed a requirement for covered financial institutions to apply special due diligence to their foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving North Korean financial institutions.\3\ The comment period for the NPRM closed on August 2, 2016. The final rule is largely identical to that found in the June 2016 notice, except that the term ``North Korean banking institution'' has been defined in order to clarify the types of institutions subject to the prohibition, and the term ``foreign banking institution'' has been replaced by ``foreign bank,'' with a corresponding change in the term's definition to conform with the definition of ``foreign bank'' under 31 CFR 1010.100(u). The final rule also explicitly incorporates the special due diligence concepts into the prohibition on processing transactions involving North Korean financial institutions. By incorporating these due diligence requirements into the prohibition, the final rule clarifies that if a covered financial institution suspects transactions involve a North Korean financial institution, then the covered financial institution shall take steps to further investigate and prevent such transactions, including steps that do not necessarily lead to the closing of the account. --------------------------------------------------------------------------- \3\ 81 FR 35665 (June 3, 2016). --------------------------------------------------------------------------- As further described below, FinCEN is adopting this proposal as a final rule. In so doing, FinCEN considered public comment and the relevant statutory factors, and engaged in the required consultations prescribed by 31 U.S.C. 5318A. III. Consideration of Comment In response to the NPRM and NOF, FinCEN received only one comment. The comment agreed with FinCEN's proposal of a prohibition under the fifth special measure, but recommended that FinCEN also impose an additional special measure under 31 U.S.C. 5318A(b)(2) to require domestic financial institutions to obtain beneficial ownership information of ``property'' held by nationals of North Korea or their representatives that is located in North Korea or that otherwise involves North Korea. The comment explained that such a requirement would help identify and expose networks of non-bank institutions and agents that establish and manage shell or front companies on behalf of the North Korean government. As described above and in the NOF, FinCEN shares the concerns raised by the comment regarding North Korea's extensive use of deceptive financial practices, including the use of shell and front companies to obfuscate the true originator, beneficiary, and purpose behind its transactions. However, FinCEN's authority, as granted by Congress in 31 U.S.C. 5318A(b)(2), applies only to information concerning the beneficial ownership of ``account[s] opened or maintained in the United States'' and thus would not extend to information relating to the beneficial ownership of property writ large, or to property outside the United States as the comment suggested. Nonetheless, FinCEN believes that the risks to the U.S. financial system posed by North Korea can be addressed through the prohibition on correspondent accounts and the related due diligence. Taken together, these requirements should, by and large, help prevent the flow of illicit funds from North Korea from entering the U.S. financial system. Accordingly, FinCEN believes that the prohibition and due diligence requirements imposed under the fifth special measure sufficiently address both FinCEN's concerns and the concerns raised by the comment. IV. Imposition of a Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern In light of the Finding as detailed in the NOF, and based upon additional consultations with required Federal agencies and departments, and the consideration of public comments, the statutory factors discussed below, and all relevant factors, FinCEN has concluded that the prohibition under the fifth special measure as proposed in the NPRM is the appropriate course of action.\4\ --------------------------------------------------------------------------- \4\ Throughout the rulemaking process, FinCEN has consulted with relevant departments and agencies in accordance with 5318A. --------------------------------------------------------------------------- The prohibition on the opening or maintaining of correspondent accounts imposed by the fifth special measure will help guard against the money laundering and WMD proliferation finance risks to the U.S. financial system posed by North Korean financial institutions and their front companies. Imposing a prohibition under the fifth special measure also complements U.S. efforts to satisfy the requirement under UNSCR 2270 Paragraph 33, discussed in section IV.A.1 below, for all UN member states to sever correspondent relationships with North Korean banks. A. Discussion of Section 311 Factors In determining which special measures to implement to address the finding that DPRK is of primary money laundering concern described in the NOF, FinCEN considered the following factors: 1. Whether Similar Action Has Been or Will Be Taken by Other Nations or Multilateral Groups Against North Korea FinCEN's action is consistent with steps taken by the international community to address North Korea's illicit financial activity. Between 2006 and 2016, the United Nations Security Council has adopted multiple resolutions, 1718,\5\ 1874,\6\ 2087,\7\ 2094,\8\ and 2270,\9\ which generally restrict North Korea's financial and operational activities related to its nuclear and missile programs and conventional arms sales. Most recently, in March 2016, the United Nations adopted UNSCR 2270, which imposes additional sanctions on North Korea in response to a January 6, 2016 nuclear test and February 7, 2016 launch using ballistic missile technology. This UNSCR contains provisions that generally require nations to: (1) Prohibit North Korean banks from opening branches in their territory or engaging in certain correspondent relationships with these banks; (2) terminate existing representative offices or subsidiaries, branches, and correspondent accounts with North Korean banks; (3) prohibit their financial institutions from opening new representative offices or subsidiaries, branches, or bank accounts in North Korea; and (4) close existing [[Page 78717]] representative offices or subsidiaries, branches, or bank accounts in North Korea if reasonable grounds exist to believe such financial services could contribute to North Korea's nuclear or missile programs, or UNSCR violations.\10\ --------------------------------------------------------------------------- \5\ See United Nations Security Council Resolution (``UNSCR'') 1718 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1718(2006)). \6\ See UNSCR 1874 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/1874(2009). \7\ See UNSCR 2087 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2087(2013)). \8\ See UNSCR 2094 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2094(2013)). \9\ See UNSCR 2270 (http://www.un.org/en/ga/search/view_doc.asp?symbol=S/RES/2270(2016)). \10\ See UNSCR 2270. --------------------------------------------------------------------------- The Financial Action Task Force (FATF) has issued a series of public statements expressing its concern that North Korea's lack of a comprehensive AML/CFT regime represents a significant vulnerability within the international financial system. The statements further called upon North Korea to address those deficiencies with urgency, and called upon FATF members and urged all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with North Korea in order to protect their correspondent accounts from being used to evade countermeasures and risk mitigation practices. Starting in February 2011, the FATF called upon its members and urged all jurisdictions to apply effective counter-measures to protect their financial sectors from the money laundering and financing of terrorism risks emanating from North Korea.\11\ --------------------------------------------------------------------------- \11\ See ``Public Statement--21 October 2016,'' Financial Action Task Force (http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-october-2016.html). --------------------------------------------------------------------------- 2. Whether the Imposition of the Fifth Special Measure Would Create a Significant Competitive Disadvantage, Including Any Undue Cost or Burden Associated With Compliance, for Financial Institutions Organized or Licensed in the United States The prohibition under the fifth special measure imposed by this rulemaking prohibits covered financial institutions from opening or maintaining a correspondent account in the United States for, or on behalf of, a North Korean banking institution. It also prohibits the use of a foreign bank's U.S. correspondent account to process a transaction involving a North Korean financial institution. As noted in FinCEN's NOF, none of North Korea's financial institutions currently maintain correspondent accounts directly with U.S. banks. Further, as noted above, U.S. financial institutions are currently subject to a range of prohibitions related to sanctions concerning North Korea, which has generally limited their direct exposure to the North Korean financial system. Therefore, FinCEN believes this action will not present an undue regulatory burden on U.S. financial institutions. Under this final rule, covered financial institutions are also required to apply special due diligence to their foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving North Korean financial institutions. U.S. financial institutions may satisfy their due diligence requirement by transmitting a notice to certain foreign correspondent account holders concerning the prohibition on processing transactions involving a North Korean financial institution through the U.S. correspondent account. U.S. financial institutions generally apply some level of screening and, when required, conduct some level of reporting of their transactions and accounts, often through the use of commercially available software such as that used for compliance with the economic sanctions programs administered by the Office of Foreign Assets Control (OFAC) and to detect potential suspicious activity. FinCEN believes financial institutions should be able to leverage these current screening and reporting procedures to detect transactions involving a North Korean financial institution. 3. The Extent to Which the Action or Timing of the Action Will Have a Significant Adverse Systemic Impact on the International Payment, Clearance, and Settlement System, or on Legitimate Business Activities of North Korea Financial institutions in North Korea are not major participants in the international payment system and are not relied upon by the international banking community for clearance or settlement services. In addition, given existing domestic and multilateral sanctions, coupled with the FATF's calls for countermeasures to address North Korea's AML/CFT deficiencies, it is unlikely that the imposition of a prohibition under the fifth special measure with respect to North Korea would have a significant adverse systemic impact on the international payment, clearance, and settlement system. In light of the reasons described in this rulemaking for imposing the fifth special measure, and based on available information, FinCEN believes that the need to protect the U.S. financial system outweighs any burden on legitimate North Korean business activity, and, therefore, the imposition of a prohibition under the fifth special measure would not impose an undue burden on such activities. 4. The Effect of the Action on United States National Security and Foreign Policy The exclusion from the U.S. financial system of jurisdictions that serve as conduits for significant money laundering activity, for the financing of WMD or their delivery systems, and for other financial crimes enhances national security by making it more difficult for proliferators and money launderers to access the U.S. financial system. To the extent that this action serves as an additional tool in preventing North Korea from accessing the U.S. financial system, this action supports and upholds U.S. national security and foreign policy goals. Further, imposing a prohibition under the fifth special measure both complements the U.S. Government's worldwide efforts to expose and disrupt international money laundering, and satisfies the requirement under UNSCR 2270 Paragraph 33 for all UN member states to sever correspondent relationships with North Korean banks. B. Consideration of Alternative Special Measures FinCEN concludes that a prohibition under the fifth special measure is the only viable measure to protect the U.S. financial system against the money laundering threats posed by the DPRK. In making this determination, FinCEN considered alternatives to a prohibition under the fifth special measure, including the first four special measures and imposing conditions on the opening or maintaining of correspondent accounts. For the reasons explained below, FinCEN believes that a prohibition under the fifth special measure would be the most effective and practical measure to employ to safeguard the U.S. financial system from the risks of illicit finance involving the DPRK. As noted above, and in the NOF, North Korea is subject to numerous UNSCRs \12\ and U.S. sanctions authorities,\13\ and it has been [[Page 78718]] consistently identified by the FATF for its AML deficiencies.\14\ Additionally, the UN has specifically called for enhanced monitoring of financial transactions to prevent the financing of North Korea's nuclear and ballistic missile programs and for the freezing of any assets suspected of supporting these illicit programs. Further, as noted in the NOF and NPRM, FinCEN has issued three advisories since 2005 detailing specific concerns of the deceptive financial practices used by North Korea and North Korean entities and calling on U.S. financial institutions to take appropriate risk mitigation measures.\15\ However, North Korea has not taken any substantial action to address the range of concerns and continues to be involved in an array of illicit activities, as reflected in the NOF. Although North Korea is subject to wide-ranging bilateral and multilateral sanctions, it continues to access the international financial system to support its WMD and conventional weapons programs through its use of aliases, agents, foreign individuals in multiple jurisdictions, and a long- standing network of front companies. As such, FinCEN believes that only the most stringent measure--a prohibition under the fifth special measure--would be effective in mitigating the illicit finance risks associated with North Korea. --------------------------------------------------------------------------- \12\ See UNSCRs 1718, 1874, 2087, 2094, and 2270. \13\ See, e.g., Executive Order (``E.O.'') 13382 ``Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters'' (2005) (https://www.federalregister.gov/articles/2005/07/01/05-13214/blocking-property-of-weapons-of-mass-destruction-proliferators-and-their-supporters); E.O. 13551 ``Blocking Property of Certain Persons with Respect to North Korea'' (2010) (https://www.thefederalregister.org/fdsys/pkg/FR-2010-09-01/pdf/X10-10901.pdf); E.O. 13687 ``Imposing Additional Sanctions with Respect to North Korea'' (2015) (https://www.federalregister.gov/articles/2015/01/06/2015-00058/imposing-additional-sanctions-with-respect-to-north-korea); E.O. 13722 ``Blocking Property of the Government of North Korea and the Workers' Party of Korea, and Prohibiting Certain Transactions with Respect to North Korea,'' (2016) (https://www.thefederalregister.org/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf). \14\ See ``Public Statement--21 October 2016,'' Financial Action Task Force (http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-october-2016.html). \15\ See ``Guidance to Financial Institutions on the Provision of Banking Services to North Korean Government Agencies and Associated Front Companies Engaged in Illicit Activities,'' FinCEN (2005) (https://www.fincen.gov/statutes_regs/guidance/pdf/advisory.pdf); ``North Korea Government Agencies' and Front Companies' Involvement in Illicit Financial Activities,'' FinCEN (2009) (https://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a002.pdf); ``Update on the Continuing Illicit Finance Threat Emanating from North Korea,'' FinCEN (2013) (https://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A005.pdf). --------------------------------------------------------------------------- Special measures one through four enable FinCEN to impose additional recordkeeping, information collection, and information reporting requirements on covered U.S. financial institutions. Special measure five enables FinCEN to impose conditions as an alternative to a prohibition on the opening or maintaining of correspondent accounts. Given North Korea's flagrant disregard for multiple UN resolutions related to the proliferation of WMD, FinCEN does not believe that any condition, additional recordkeeping, or reporting requirement would be an effective measure to safeguard the U.S. financial system. Such measures would not prevent North Korea from accessing directly or indirectly the correspondent accounts of U.S. financial institutions, thus leaving the U.S. financial system vulnerable to processing the types of illicit transfers described in the NOF. Moreover, as OFAC sanctions prohibit a variety of financial transactions with the DPRK, recordkeeping related to transactions with the DPRK would be impractical as would conditioning the opening or maintaining of correspondent accounts. As noted above, because North Korea has a history of engaging in deceptive financial practices to evade international sanctions and is known to utilize networks of front companies to engage in illicit activity, any conditions that would continue to allow the opening or maintaining of correspondent accounts for North Korean banks would not sufficiently protect the U.S. financial system. Therefore, in the case of the jurisdiction of North Korea, FinCEN views a prohibition under the fifth special measure as the only special measure that can adequately protect the U.S. financial system from North Korean illicit financial activity. V. Section-by-Section Analysis for Imposition of a Prohibition Under the Fifth Special Measure A. 1010.659(a)--Definitions 1. North Korean Banking Institution Section 1010.659(a)(1) of the rule defines a ``North Korean banking institution'' as any bank organized under North Korean law, or any agency, branch, or office located outside the United States of such a bank. This definition is consistent with the definition of ``foreign bank'' at 31 CFR 1010.100(u). 2. North Korean Financial Institution Section 1010.659(a)(2) of this rule defines a ``North Korean financial institution'' as all branches, offices, or subsidiaries of any foreign financial institution, as defined at 31 CFR 1010.605(f), chartered or licensed by North Korea, wherever located, including any branches, offices, or subsidiaries of such a financial institution operating in any jurisdiction, and any branch or office within North Korea of any foreign financial institution. 3. Foreign Bank Section 1010.659(a)(3) of this rule states that ``foreign bank'' has the same meaning as provided in 31 CFR 1010.100(u). 4. Correspondent Account Section 1010.659(a)(4) of this rule defines the term ``correspondent account'' by reference to the definition contained in 31 CFR 1010.605(c)(1)(i). Section 1010.605(c)(1)(i) defines a correspondent account to mean an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign financial institution, or to handle other financial transactions related to the foreign financial institution. Under this definition, ``payable through accounts'' are a type of correspondent account. In the case of a U.S. depository institution, this broad definition includes most types of banking relationships between a U.S. depository institution and a foreign bank that are established to provide regular services, dealings, and other financial transactions, including a demand deposit, savings deposit, or other transaction or asset account, and a credit account or other extension of credit. FinCEN is using the same definition of ``account'' for purposes of this rule as was established for depository institutions in the final rule implementing the provisions of section 312 of the USA PATRIOT Act requiring enhanced due diligence for correspondent accounts maintained for certain foreign banks.\16\ --------------------------------------------------------------------------- \16\ 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 rule as was established for these entities in the final rule implementing the provisions of section 312 of the USA PATRIOT Act requiring enhanced due diligence for correspondent accounts maintained for certain foreign banks.\17\ --------------------------------------------------------------------------- \17\ See 31 CFR 1010.605(c)(2)(ii)-(iv). --------------------------------------------------------------------------- 5. Covered Financial Institution Section 1010.659(a)(5) of this rule defines ``covered financial institution'' with the same definition used in the final rule implementing the provisions of section 312 of the USA PATRIOT Act,\18\ which in general includes the following: --------------------------------------------------------------------------- \18\ See 31 CFR 1010.605(e)(1). ---------------------------------------------------------------------------An insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); a commercial bank; [[Page 78719]] an agency or branch of a foreign bank in the United States; a Federally insured credit union; a savings association; a corporation acting under section 25A of the Federal Reserve Act (12 U.S.C. 611); a trust bank or trust company; a broker or dealer in securities; a futures commission merchant or an introducing broker- commodities; and a mutual fund. 6. Subsidiary Section 1010.659(a)(6) of this rule defines ``subsidiary'' as a company of which more than 50 percent of the voting stock or analogous equity interest is owned by another company. B. 1010.659(b)--Prohibition on Accounts and Due Diligence Requirements for Covered Financial Institutions 1. Prohibition on Opening or Maintaining Correspondent Accounts Section 1010.659(b)(1) and (2) of this rule prohibits covered financial institutions from opening or maintaining in the United States a correspondent account for, or on behalf of, a North Korean banking institution. It also requires covered financial institutions to take reasonable steps to not process a transaction for the correspondent account of a foreign bank in the United States if such a transaction involves a North Korean financial institution. Such reasonable steps are described in 1010.659(b)(3), which sets forth the special due diligence requirements a covered financial institution must take when it knows or has reason to believe a transaction involves a North Korean financial institution. By expressly incorporating these due diligence requirements into the prohibition, the final rule clarifies that if a covered financial institution suspects transactions involve a North Korean financial institution, then the covered financial institution shall take steps to further investigate and prevent such transactions, including steps that do not necessarily lead to the closing of the account. 2. Special Due Diligence for Correspondent Accounts To Prohibit Use As a corollary to the prohibition set forth in section 1010.659(b)(1) and (2), section 1010.659(b)(3) of this rule requires a covered financial institution to apply special due diligence to all of its foreign correspondent accounts that is reasonably designed to guard against processing transactions involving North Korean financial institutions. As part of that special due diligence, covered financial institutions must notify those foreign correspondent account holders that the covered financial institutions know or have reason to believe provide services to a North Korean financial institution that such correspondents may not provide a North Korean financial institution with access to the correspondent account maintained at the covered financial institution. A covered financial institution may satisfy this notification requirement using the following notice: Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.659, we are prohibited from opening or maintaining in the United States a correspondent account for, or on behalf of, a North Korean banking institution. The regulations also require us to notify you that you may not provide a North Korean financial institution, including any of its branches, offices, or subsidiaries, with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving a North Korean financial institution, including any of its branches, offices, or subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account. Covered financial institutions should implement appropriate risk- based procedures to identify transactions involving a North Korean financial institution. A covered financial institution may, for example, have knowledge through transaction screening software that a correspondent account processes transactions for a North Korean financial institution. The purpose of the notice requirement is to aid cooperation with correspondent account holders in preventing transactions involving a North Korean financial institution from accessing the U.S. financial system. FinCEN does not require or expect a covered financial institution to obtain a certification from any of its correspondent account holders that access will not be provided to comply with this notice requirement. Methods of compliance with the notice requirement could include, for example, transmitting a notice by mail, fax, or email. The notice should be transmitted whenever a covered financial institution knows or has reason to believe that a foreign correspondent account holder provides services to a North Korean financial institution. Special due diligence also includes implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving North Korean financial institutions. A covered financial institution is expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed a North Korean financial institution as the financial institution of the originator or beneficiary, or otherwise referenced a North Korean financial institution in a manner detectable under the financial institution's normal screening mechanisms. An appropriate screening mechanism could be the mechanisms used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC. A covered financial institution is also required to implement risk- based procedures to identify indirect use of its correspondent accounts, including through methods used to disguise the originator or originating institution of a transaction. As noted above, and in the NOF, FinCEN is concerned that a North Korean financial institution may attempt to disguise its transactions through the use of front companies, which would not explicitly identify the North Korean institution as an involved party in the transaction. A financial institution may develop a suspicion of such misuse based on other information in its possession, patterns of transactions, or any other method available to it based on its existing systems. Under this rule, a covered financial institution that knows or has reason to believe that a foreign bank's correspondent account is being used to process a transaction involving a North Korean financial institution must take all appropriate steps to attempt to verify and prevent such use. Such steps may include a notification to its correspondent account holder requesting further information regarding a transaction, requesting corrective action to address the perceived risk, and, where necessary, terminating the correspondent account. If a covered financial institution deems it appropriate to terminate a correspondent account, it may re-establish such an account if it determines that the account will not be used to process transactions involving North Korean financial institutions. 3. Recordkeeping and Reporting Section 1010.659(b)(4) of this rule clarifies that paragraph (b) of the rule does not impose any reporting requirement upon any covered financial institution that is not otherwise required by applicable law or regulation. A [[Page 78720]] covered financial institution must, however, document its compliance with the notification requirement under section 1010.659(b)(3)(i)(A). VI. Regulatory Flexibility Act When an agency issues a final rule, the Regulatory Flexibility Act (``RFA'') requires the agency to ``prepare and make available for public comment an initial regulatory flexibility analysis'' that will ``describe the impact of the final rule on small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an analysis, if the final rule is not expected to have a significant economic impact on a substantial number of small entities. A. Prohibition on Covered Financial Institutions From Opening or Maintaining Correspondent Accounts With Certain Foreign Banks Under the Fifth Special Measure 1. Estimate of the Number of Small Entities to Whom the Fifth Special Measure Will Apply For purposes of the RFA, both banks and credit unions are considered small entities if they have less than $550,000,000 in assets.\19\ Of the estimated 6,192 banks, 80 percent have less than $550,000,000 in assets and are considered small entities.\20\ Of the estimated 6,021 credit unions, 92.5 percent have less than $550,000,000 in assets.\21\ --------------------------------------------------------------------------- \19\ Table of Small Business Size Standards Matched to North American Industry Classification System Codes, Small Business Administration Size Standards (SBA Feb. 26, 2016) [hereinafter ``SBA Size Standards'']. (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf). \20\ Federal Deposit Insurance Corporation, Find an Institution, http://www2.fdic.gov/idasp/main.asp; select Size or Performance: Total Assets, type Equal or less than $: ``550000'' and select Find. \21\ National Credit Union Administration, Credit Union Data, http://webapps.ncua.gov/customquery/; select Search Fields: Total Assets, select Operator: Less than or equal to, type Field Values: ``550,000,000'' and select Go. --------------------------------------------------------------------------- Broker-dealers are defined in 31 CFR 1010.100(h) as those broker- dealers required to register with the Securities and Exchange Commission (SEC). For the purposes of the RFA, FinCEN relies on the SEC's definition of small business as previously submitted to the Small Business Administration (SBA). The SEC has defined the term small entity to mean a broker or dealer that: (1) Had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated debt) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this release.\22\ Based on SEC estimates, 17 percent of broker-dealers are classified as small entities for purposes of the RFA.\23\ --------------------------------------------------------------------------- \22\ 17 CFR 240.0-10(c). \23\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871 small broker-dealers of the 5,063 total registered broker-dealers). --------------------------------------------------------------------------- Futures commission merchants (FCMs) are defined in 31 CFR 1010.100(x) as those FCMs that are registered or required to be registered as a FCM with the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA), except persons who register pursuant to section 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2). Because FinCEN and the CFTC regulate substantially the same population, for the purposes of the RFA, FinCEN relies on the CFTC's definition of small business as previously submitted to the SBA. In the CFTC's ``Policy Statement and Establishment of Definitions of `Small Entities' for Purposes of the Regulatory Flexibility Act,'' the CFTC concluded that registered FCMs should not be considered to be small entities for purposes of the RFA.\24\ The CFTC's determination in this regard was based, in part, upon the obligation of registered FCMs to meet the capital requirements established by the CFTC. --------------------------------------------------------------------------- \24\ 47 FR 18618, 18619 (Apr. 30, 1982). --------------------------------------------------------------------------- For purposes of the RFA, an introducing broker-commodities dealer is considered small if it has less than $35,500,000 in gross receipts annually.\25\ Based on information provided by the National Futures Association, 95 percent of introducing brokers-commodities dealers have less than $35.5 million in adjusted net capital and are considered to be small entities. --------------------------------------------------------------------------- \25\ SBA Size Standards at 28. --------------------------------------------------------------------------- Mutual funds are defined in 31 CFR 1010.100(gg) as those investment companies that are open-end investment companies that are registered or are required to register with the SEC. For the purposes of the RFA, FinCEN relies on the SEC's definition of small business as previously submitted to the SBA. The SEC has defined the term ``small entity'' under the Investment Company Act to mean ``an investment company that, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.'' \26\ Based on SEC estimates, seven percent of mutual funds are classified as ``small entities'' for purposes of the RFA under this definition.\27\ --------------------------------------------------------------------------- \26\ 17 CFR 270.0-10. \27\ 78 FR 23637, 23658 (April 19, 2013). --------------------------------------------------------------------------- As noted above, 80 percent of banks, 92.5 percent of credit unions, 17 percent of broker-dealers, 95 percent of introducing broker- commodities dealers, no FCMs, and seven percent of mutual funds are small entities. B. Description of the Projected Reporting and Recordkeeping Requirements of the Fifth Special Measure The imposition of the fifth special measure requires covered financial institutions to provide a notification intended to aid cooperation from foreign correspondent account holders in preventing transactions involving North Korean financial institutions from being processed by the U.S. financial system. FinCEN estimates that the burden on institutions providing this notice is one hour. Covered financial institutions are also required to take reasonable measures to detect use of their correspondent accounts to process transactions involving North Korean financial institutions. All U.S. persons, including U.S. financial institutions, currently must comply with OFAC sanctions, and U.S. financial institutions have suspicious activity reporting requirements. U.S. financial institutions are currently subject to a range of sanctions prohibitions related to North Korea, which has limited their direct exposure to the North Korean financial system. More recently, on March 15, 2016, the President issued Executive Order 13722, which places additional sanctions on North Korea and has the effect of generally prohibiting U.S. financial institutions from processing transactions involving persons located in North Korea and the North Korean government, unless authorized by OFAC or exempt.\28\ Therefore, current transactional activity between U.S. financial institutions and North Korean banks is very constricted. Further, North Korea is subject to a range of United Nations sanctions resolutions and it has been consistently recognized by the FATF for its AML deficiencies. The special due diligence that is required [[Page 78721]] under this rule--i.e., the transmittal of notice to certain correspondent account holders, the screening of transactions to identify any use of correspondent accounts, and the implementation of risk-based measures to detect use of correspondent accounts--will not impose a significant additional economic burden upon small U.S. financial institutions. --------------------------------------------------------------------------- \28\ See E.O. 13722 ``Blocking Property of the Government of North Korea and the Workers Party of Korea, and Prohibiting Certain Transactions With Respect to North Korea'' (2016) (https://www.thefederalregister.org/fdsys/pkg/FR-2016-03-18/pdf/FR-2016-03-18.pdf). --------------------------------------------------------------------------- C. Certification For these reasons, FinCEN certifies that this final rulemaking would not have a significant impact on a substantial number of small businesses. VII. Paperwork Reduction Act The collection of information contained in this rule is being submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and has been assigned OMB Control Number 1506-0071. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid OMB control number. A. Information Collection Under the Fifth Special Measure The notification requirement in section 1010.659(b)(3)(i)(A) is intended to aid cooperation from correspondent account holders in denying North Korea access to the U.S. financial system. The information required to be maintained by section 1010.659(b)(4)(i) will be used by federal agencies and certain self-regulatory organizations to verify compliance by covered financial institutions with the provisions of 31 CFR 1010.659. The collection of information is mandatory. Description of Affected Financial Institutions: Banks, broker- dealers in securities, futures commission merchants and introducing brokers-commodities, money services businesses, and mutual funds. Estimated Number of Affected Financial Institutions: 5,000. Estimated Average Annual Burden in Hours per Affected Financial Institution: The estimated average burden associated with the collection of information in this rule is one hour per affected financial institution. Estimated Total Annual Burden: 5,000 hours. VIII. Executive Order 12866 Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. It has been determined that this rule is not a ``significant regulatory action'' for purposes of Executive Order 12866. List of Subjects in 31 CFR Part 1010 Administrative practice and procedure, Banks and banking, Brokers, Counter-money laundering, Counter-terrorism, Foreign banking. Authority and Issuance For the reasons set forth in the preamble, part 1010, chapter X of title 31 of the Code of Federal Regulations, is amended as follows: PART 1010--GENERAL PROVISIONS 0 1. The authority citation for part 1010 continues to read as follows: Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314, 5316-5332; Title III, sec. 314 Pub. L. 107-56, 115 Stat. 307; sec. 701 Pub. L. 114-74, 129 Stat. 599. 0 2. Subpart F of part 1010 is amended by adding Sec. 1010.659 to read as follows: Sec. 1010.659 Special measures against North Korea. (a) Definitions. For purposes of this section: (1) North Korean banking institution means any bank organized under North Korean law, or any agency, branch, or office located outside the United States of such a bank. (2) North Korean financial institution means all branches, offices, or subsidiaries of any foreign financial institution, as defined at Sec. 1010.605(f), chartered or licensed by North Korea, wherever located, including any branches, offices, or subsidiaries of such a financial institution operating in any jurisdiction, and any branch or office within North Korea of any foreign financial institution. (3) Foreign bank has the same meaning as provided in Sec. 1010.100(u). (4) Correspondent account has the same meaning as provided in Sec. 1010.605(c)(1)(i). (5) Covered financial institution has the same meaning as provided in Sec. 1010.605(e)(1). (6) Subsidiary means a company of which more than 50 percent of the voting stock or analogous equity interest is owned by another company. (b) Prohibition on accounts and due diligence requirements for covered financial institutions--(1) Opening or maintenance of correspondent accounts for a North Korean banking institution. A covered financial institution shall not open or maintain in the United States a correspondent account for, or on behalf of, a North Korean banking institution. (2) Prohibition on use of correspondent accounts involving North Korean financial institutions. A covered financial institution shall take reasonable steps to not process a transaction for the correspondent account of a foreign bank in the United States if such a transaction involves a North Korean financial institution. (3) Special due diligence of correspondent accounts to prohibit use. (i) A covered financial institution shall apply special due diligence to its foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving North Korean financial institutions. At a minimum, that special due diligence must include: (A) Notifying those foreign correspondent account holders that the covered financial institution knows or has reason to believe provide services to a North Korean financial institution that such correspondents may not provide a North Korean financial institution with access to the correspondent account maintained at the covered financial institution; and (B) Taking reasonable steps to identify any use of its foreign correspondent accounts by a North Korean financial institution, to the extent that such use can be determined from transactional records maintained in the covered financial institution's normal course of business. (ii) A covered financial institution shall take a risk-based approach when deciding what, if any, other due diligence measures it reasonably must adopt to guard against the use of its foreign correspondent accounts to process transactions involving North Korean financial institutions. (iii) A covered financial institution that knows or has reason to believe that a foreign bank's correspondent account has been or is being used to process transactions involving a North Korean financial institution shall take all appropriate steps to further investigate and prevent such access, including the notification of its correspondent account holder under paragraph (b)(3)(i)(A) of this section and, where necessary, termination of the correspondent account. (4) Recordkeeping and reporting. (i) A covered financial institution is required to document its compliance with the [[Page 78722]] notice requirement set forth in paragraph (b)(3)(i)(A) of this section. (ii) Nothing in this paragraph (b) shall require a covered financial institution to report any information not otherwise required to be reported by law or regulation. Dated: November 4, 2016. Jamal El-Hindi, Acting Director, Financial Crimes Enforcement Network. [FR Doc. 2016-27049 Filed 11-8-16; 8:45 am] BILLING CODE 4810-02-P
![Federal Register / Vol. 81, No. 217 / Wednesday, November 9, 2016 / Rules and Regulations 78715
Comp., p. 783; E.O. 13224, 66 FR 49079, 3 apply special due diligence to guard institutions. Section 311 identifies
CFR, 2001 Comp., p. 786; E.O. 13338, 69 FR against such use by North Korean factors for the Secretary to consider and
26751, 3 CFR, 2004 Comp., p 168; E.O. financial institutions. requires consultations with Federal
13637, 78 FR 16129, 3 CFR, 2014 Comp., p. agencies before making a finding that
DATES: This final rule is effective
223; Notice of November 12, 2015, 80 FR
70667 (November 13, 2015); Notice of December 9, 2016. reasonable grounds exist for concluding
January 20, 2016, 81 FR 3937 (January 22, FOR FURTHER INFORMATION CONTACT: The that a jurisdiction, institution, class of
2016); Notice of May 3, 2016, 81 FR 27293 FinCEN Resource Center, (800) 949– transactions or type of account is of
(May 5, 2016); Notice of August 4, 2016, 81 2732. primary money laundering concern. The
FR 52587 (August 8, 2016); Notice of statute also provides similar procedures,
SUPPLEMENTARY INFORMATION:
September 15, 2016, 81 FR 64343 (September including factors to consider and
19, 2016). I. Statutory Provisions consultation requirements for selecting
On October 26, 2001, the President and imposing the fifth special measure.
PART 744—[AMENDED]
signed into law the Uniting and II. FinCEN’s Section 311 Rulemaking
■ 2. The authority citation for 15 CFR Strengthening America by Providing Regarding North Korea
part 744 is revised to read as follows: Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, A. Notice of Finding Regarding North
Authority: 50 U.S.C. 4601 et seq.; 50 U.S.C. Korea
1701 et seq.; 22 U.S.C. 3201 et seq.; 42 U.S.C. Public Law 107–56 (the USA PATRIOT
2139a; 22 U.S.C. 7201 et seq.; 22 U.S.C. 7210; Act). Title III of the USA PATRIOT Act In a Notice of Finding (NOF)
E.O. 12058, 43 FR 20947, 3 CFR, 1978 Comp., amended the anti-money laundering published in the Federal Register on
p. 179; E.O. 12851, 58 FR 33181, 3 CFR, 1993 (AML) provisions of the Bank Secrecy June 2, 2016, FinCEN found that
Comp., p. 608; E.O. 12938, 59 FR 59099, 3 Act (BSA), codified at 12 U.S.C. 1829b, reasonable grounds exist for concluding
CFR, 1994 Comp., p. 950; E.O. 12947, 60 FR 12 U.S.C. 1951–1959, and 31 U.S.C. that the Democratic People’s Republic of
5079, 3 CFR, 1995 Comp., p. 356; E.O. 13026, 5311–5314, 5316–5332, to promote the Korea (DPRK or North Korea) is a
61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. prevention, detection, and prosecution jurisdiction of primary money
13099, 63 FR 45167, 3 CFR, 1998 Comp., p. of international money laundering and
208; E.O. 13222, 66 FR 44025, 3 CFR, 2001 laundering concern pursuant to 31
Comp., p. 783; E.O. 13224, 66 FR 49079, 3
the financing of terrorism. Regulations U.S.C. 5318A.2 FinCEN’s NOF noted
CFR, 2001 Comp., p. 786; Notice of implementing the BSA appear at 31 CFR four main areas of concern: North Korea
November 12, 2015, 80 FR 70667 (November Chapter X. The authority of the (1) uses state-controlled financial
13, 2015); Notice of January 20, 2016, 81 FR Secretary of the Treasury (the Secretary) institutions and front companies to
3937 (January 22, 2016); Notice of August 4, to administer the BSA and its conduct international financial
2016, 81 FR 52587 (August 8, 2016); Notice implementing regulations has been transactions that support the
of September 15, 2016, 81 FR 64343 delegated to the Director of FinCEN.1 proliferation of weapons of mass
(September 19, 2016). Section 311 of the USA PATRIOT Act destruction (WMD) and the
Dated: November 3, 2016. (Section 311), codified at 31 U.S.C. development of ballistic missiles in
Kevin J. Wolf, 5318A, grants FinCEN the authority, violation of international and U.S.
Assistant Secretary for Export
upon finding that reasonable grounds sanctions; (2) is subject to little or no
Administration. exist for concluding that a foreign bank supervision or anti-money
[FR Doc. 2016–27017 Filed 11–8–16; 8:45 am]
jurisdiction, financial institution, class laundering or combating the financing
of transactions, or type of account is of of terrorism (‘‘AML/CFT’’) controls; (3)
BILLING CODE 3510–33–P
‘‘primary money laundering concern,’’ has no mutual legal assistance treaty
to require domestic financial with the United States; and (4) relies on
institutions and financial agencies to the illicit and corrupt activity of high-
DEPARTMENT OF THE TREASURY take certain ‘‘special measures’’ to level officials to support its government.
address the primary money laundering In the NOF, FinCEN also noted that
Financial Crimes Enforcement Network
concern. The special measures the North Korean government continues
enumerated under Section 311 are to access the international financial
31 CFR Part 1010
prophylactic safeguards that defend the system to support its WMD and
RIN 1506–AB35 U.S. financial system from money conventional weapons programs
laundering and terrorist financing. through its use of aliases, agents, foreign
Imposition of Special Measure Against FinCEN may impose one or more of
North Korea as a Jurisdiction of individuals in multiple jurisdictions,
these special measures in order to and a long-standing network of front
Primary Money Laundering Concern protect the U.S. financial system from companies and North Korean embassy
AGENCY: Financial Crimes Enforcement these threats. Special measures one personnel which support illicit
Network (‘‘FinCEN’’), Treasury. through four, codified at 31 U.S.C. activities through banking, bulk cash,
5318A(b)(1)–(b)(4), impose additional and trade. Front company transactions
ACTION: Final rule.
recordkeeping, information collection, originating in foreign-based banks have
SUMMARY: FinCEN is issuing this final and reporting requirements on covered been processed through correspondent
rule to prohibit U.S. financial U.S. financial institutions. The fifth bank accounts in the United States and
institutions from opening or special measure, codified at 31 U.S.C. Europe. Further, the enhanced due
maintaining a correspondent account 5318A(b)(5), allows FinCEN to prohibit diligence required by United Nations
for, or on behalf of, North Korean or impose conditions on the opening or Security Council Resolutions (UNSCRs)
jstallworth on DSK7TPTVN1PROD with RULES
banking institutions. The rule further maintaining of correspondent or related to North Korea is undermined by
prohibits U.S. financial institutions payable-through accounts for the North Korean-linked front companies,
from processing transactions for the identified jurisdiction by U.S. financial which are often registered by non-North
correspondent account of a foreign bank 1 Therefore, references to the authority of the
Korean citizens, and which conceal
in the United States if such a transaction Secretary of the Treasury under Section 311 of the their activity through the use of indirect
involves a North Korean financial USA PATRIOT Act apply equally to the Director of
institution, and requires institutions to FinCEN. 2 81 FR 35441 (June 2, 2016).
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![78716 Federal Register / Vol. 81, No. 217 / Wednesday, November 9, 2016 / Rules and Regulations
payment methods and circuitous proposal of a prohibition under the fifth The prohibition on the opening or
transactions disassociated from the special measure, but recommended that maintaining of correspondent accounts
movement of goods or services. FinCEN also impose an additional imposed by the fifth special measure
special measure under 31 U.S.C. will help guard against the money
B. Notice of Proposed Rulemaking
5318A(b)(2) to require domestic laundering and WMD proliferation
In light of this Finding, in a Notice of financial institutions to obtain finance risks to the U.S. financial
Proposed Rulemaking (NPRM) beneficial ownership information of system posed by North Korean financial
published in the Federal Register on ‘‘property’’ held by nationals of North institutions and their front companies.
June 3, 2016, FinCEN (1) proposed a Korea or their representatives that is Imposing a prohibition under the fifth
prohibition on covered financial located in North Korea or that otherwise special measure also complements U.S.
institutions from opening or involves North Korea. The comment efforts to satisfy the requirement under
maintaining a correspondent account in explained that such a requirement UNSCR 2270 Paragraph 33, discussed in
the United States for, or on behalf of, a would help identify and expose section IV.A.1 below, for all UN member
North Korean banking institution; (2) networks of non-bank institutions and states to sever correspondent
proposed a prohibition on covered agents that establish and manage shell relationships with North Korean banks.
financial institutions from processing a or front companies on behalf of the
transaction involving a North Korean A. Discussion of Section 311 Factors
North Korean government.
financial institution through the United As described above and in the NOF, In determining which special
States correspondent account of a FinCEN shares the concerns raised by measures to implement to address the
foreign banking institution; and (3) the comment regarding North Korea’s finding that DPRK is of primary money
proposed a requirement for covered extensive use of deceptive financial laundering concern described in the
financial institutions to apply special practices, including the use of shell and NOF, FinCEN considered the following
due diligence to their foreign front companies to obfuscate the true factors:
correspondent accounts that is originator, beneficiary, and purpose 1. Whether Similar Action Has Been or
reasonably designed to guard against behind its transactions. However, Will Be Taken by Other Nations or
their use to process transactions FinCEN’s authority, as granted by Multilateral Groups Against North
involving North Korean financial Congress in 31 U.S.C. 5318A(b)(2), Korea
institutions.3 The comment period for applies only to information concerning
the NPRM closed on August 2, 2016. FinCEN’s action is consistent with
the beneficial ownership of ‘‘account[s]
The final rule is largely identical to that steps taken by the international
opened or maintained in the United
found in the June 2016 notice, except community to address North Korea’s
States’’ and thus would not extend to
that the term ‘‘North Korean banking illicit financial activity. Between 2006
information relating to the beneficial
institution’’ has been defined in order to and 2016, the United Nations Security
ownership of property writ large, or to
clarify the types of institutions subject Council has adopted multiple
property outside the United States as
to the prohibition, and the term ‘‘foreign resolutions, 1718,5 1874,6 2087,7 2094,8
the comment suggested. Nonetheless,
banking institution’’ has been replaced and 2270,9 which generally restrict
FinCEN believes that the risks to the
by ‘‘foreign bank,’’ with a corresponding North Korea’s financial and operational
U.S. financial system posed by North activities related to its nuclear and
change in the term’s definition to Korea can be addressed through the
conform with the definition of ‘‘foreign missile programs and conventional arms
prohibition on correspondent accounts sales. Most recently, in March 2016, the
bank’’ under 31 CFR 1010.100(u). The and the related due diligence. Taken
final rule also explicitly incorporates United Nations adopted UNSCR 2270,
together, these requirements should, by which imposes additional sanctions on
the special due diligence concepts into and large, help prevent the flow of illicit
the prohibition on processing North Korea in response to a January 6,
funds from North Korea from entering 2016 nuclear test and February 7, 2016
transactions involving North Korean the U.S. financial system. Accordingly,
financial institutions. By incorporating launch using ballistic missile
FinCEN believes that the prohibition technology. This UNSCR contains
these due diligence requirements into and due diligence requirements
the prohibition, the final rule clarifies provisions that generally require nations
imposed under the fifth special measure to: (1) Prohibit North Korean banks from
that if a covered financial institution sufficiently address both FinCEN’s
suspects transactions involve a North opening branches in their territory or
concerns and the concerns raised by the engaging in certain correspondent
Korean financial institution, then the comment.
covered financial institution shall take relationships with these banks; (2)
steps to further investigate and prevent IV. Imposition of a Special Measure terminate existing representative offices
such transactions, including steps that Against North Korea as a Jurisdiction of or subsidiaries, branches, and
do not necessarily lead to the closing of Primary Money Laundering Concern correspondent accounts with North
the account. Korean banks; (3) prohibit their
In light of the Finding as detailed in
As further described below, FinCEN is financial institutions from opening new
the NOF, and based upon additional
adopting this proposal as a final rule. In representative offices or subsidiaries,
consultations with required Federal branches, or bank accounts in North
so doing, FinCEN considered public agencies and departments, and the
comment and the relevant statutory Korea; and (4) close existing
consideration of public comments, the
factors, and engaged in the required statutory factors discussed below, and 5 See United Nations Security Council Resolution
consultations prescribed by 31 U.S.C. all relevant factors, FinCEN has (‘‘UNSCR’’) 1718 (http://www.un.org/en/ga/search/
5318A. concluded that the prohibition under view_doc.asp?symbol=S/RES/1718(2006)).
jstallworth on DSK7TPTVN1PROD with RULES
6 See UNSCR 1874 (http://www.un.org/en/ga/
III. Consideration of Comment the fifth special measure as proposed in
search/view_doc.asp?symbol=S/RES/1874(2009).
the NPRM is the appropriate course of 7 See UNSCR 2087 (http://www.un.org/en/ga/
In response to the NPRM and NOF, action.4 search/view_doc.asp?symbol=S/RES/2087(2013)).
FinCEN received only one comment. 8 See UNSCR 2094 (http://www.un.org/en/ga/
The comment agreed with FinCEN’s 4 Throughout the rulemaking process, FinCEN has search/view_doc.asp?symbol=S/RES/2094(2013)).
consulted with relevant departments and agencies 9 See UNSCR 2270 (http://www.un.org/en/ga/
3 81 FR 35665 (June 3, 2016). in accordance with 5318A. search/view_doc.asp?symbol=S/RES/2270(2016)).
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![78720 Federal Register / Vol. 81, No. 217 / Wednesday, November 9, 2016 / Rules and Regulations
covered financial institution must, had total capital (net worth plus has net assets of $50 million or less as
however, document its compliance with subordinated debt) of less than $500,000 of the end of its most recent fiscal
the notification requirement under on the last business day of the preceding year.’’ 26 Based on SEC estimates, seven
section 1010.659(b)(3)(i)(A). fiscal year (or in the time that it has percent of mutual funds are classified as
been in business if shorter); and (2) is ‘‘small entities’’ for purposes of the RFA
VI. Regulatory Flexibility Act
not affiliated with any person (other under this definition.27
When an agency issues a final rule, than a natural person) that is not a small As noted above, 80 percent of banks,
the Regulatory Flexibility Act (‘‘RFA’’) business or small organization as 92.5 percent of credit unions, 17 percent
requires the agency to ‘‘prepare and defined in this release.22 Based on SEC of broker-dealers, 95 percent of
make available for public comment an estimates, 17 percent of broker-dealers introducing broker-commodities
initial regulatory flexibility analysis’’ are classified as small entities for dealers, no FCMs, and seven percent of
that will ‘‘describe the impact of the purposes of the RFA.23 mutual funds are small entities.
final rule on small entities.’’ (5 U.S.C. Futures commission merchants
603(a)). Section 605 of the RFA allows B. Description of the Projected
(FCMs) are defined in 31 CFR Reporting and Recordkeeping
an agency to certify a rule, in lieu of 1010.100(x) as those FCMs that are
preparing an analysis, if the final rule is Requirements of the Fifth Special
registered or required to be registered as Measure
not expected to have a significant a FCM with the Commodity Futures
economic impact on a substantial Trading Commission (CFTC) under the The imposition of the fifth special
number of small entities. Commodity Exchange Act (CEA), except measure requires covered financial
persons who register pursuant to section institutions to provide a notification
A. Prohibition on Covered Financial intended to aid cooperation from foreign
Institutions From Opening or 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2).
Because FinCEN and the CFTC regulate correspondent account holders in
Maintaining Correspondent Accounts preventing transactions involving North
With Certain Foreign Banks Under the substantially the same population, for
Korean financial institutions from being
Fifth Special Measure the purposes of the RFA, FinCEN relies
processed by the U.S. financial system.
on the CFTC’s definition of small
1. Estimate of the Number of Small FinCEN estimates that the burden on
business as previously submitted to the
Entities to Whom the Fifth Special institutions providing this notice is one
SBA. In the CFTC’s ‘‘Policy Statement
Measure Will Apply hour. Covered financial institutions are
and Establishment of Definitions of
For purposes of the RFA, both banks also required to take reasonable
‘Small Entities’ for Purposes of the
and credit unions are considered small measures to detect use of their
Regulatory Flexibility Act,’’ the CFTC
entities if they have less than correspondent accounts to process
concluded that registered FCMs should
$550,000,000 in assets.19 Of the transactions involving North Korean
not be considered to be small entities for
estimated 6,192 banks, 80 percent have financial institutions.
purposes of the RFA.24 The CFTC’s
All U.S. persons, including U.S.
less than $550,000,000 in assets and are determination in this regard was based, financial institutions, currently must
considered small entities.20 Of the in part, upon the obligation of registered comply with OFAC sanctions, and U.S.
estimated 6,021 credit unions, 92.5 FCMs to meet the capital requirements financial institutions have suspicious
percent have less than $550,000,000 in established by the CFTC. activity reporting requirements. U.S.
assets.21 For purposes of the RFA, an
Broker-dealers are defined in 31 CFR financial institutions are currently
introducing broker-commodities dealer subject to a range of sanctions
1010.100(h) as those broker-dealers is considered small if it has less than
required to register with the Securities prohibitions related to North Korea,
$35,500,000 in gross receipts which has limited their direct exposure
and Exchange Commission (SEC). For annually.25 Based on information
the purposes of the RFA, FinCEN relies to the North Korean financial system.
provided by the National Futures More recently, on March 15, 2016, the
on the SEC’s definition of small Association, 95 percent of introducing
business as previously submitted to the President issued Executive Order 13722,
brokers-commodities dealers have less which places additional sanctions on
Small Business Administration (SBA). than $35.5 million in adjusted net
The SEC has defined the term small North Korea and has the effect of
capital and are considered to be small generally prohibiting U.S. financial
entity to mean a broker or dealer that: entities.
(1) Had total capital (net worth plus institutions from processing
Mutual funds are defined in 31 CFR transactions involving persons located
subordinated liabilities) of less than 1010.100(gg) as those investment
$500,000 on the date in the prior fiscal in North Korea and the North Korean
companies that are open-end investment government, unless authorized by OFAC
year as of which its audited financial companies that are registered or are
statements were prepared pursuant to or exempt.28 Therefore, current
required to register with the SEC. For
Rule 17a–5(d) or, if not required to file transactional activity between U.S.
the purposes of the RFA, FinCEN relies
such statements, a broker or dealer that financial institutions and North Korean
on the SEC’s definition of small
banks is very constricted. Further, North
business as previously submitted to the
19 Table of Small Business Size Standards Korea is subject to a range of United
SBA. The SEC has defined the term
Matched to North American Industry Classification Nations sanctions resolutions and it has
‘‘small entity’’ under the Investment
System Codes, Small Business Administration Size been consistently recognized by the
Standards (SBA Feb. 26, 2016) [hereinafter ‘‘SBA Company Act to mean ‘‘an investment
FATF for its AML deficiencies. The
Size Standards’’]. (https://www.sba.gov/sites/ company that, together with other
default/files/files/Size_Standards_Table.pdf). special due diligence that is required
investment companies in the same
jstallworth on DSK7TPTVN1PROD with RULES
20 Federal Deposit Insurance Corporation, Find an
group of related investment companies, 26 17 CFR 270.0–10.
Institution, http://www2.fdic.gov/idasp/main.asp;
select Size or Performance: Total Assets, type Equal 27 78 FR 23637, 23658 (April 19, 2013).
22 17 CFR 240.0–10(c).
or less than $: ‘‘550000’’ and select Find. 28 See E.O. 13722 ‘‘Blocking Property of the
21 National Credit Union Administration, 23 76 FR 37572, 37602 (June 27, 2011) (the SEC
Government of North Korea and the Workers Party
Credit Union Data, http://webapps.ncua.gov/ estimates 871 small broker-dealers of the 5,063 total of Korea, and Prohibiting Certain Transactions With
customquery/; select Search Fields: Total Assets, registered broker-dealers). Respect to North Korea’’ (2016) (https://
24 47 FR 18618, 18619 (Apr. 30, 1982).
select Operator: Less than or equal to, type Field www.gpo.gov/fdsys/pkg/FR-2016-03-18/pdf/FR-
Values: ‘‘550,000,000’’ and select Go. 25 SBA Size Standards at 28. 2016-03-18.pdf).
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![78722 Federal Register / Vol. 81, No. 217 / Wednesday, November 9, 2016 / Rules and Regulations
notice requirement set forth in p.m. on November 18, 2016. This action TCM substitution provisions contained
paragraph (b)(3)(i)(A) of this section. is being taken to provide for the safety in the Clean Air Act (CAA). EPA
(ii) Nothing in this paragraph (b) shall of life on navigable waterways during concurred on this substitution on May
require a covered financial institution to the marine event. Entry into the safety 31, 2016. In this administrative action,
report any information not otherwise zone is prohibited unless authorized by EPA is updating the non-regulatory
required to be reported by law or the COTP or a designated provisions of the Texas SIP to reflect the
regulation. representative. Persons or vessels substitution. In summary, the
Dated: November 4, 2016. desiring entrance into or passage substitution was a replacement of a
Jamal El-Hindi, through the safety zone must request High-Occupancy Vehicle (HOV) Lane
permission from the COTP or a TCM within the DFW 8-hour ozone
Acting Director, Financial Crimes
Enforcement Network. designated representative. If permission nonattainment area with traffic
is granted, all persons and vessels shall signalization projects. EPA has
[FR Doc. 2016–27049 Filed 11–8–16; 8:45 am]
comply with the instructions of the determined that this action falls under
BILLING CODE 4810–02–P
COTP or designated representative. the ‘‘good cause’’ exemption in the
Vessels may safely transit outside the Administrative Procedures Act (APA)
regulated area but may not anchor, which, upon finding ‘‘good cause,’’
DEPARTMENT OF HOMELAND block, loiter in, or impede the regulated authorizes an agency to make an action
SECURITY area. effective immediately, thereby avoiding
This notice of enforcement is issued the 30-day delayed effective date
Coast Guard
under authority of 33 CFR 165.801 and otherwise provided for in the APA.
5 U.S.C. 552(a). In addition to this DATES: This action is effective
33 CFR Part 165
notice in the Federal Register, the Coast November 9, 2016.
[Docket No. USCG–2016–0954] Guard will provide the maritime ADDRESSES: The EPA has established a
community with advance notification of docket for this action under Docket ID
Eighth Coast Guard District Annual this enforcement period via Local No. EPA–R06–OAR–2016–0329. All
Safety Zones; Duquesne Light/Santa Notice to Mariners and updates via documents in the docket are listed on
Spectacular; Monongahela River Mile Marine Information Broadcasts. the http://www.regulations.gov Web
0.00–0.22, Allegheny River Mile 0.00– site. Although listed in the index, some
0.25, Ohio River Mile 0.0–0.3; L. Mcclain, Jr.,
information is not publicly available,
Pittsburgh, Pennsylvania Commander, U.S. Coast Guard, Captain of e.g., Confidential Business Information
the Port Pittsburgh.
AGENCY: Coast Guard, DHS. or other information whose disclosure is
[FR Doc. 2016–27003 Filed 11–8–16; 8:45 am]
ACTION: Notice of enforcement of restricted by statute. Certain other
BILLING CODE 9110–04–P material, such as copyrighted material,
regulation.
is not placed on the Internet and will be
SUMMARY: The Coast Guard will enforce publicly available only in hard copy
a safety zone for the Duquesne Light/ ENVIRONMENTAL PROTECTION form. Publicly available docket
Santa Spectacular on the Monongahela AGENCY materials are available either
River mile 0.00–0.22, Allegheny River electronically through http://
mile 0.00–0.25, and Ohio River mile 40 CFR Part 52 www.regulations.gov or in hard copy at
0.0–0.3 extending the entire width of [EPA–R06–OAR–2016–0329; FRL–9954–36– the EPA Region 6, 1445 Ross Avenue,
the three rivers. This zone is needed to Region 6] Suite 700, Dallas, Texas 75202–2733.
protect vessels transiting the area and FOR FURTHER INFORMATION CONTACT:
event spectators from the hazards Approval and Promulgation of Jeffrey Riley, 214–665–8542,
associated with the barge based firework Implementation Plans: Texas; riley.jeffrey@epa.gov.
event. During the enforcement period, Approval of Substitution for SUPPLEMENTARY INFORMATION: On May
entry into, transiting, or anchoring in Transportation Control Measures 31, 2016, EPA issued a concurrence
the safety zone is prohibited to all letter to TCEQ stating that the
AGENCY: Environmental Protection
vessels not registered with the sponsor substitution of the DFW area US67/IH–
Agency (EPA).
as participants or official patrol vessels, 35E HOV Lane TCM with traffic
unless specifically authorized by the ACTION: Final rule; notice of
administrative change. signalization project TCMs met the CAA
Captain of the Port (COTP) Pittsburgh or section 176(c)(8) requirements for
a designated representative. SUMMARY: The Environmental Protection substituting TCMs in an area’s approved
DATES: The regulations in 33 CFR Agency (EPA) is making an SIP. See also EPA’s Guidance for
165.801 Table 1, Sector Ohio Valley, No. administrative change to update the Implementing the CAA section 176(c)(8)
66 will be enforced from 8 p.m. until Code of Federal Regulations (CFR) to Transportation Control Measure
9:15 p.m. on November 18, 2016. reflect a change made to the Texas State Substitution and Addition Provision
FOR FURTHER INFORMATION CONTACT: If Implementation Plan (SIP) on May 31, contained in the Safe, Accountable,
you have questions about this notice of 2016, as a result of EPA’s concurrence Flexible, Efficient Transportation Equity
enforcement, call or email MST1 on a substitute transportation control Act: A Legacy for Users which was
Jennifer Haggins, Marine Safety Unit measure (TCM) for the Dallas/Ft. Worth signed into law on August 10, 2005,
Pittsburgh, U.S. Coast Guard; telephone (DFW) portion of the Texas SIP. On dated January 2009. The DFW area
jstallworth on DSK7TPTVN1PROD with RULES
412–221–0807, email August 16, 2016, the State of Texas, US67/IH–35E HOV Lane TCM was
Jennifer.L.Haggins@uscg.mil. through the Texas Commission on originally approved into the SIP on
SUPPLEMENTARY INFORMATION: The Coast Environmental Quality (TCEQ), September 27, 2005 (70 FR 56374).1 The
Guard will enforce the Safety Zone for submitted a revision to the Texas SIP 1 EPA’s May 31, 2016 concurrence letter to TCEQ
the annual Pittsburgh Santa Spectacular requesting that EPA update its SIP to provided an incorrect SIP citation for EPA approval
listed in 33 CFR 165.801 Table 1, Sector reflect a substitution of a TCM. The of the US67/IH–35E HOV Lane TCM. September 27,
Ohio Valley, No. 66 from 8 p.m. to 9:15 substitution was made pursuant to the 2005 (70 FR 56374) is the correct SIP citation.
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Document Created: 2016-11-09 01:39:46
Document Modified: 2016-11-09 01:39:46
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final rule. | |
| Dates | This final rule is effective December 9, 2016. | |
| Contact | The FinCEN Resource Center, (800) 949- 2732. | |
| FR Citation | 81 FR 78715 | |
| RIN Number | 1506-AB35 | |
| CFR Associated | Administrative Practice and Procedure; Banks and Banking; Brokers; Counter-Money Laundering; Counter-Terrorism and Foreign Banking |
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