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(3) Covered financial institution has to document its compliance with the include the agency name and the the same meaning as provided in notice requirement set forth in Regulatory Information Number (RIN) § 103.175(f)(2) and also includes: paragraph (b)(2)(i)(A) of this section. for this proposed rulemaking. All (i) A futures commission merchant or (ii) Nothing in this section shall comments received will be posted an introducing broker registered, or require a covered financial institution to without change to http:// required to register, with the report any information not otherwise www.fincen.gov, including any personal Commodity Futures Trading required to be reported by law or information provided. Comments may Commission under the Commodity regulation. be inspected at FinCEN between 10 a.m. Exchange Act (7 U.S.C. 1 et seq.); and Dated: August 18, 2004. and 4 p.m., in the FinCEN reading room (ii) An investment company (as in Washington, DC. Persons wishing to William J. Fox, defined in section 3 of the Investment inspect the comments submitted must Company Act of 1940 (15 U.S.C. 80a–5)) Director, Financial Crimes Enforcement request an appointment by telephoning Network. that is an open-end company (as defined (202) 354–6400 (not a toll-free number). [FR Doc. 04–19266 Filed 8–23–04; 8:45 am] in section 5 of the Investment Company FOR FURTHER INFORMATION CONTACT: Act (15 U.S.C. 80a–5)) and that is BILLING CODE 4810–02–P Office of Regulatory Programs, FinCEN, registered, or required to register, with at (202) 354–6400 or Office of Chief the Securities and Exchange DEPARTMENT OF THE TREASURY Counsel, FinCEN, at (703) 905–3590 Commission under section 8 of the (not toll-free numbers). Investment Company Act (15 U.S.C. 31 CFR Part 103 SUPPLEMENTARY INFORMATION: 80a–8). (4) Subsidiary means a company of RIN 1506–AA65 I. Background which more than 50 percent of the A. Statutory Provisions voting stock or analogous equity interest Financial Crimes Enforcement is owned by another company. Network; Amendment to the Bank On October 26, 2001, the President (b) Requirements for covered financial Secrecy Act Regulations—Imposition signed into law the Uniting and institutions—(1) Prohibition on direct of Special Measure Against First Strengthening America by Providing use of correspondent accounts. A Merchant Bank OSH Ltd, Including Its Appropriate Tools Required to Intercept covered financial institution shall Subsidiaries, FMB Finance Ltd, First and Obstruct Terrorism (USA PATRIOT terminate any correspondent account Merchant International Inc, First Act) Act of 2001 (the USA Patriot Act), that is established, maintained, Merchant Finance Ltd, and First Pub. L. 107–56. Title III of the USA administered, or managed in the United Merchant Trust Ltd, as a Financial Patriot Act amends the anti-money States for, or on behalf of, Infobank. Institution of Primary Money laundering provisions of the Bank (2) Special due diligence of Laundering Concern Secrecy Act (BSA), codified at 12 U.S.C. correspondent accounts to prohibit 1829b, 12 U.S.C. 1951–1959, and 31 AGENCY: Financial Crimes Enforcement U.S.C. 5311–5314, 5316–5332, to indirect use. (i) A covered financial Network (FinCEN), Treasury. institution shall apply special due promote the prevention, detection, and ACTION: Notice of proposed rulemaking. diligence to its correspondent accounts prosecution of international money laundering and the financing of that is reasonably designed to guard SUMMARY: FinCEN is issuing this notice terrorism. Regulations implementing the against their indirect use by Infobank. of proposed rulemaking to impose a BSA appear at 31 CFR Part 103. The At a minimum, that special due special measure against First Merchant authority of the Secretary of the diligence must include: Bank OSH Ltd as a financial institution Treasury (Secretary) to administer the (A) Notifying correspondent account of primary money laundering concern, BSA and its implementing regulations holders that they may not provide pursuant to the authority contained in has been delegated to the Director of Infobank with access to the 31 U.S.C. 5318A of the Bank Secrecy FinCEN. correspondent account maintained at Act. the covered financial institution; and Section 311 of the USA Patriot Act (B) Taking reasonable steps to identify DATES: Written comments on the notice (section 311) added section 5318A to any indirect use of its correspondent of proposed rulemaking must be the BSA, granting the Secretary the accounts by Infobank, to the extent that submitted on or before September 23, authority, upon finding that reasonable such indirect use can be determined 2004. grounds exist for concluding that a from transactional records maintained ADDRESSES: You may submit comments, foreign jurisdiction, institution, class of in the covered financial institution’s identified by RIN 1506–AA65, by any of transactions, or type of account is of normal course of business. the following methods: ‘‘primary money laundering concern,’’ (ii) A covered financial institution • Federal e-rulemaking portal: http:// to require domestic financial shall take a risk-based approach when www.regulations.gov. Follow the institutions and financial agencies to deciding what, if any, additional due instructions for submitting comments. take certain ‘‘special measures’’ against diligence measures it should adopt to • E-mail: the primary money laundering concern. guard against the indirect use of its [email protected]. Include Section 311 identifies factors for the correspondent accounts by Infobank. RIN 1506–AA65 in the subject line of Secretary to consider and Federal (iii) A covered financial institution the message. agencies to consult before the Secretary that obtains knowledge that a • Mail: FinCEN, P.O. Box 39, Vienna, may find that reasonable grounds exist correspondent account is being used by VA 22183. Include RIN 1506–AA65 in for concluding that a jurisdiction, the foreign bank to provide indirect the body of the text. institution, or transaction is of primary access to Infobank, shall take all Instructions: It is preferable for money laundering concern. The statute appropriate steps to block such indirect comments to be submitted by electronic also provides similar procedures, i.e., access, including, where necessary, mail because paper mail in the factors and consultation requirements, terminating the correspondent account. Washington, DC, area may be delayed. for selecting the imposition of specific (3) Recordkeeping and reporting. (i) A Please submit comments by one method special measures against the primary covered financial institution is required only. All submissions received must money laundering concern.

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Taken as a whole, section 311 the imposition of special measures, the financial institution of primary money provides the Secretary with a range of Secretary follows procedures similar to laundering concern. This special options that can be adapted to target those for finding a foreign financial measure may be imposed only through specific money laundering and terrorist institution to be of primary money the issuance of a regulation. financing concerns most effectively. laundering concern, but performs Cyprus was divided in 1974 when a These options give the Secretary the additional consultations and considers coup d’etat directed from Greece authority to bring additional and useful additional factors. Section 311 requires induced the Turkish military to pressure on those jurisdictions and the Secretary to consult with other intervene. Since then, the southern part institutions that pose money laundering appropriate Federal agencies and of the country has been under the threats. Through the imposition of parties 2 and to consider the following control of the Government of the various special measures, the Secretary specific factors: Republic of Cyprus. The northern part is can gain more information about the • Whether similar action has been or controlled by a Turkish Cypriot concerned jurisdictions, institutions, is being taken by other nations or administration that in 1983 proclaimed transactions, and accounts; monitor multilateral groups; itself the ‘‘Turkish Republic of Northern more effectively the respective • Whether the imposition of any Cyprus’’ (‘‘TRNC’’).4 Turkey is the only jurisdictions, institutions, transactions, particular special measure would create country that recognizes the ‘‘TRNC.’’ and accounts; and/or protect U.S. a significant competitive disadvantage, The ‘‘TRNC’’ has a sizeable offshore financial institutions from involvement including any undue cost or burden sector that is not subject to effective with jurisdictions, institutions, associated with compliance, for anti-money laundering regulation. The transactions, or accounts that pose a financial institutions organized or offshore sector consists of 33 banks and money laundering concern. Before licensed in the United States; approximately 54 international business • making a finding that reasonable The extent to which the action or companies. Under Turkish Cypriot law, grounds exist for concluding that a the timing of the action would have a the offshore banks may not conduct foreign financial institution is of significant adverse systemic impact on business with ‘‘TRNC’’ residents and primary money laundering concern, the the international payment, clearance, may not deal in cash. The offshore Secretary is required to consult with and settlement system, or on legitimate entities are audited by the Turkish both the Secretary of State and the business activities involving the Cypriot ‘‘Central Bank’’ and are required Attorney General. particular institution; and • to submit a yearly report on their In addition to these consultations, the The effect of the action on United activities. However, the ‘‘Central Bank’’ Secretary, when finding that a foreign States national security and foreign has no regulatory authority over the 3 financial institution is of primary policy. offshore banks and can neither grant nor money laundering concern, is required A. ‘‘Turkish Republic of Northern revoke licenses. Instead, the Turkish by section 311 to consider ‘‘such Cyprus’’ Cypriot ‘‘Ministry of the Interior’’ information as the Secretary determines performs this function, which leaves the to be relevant, including the following In this proposed rulemaking, FinCEN proposes to impose the fifth special process open to politicization and potentially relevant factors:’ possible corruption. Although a recently • measure (31 U.S.C. 5318A(b)(5)) against The extent to which such financial proposed law would have restricted the institution is used to facilitate or First Merchant Bank OSH Ltd (First Merchant Bank or the Bank). The fifth granting of new bank licenses to only promote money laundering in or those banks already having licensees in through the jurisdiction; special measure prohibits or imposes • conditions upon the opening or an OECD country, the law never passed. The extent to which such financial The Turkish Cypriot anti-money institution is used for legitimate maintaining of correspondent or payable-through accounts for the foreign laundering law became effective in business purposes in the jurisdiction; 1999. Although the law, on paper, is a and significant improvement over the money • The extent to which such action is correspondent accounts; and (5) prohibition or conditions on the opening or maintaining of laundering controls previously in place, sufficient to ensure, with respect to correspondent or payable-through accounts. 31 the Government of the ‘‘TRNC’’ has transactions involving the institution U.S.C. 5318A(b)(1)–(5). For a complete discussion received few suspicious activity reports operating in the jurisdiction, that the of the range of possible countermeasures, see 68 FR from financial institutions and has been purposes of the BSA continue to be 18917 (April 17, 2003) (proposing to impose special measures against Nauru). lax in enforcing the law.5 The fact that fulfilled, and to guard against 2 Section 5318A(a)(4)(A) requires the Secretary to the ‘‘TRNC’’ is recognized only by international money laundering and consult with the Chairman of the Board of Turkey prevents ‘‘TRNC’’ officials from other financial crimes. Governors of the Federal Reserve System, any other appropriate Federal banking agency, the Secretary receiving training or funding from If the Secretary determines that international organizations with reasonable grounds exist for concluding of State, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission experience in combating money that a foreign financial institution is of (CFTC), the National Credit Union Administration laundering. primary money laundering concern, the (NCUA), and, in the sole discretion of the Secretary, There continues to be evidence that Secretary must determine the ‘‘such other agencies and interested parties as the Secretary may find to be appropriate.’’ The narcotics trade with Turkey and Britain appropriate special measure(s) to consultation process must also include the Attorney and money laundering are conducted in address the specific money laundering General, if the Secretary is considering prohibiting or through the ‘‘TRNC.’’ 6 Criminals risks. Section 311 provides a range of or imposing conditions upon the opening or reportedly use casinos operating in the special measures that can be imposed, maintaining of a correspondent account by any domestic financial institution or domestic financial individually, jointly, in any agency for the foreign financial institution of 4 Because the United States does not recognize 1 combination, and in any sequence. In primary money laundering concern. the ‘‘Turkish Republic of Northern Cyprus,’’ all 3 Classified information used in support of a references to the country or government in this 1 Available special measures include requiring: section 311 designation and measure(s) may be proposed rulemaking are placed within quotation (1) Recordkeeping and reporting of certain financial submitted by Treasury to a reviewing court ex parte marks. transactions; (2) collection of information relating to and in camera. See section 376 of the Intelligence 5 See U.S. Department of State, 2003 International beneficial ownership; (3) collection of information Authorization Act for Fiscal Year 2004, Pub. L. Narcotics Control Strategy Report, issued March 1, relating to certain payable-through accounts; (4) 108–177 (amending 31 U.S.C. 5318A by adding new 2004 (INCSR). collection of information relating to certain paragraph (f)). 6 INCSR, supra note 11.

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‘‘TRNC’’ and Turkish Cypriot banks Merchant Finance Ltd (Ireland), and through accounts held by First licensed to operate offshore to launder First Merchant Trust Ltd (Ireland). For Merchant Bank at U.S. financial money from their illegal activities. The the purposes of this document, unless institutions. jurisdiction’s 21 primarily Turkish- the context dictates otherwise, In January 2003, a Federal grand jury mainland owned casinos are essentially references to First Merchant Bank sitting in the Southern District of New unregulated. ‘‘TRNC’’ officials believe include FMB Finance Ltd, First York indicted First Merchant Bank’s that much of the currency generated by Merchant International Inc, First President, Chairman, and General these casinos is transported directly to Merchant Finance Ltd, and First Manager, Dr. Hakki Yaman Namli, as a Turkey without entering the ‘‘TRNC’’ Merchant Trust Ltd, and any other co-conspirator with an associate, Ralph banking system.7 And, as noted above, branch, office, or subsidiary of First Jarson,13 in a scheme to market ‘‘credit the licensing process and supervision of Merchant Bank operating in the enhancement’’ products, which offshore banks by the Government of the ‘‘TRNC’’ or in any other jurisdiction. consisted of deceptive bank documents ‘‘TRNC’’ is not rigorous. Although showing that a customer had assets that II. Imposition of Special Measure Turkish Cypriot law prohibits did not exist, and to sell worthless Against First Merchant Bank, Including 14 individuals entering or leaving the ‘‘credit facilities’’ to investors. Its Subsidiaries, FMB Finance Ltd, First ‘‘TRNC’’ from transporting more than Allegedly, the conspirators worked with Merchant International Inc, First the equivalent of $10,000 in currency, First Merchant Bank to produce and Merchant Finance Ltd, and First Central Bank officials note that this law market the deceptive bank documents Merchant Trust Ltd, as a Financial is difficult to enforce, given the large and worthless credit facilities. Because Institution of Primary Money volume of travelers between Turkey and Dr. Hakki Yaman Namli became a Laundering Concern the ‘‘TRNC’’ and the growing number of fugitive from justice he was not tried on individuals crossing the U.N.-patrolled A. Finding the indictment; however, his associate, buffer zone since travel restrictions were Ralph Jarson, was convicted on six Based upon a review and analysis of felony counts, including one count of relaxed between north and south Cyprus relevant information, consultations with in 2003.8 conspiring with Dr. Hakki Yaman Namli relevant Federal agencies and to engage in wire fraud, and five counts B. First Merchant Bank OSH Ltd departments, and after consideration of of committing wire fraud, on October the factors enumerated in section 311, 30, 2003. First Merchant Bank operates out of the Secretary, through his delegate, the offices in Lefkosa/Nicosia, ‘‘TRNC,’’ and The indictment on which Ralph Director of FinCEN, has found that Jarson was tried describes two different has 21 employees. First Merchant Bank reasonable grounds exist for concluding was licensed in the ‘‘TRNC’’ in 1993 as schemes perpetrated by Ralph Jarson, that First Merchant Bank is a financial Dr. Hakki Yaman Namli, and First an offshore bank. It is a privately owned institution of primary money laundering commercial bank specializing in the Merchant Bank. First, Ralph Jarson and concern. FinCEN has found First Dr. Hakki Yaman Namli negotiated the provision of commercial and investment Merchant Bank to be of primary money banking services to individual and sale of a fraudulent ‘‘special account laundering concern based on a number statement’’ issued by First Merchant corporate offshore customers. On its of factors, including: (1) It is licensed as Web site, the Bank repeatedly advertises Bank to an FBI undercover agent posing an offshore bank in the ‘‘TRNC,’’ a as a representative of a brokerage firm the ‘‘private’’ and ‘‘discreet’’ nature of jurisdiction with inadequate anti-money its services, stressing that customers for a fee of $2 million. The ‘‘special laundering controls, particularly those account statement’’ showed that the receive the ‘‘highest confidentiality’’ applicable to its offshore sector; (2) it is from and ‘‘a close relationship’’ with the brokerage firm had $20 million in involved in the marketing and sale of immediately available assets when, in Bank.9 First Merchant Bank maintains fraudulent financial products and fact, no assets existed. Second, in correspondent accounts with banks in services; (3) it has been used as a exchange for $1 million, First Merchant countries all over the world, including conduit for the laundering of Bank issued a worthless letter of credit several U.S. and foreign banks located fraudulently obtained funds; and (4) the with a face value of $100 million to an in New York City.10 According to individuals who own, control, and investor for the purchase of discounted published reports, Dr. Hakki Yaman operate First Merchant Bank have links medium term bank notes that the Namli is President, Chairman, and with organized crime and apparently investor later discovered were non- General Manager of First Merchant 11 have used First Merchant Bank to existent. Bank. First Merchant Bank is owned launder criminal proceeds. A discussion A review of records obtained from a by Standard Finance Ltd. (Ireland) and of the section 311 factors relevant to this number of financial institutions in the private shareholders (98% and 2%, U.S. shows a pattern of fraudulent 12 finding follows. respectively). Standard Finance Ltd., conduct similar to that described in the in turn, is owned by Provincial & Allied 1. The Extent to Which First Merchant indictment by Dr. Hakki Yaman Namli Funding Corp. (Bahamas) and Millvale Bank Has Been Used To Facilitate or and First Merchant Bank that began as Holdings Inc. (British Virgin Islands). Promote Money Laundering in or early as 1997 and continued through at As stated on its Web site, First Merchant Through the Jurisdiction least the end of 2002. Several different Bank has four wholly owned FinCEN has determined, based on a U.S. banks were approached by First subsidiaries: FMB Finance Ltd (British variety of sources, that First Merchant Merchant Bank customers attempting to Virgin Islands), First Merchant Bank is used to facilitate or promote use fraudulent letters of credit or International Inc (Bahamas), First money laundering in or through the fraudulent loan guarantees issued or ‘‘TRNC.’’ Indeed, some of the money provided by First Merchant Bank as 7 Id. laundering occurring at First Merchant 8 Id. Bank appears to involve the proceeds of 13 Jarson operated through his company Concorde 9 See http://www.firstmerchantbank.com. First Merchant Bank’s own fraudulent Wyvern Atlantic, a/k/a Wyvern Anstalt, located in 10 The Bankers’ Almanac, Reed Business London and registered in Liechtenstein. Information Ltd (2003). activity, as further described below. In 14 Indictment S1 02 Cr. 679 (MGC); Southern 11 Id. addition, the proceeds of alleged illicit District of New York, United States of America, 12 Id. activity have been transferred to or versus Ralph Jarson and Hakki Yaman Namli.

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collateral to obtain funds from the U.S. Umit, and Dr. Hakki Yaman Namli are institution, is a necessary step to ensure banks. alleged to have been involved with the that First Merchant Bank is not able to In addition, it appears that First laundering of $450 million in narcotics access the U.S. financial system to Merchant Bank has used its proceeds for the ‘‘Susurluk gang.’’ facilitate money laundering or any other correspondent accounts with banks in criminal activity. The finding of primary 2. The Extent to Which First Merchant the U.S. as conduits for the transfer of money laundering concern and the fraudulently obtained funds. In one Bank Is Used for Legitimate Business Purposes in the Jurisdiction imposition of the special measure also case, $4 million in proceeds of a ‘‘prime bring the Bank’s criminal conduct to the bank’’ fraud 15 were transferred through Because First Merchant Bank is attention of the international financial one of First Merchant Bank’s located in the ‘‘TRNC,’’ which is not community and hopefully further limit correspondent accounts in the U.S. to recognized by the United States and has the Bank’s ability to conduct the perpetrator’s account in the weak anti-money laundering laws, and transactions. ‘‘TRNC.’’ In another case, a former is an offshore bank subject to limited officer of a third bank wired $700,000 to government oversight, the extent of First B. Imposition of Special Measure the same correspondent account for the Merchant Bank’s legitimate activities is As a result of the finding that First benefit of First Merchant Bank. The ultimately difficult to quantify. FinCEN Merchant Bank is a financial institution third bank suspected that the funds has identified several instances in of primary money laundering concern, derived from the former officer’s misuse which First Merchant Bank and its and based upon additional of position or self-dealing while Chairman have engaged in fraudulent consultations with certain Federal employed at the bank. activity and money laundering and in agencies and departments and Domestic and foreign newspapers and which illicit funds have passed through consideration of additional relevant magazines report that First Merchant First Merchant Bank or one of its factors, the Secretary, through his Bank has been used for illicit subsidiaries. Considering this evidence delegate, the Director of FinCEN, transactions since its founding in 1993. and the lack of evidence showing that proposes imposition of the special Apparently, First Merchant Bank was the Bank is used for legitimate business measure authorized by 31 U.S.C. established, at least in part, to facilitate purposes, FinCEN believes that First 5318A(b)(5).17 That special measure the movement of funds between Merchant Bank is rarely, if ever, used authorizes the prohibition of the organized crime rings and corrupt for legitimate business transactions and opening or maintaining of politicians. The earliest indicators of any legitimate use of First Merchant correspondent or payable-through illicit activity on the part of First Bank and its subsidiaries is significantly accounts 18 by any domestic financial Merchant Bank or its principals outweighed by their use to promote or institution or domestic financial agency involved the original shareholders or facilitate money laundering. for, or on behalf of, a foreign financial partners of the Bank. One of the original Nevertheless, FinCEN specifically institution found to be of primary partners of First Merchant Bank is solicits comment on the impact of the money laundering concern. A reported to be a former KGB employee proposed special measure upon the any discussion of the additional section 311 identified as Vladimir Kobarel, who legitimate transactions conducted with factors relevant to the imposition of this allegedly involved First Merchant Bank First Merchant Bank involving, for particular special measure follows. in transferring underground money to example, United States businesses, Russian banks. Another original partner, United Nations agencies, and non- 1. Whether Similar Actions Have Been Tarik Umit, was a former Turkish governmental and private voluntary or Will Be Taken by Other Nations or National Intelligence Organization organizations doing business in or Multilateral Groups Against First (MIT) member who was believed killed operating in the ‘‘TRNC.’’ Merchant Bank in connection with a well-known 3. The Extent to Which Such Action Is Other countries have not taken any Turkish investigation into links between Sufficient To Ensure, With Respect to action similar to the one proposed in the Turkish mafia, the MIT, and right Transactions Involving First Merchant this proposed rulemaking that would wing politicians (the Susurluk Bank, That the Purposes of the BSA prohibit domestic financial institutions scandal).16 First Merchant Bank, Tarik Continue To Be Fulfilled, and To Guard and domestic financial agencies from Against International Money opening or maintaining a correspondent 15 The persons promoting these fraudulent schemes often claim that an innocent investor’s Laundering and Other Financial Crimes account for or on behalf of First funds will be used to purchase and trade financial As detailed above, FinCEN has Merchant Bank. The United States instruments issued by well-regarded and financially reasonable grounds to conclude that hopes that other countries will take sound institutions (‘‘prime banks’’) on clandestine similar action based on the findings overseas markets to generate huge returns in which First Merchant Bank is being used to the investor will share. However, neither the promote or facilitate money laundering, contained in this proposed rulemaking. instruments, nor the markets on which they including the transmission of fraudulent In the meantime, lack of similar action allegedly trade, exist. bank instruments through the U.S. by other countries makes it even more 16 The Susurluk scandal began with an imperative that the fifth special measure automobile accident in Susurluk, Turkey, on financial system and the international November 3, 1996. Four people occupied the laundering of the proceeds of fraudulent be imposed to prevent access by First automobile: The deputy police chief of Istanbul; an activity. Currently, there are no Merchant Bank to the U.S. financial alleged ‘‘extreme nationalist hit man’’ previously system. convicted of heroin trafficking and wanted for protective measures that specifically terrorism; the hit man’s girlfriend, who couriered target First Merchant Bank or otherwise drugs and had been the mistress of several serve to notify U.S. and foreign financial 17 In connection with this action, FinCEN consulted with the Federal functional regulators, prominent members of the Turkish mafia; and a institutions of the money laundering member of the Turkish Parliament, whose private the Department of Justice, and the Department of militia had helped the army fight Kurdish militants. risks associated with First Merchant State. The member of Parliament was the only survivor of Bank. Thus, finding First Merchant 18 For purposes of the proposed rule, a the crash and claimed to have lost his memory. The Bank to be a financial institution of correspondent account is defined as an account trunk of the car was full of weapons. The incident primary money laundering concern and established to receive deposits from, or make received national notoriety and served as the basis payments or other disbursements on behalf of, a for Parliamentary investigations into links among prohibiting the opening or maintaining foreign bank, or handle other financial transactions politicians, the arms trade, and organized crime. of correspondent accounts for that related to the foreign bank.

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2. Whether the Imposition of the Fifth First Merchant Bank is rarely, if ever, diligence measures it should adopt to Special Measure Would Create a used for legitimate business transactions guard against the indirect use of its Significant Competitive Disadvantage, and any legitimate use of First Merchant correspondent accounts by First Including Any Undue Cost or Burden Bank and its subsidiaries is significantly Merchant Bank, based on risk factors Associated With Compliance, for outweighed by their use to promote or such as the type of services it offers and Financial Institutions Organized or facilitate money laundering. geographic locations of its correspondents. Licensed in the United States 4. The Effect of the Proposed Action on The fifth special measure sought to be the United States’ National Security and A. 103.189(a)—Definitions imposed by this proposed rulemaking Foreign Policy 1. Correspondent Account would prohibit covered financial The exclusion from the U.S. financial Section 103.189(a)(1) defines the term institutions from opening or system of banks that serve as conduits ‘‘correspondent account’’ by reference to maintaining correspondent accounts for, for significant money laundering the definition contained in 31 CFR or on behalf of, First Merchant Bank. As activity and participate in other 103.175(d)(1)(ii). Section a corollary to this measure, covered financial crime enhances national 103.175(d)(1)(ii) defines a financial institutions also would be security, by making it more difficult for correspondent account to mean an required to apply special due diligence criminals to access the substantial account established to receive deposits to all of their correspondent accounts to resources of the U.S. financial system. from, or make payments or other ensure that no such account is being In addition, the imposition of the fifth disbursements on behalf of, a foreign used indirectly to provide services to special measure against First Merchant bank, or handle other financial First Merchant Bank. The burden Bank would complement the U.S. transactions related to the foreign bank. associated with these requirements is Government’s overall foreign policy not expected to be significant, given that In the case of a U.S. depository strategy of making the entry into the institution, this broad definition would only a few domestic banks currently U.S. financial system more difficult for maintain correspondent accounts for include most types of banking high-risk financial institutions located relationships between a U.S. depository First Merchant Bank. In addition, all in jurisdictions with lax anti-money U.S. financial institutions currently institution and a foreign bank, including laundering controls. payable-through accounts. apply some degree of due diligence to Therefore, after conducting the the transactions or accounts subject to In the case of securities broker- required consultations and weighing the dealers, futures commission merchants, sanctions administered by the Office of relevant factors, FinCEN has determined introducing brokers, and investment Foreign Assets Control (OFAC) of the that reasonable grounds exist for companies that are open-end companies Department of the Treasury. As concluding that First Merchant Bank is (mutual funds), a correspondent account explained in more detail in the section- a financial institution of primary money would include any account that permits by-section analysis below, financial laundering concern and for imposing the foreign bank to engage in (1) trading institutions should be able to adapt their the special measure authorized by 31 in securities and commodity futures or current screening procedures for OFAC U.S.C. 5318A(b)(5). options, (2) funds transfers, or (3) other sanctions to comply with this special III. Section-by-Section Analysis types of financial transactions. measure. Thus, the special due FinCEN is using the same definition The proposed rule would prohibit diligence that would be required by this for purposes of the proposed rule as that covered financial institutions from proposed rulemaking is not expected to established in the final rule establishing, maintaining, impose a significant additional burden implementing sections 313 and 319(b) administering, or managing in the upon U.S. financial institutions. of the USA Patriot Act,19 except that the United States any correspondent term is being expanded to cover such 3. The Extent to Which the Proposed account for, or on behalf of, First accounts maintained by mutual funds, Action or Timing of the Action Will Merchant Bank. As a corollary to this futures commission merchants, and Have a Significant Adverse Systemic prohibition, covered financial introducing brokers. Impact on the International Payment, institutions would be required to apply Clearance, and Settlement System, or on special due diligence to their 2. Covered Financial Institution Legitimate Business Activities of the correspondent accounts to guard against Bank Section 103.189(a)(2) of the proposed their indirect use by First Merchant rule defines covered financial This proposed rulemaking targets Bank. At a minimum, that special due institution to mean all of the following: First Merchant Bank specifically; it does diligence must include two elements. Any insured bank (as defined in section not target a class of financial First, a covered financial institution 3(h) of the Federal Deposit Insurance transactions (such as wire transfers) or must notify its correspondent account Act (12 U.S.C. 1813(h)); a commercial a particular jurisdiction. First Merchant holders that they may not provide First bank or trust company; a private banker; Bank is not a major participant in the Merchant Bank with access to the an agency or branch of a foreign bank international payment system and is not correspondent account maintained at in the United States; a credit union; a relied upon by the international banking the covered financial institution. thrift institution; a corporation acting community for clearance or settlement Second, a covered financial institution under section 25A of the Federal services. Moreover, as an offshore bank, must take reasonable steps to identify Reserve Act (12 U.S.C. 611 et seq.); a it is prohibited from offering banking any indirect use of its correspondent broker or dealer registered or required to services to the residents of its home accounts by First Merchant Bank, to the register with the SEC under the jurisdiction. Thus, the imposition of the extent that such indirect use can be Securities Exchange Act of 1934 (15 fifth special measure against First determined from transactional records U.S.C. 78a et seq.); a futures commission Merchant Bank will not have a maintained by the covered financial merchant or an introducing broker significant adverse systemic impact on institution in the normal course of registered, or required to register, with the international payment, clearance, business. A covered financial institution and settlement system. In addition, as must take a risk-based approach when 19 See 67 FR 60562 (September 26, 2002), codified discussed above, FinCEN believes that deciding what, if any, other due at 31 CFR 103.175(d)(1).

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the CFTC under the Commodity 2. Special Due Diligence of provide First Merchant Bank with Exchange Act (7 U.S.C. 1 et seq.); and Correspondent Accounts To Prohibit access to the covered financial an investment company (as defined in Indirect Use institution’s correspondent account, or section 3 of the Investment Company As a corollary to the prohibition on including such information in the next Act of 1940 (15 U.S.C. 80a–3)) that is an the opening or maintaining of regularly occurring transmittal from the open-end company (as defined in correspondent accounts directly for covered financial institution to its section 5 of the Investment Company First Merchant Bank, section correspondent account holders. FinCEN Act of 1940 (15 U.S.C. 80a–5)) that is 103.189(b)(2) requires a covered specifically solicits comments on the registered, or required to register, with financial institution to apply special appropriate form, scope, and timing of the SEC under section 8 of the due diligence to its correspondent the notice that would be required under Investment Company Act of 1940 (15 accounts 20 that is reasonably designed the rule. A covered financial institution also U.S.C. 80a–8). to guard against their indirect use by First Merchant Bank. At a minimum, would be required under this 3. First Merchant Bank that special due diligence must include rulemaking to take reasonable steps to notifying correspondent account holders identify any indirect use of its Section 103.189(a)(3) of the proposed that they may not provide First correspondent accounts by First rule defines First Merchant Bank to Merchant Bank with access to the Merchant Bank, to the extent that such include all subsidiaries, branches, and correspondent account maintained at indirect use can be determined from offices of First Merchant Bank operating the covered financial institution. For transactional records maintained by the in the ‘‘TRNC’’ or in any other example, a covered financial institution covered financial institution in the jurisdiction. FMB Finance Ltd. (British may satisfy this requirement by normal course of business. For example, Virgin Islands), First Merchant transmitting the following notice to all a covered financial institution would be International Inc. (Bahamas), First of its correspondent account holders: expected to apply an appropriate screening mechanism to be able to Merchant Finance Ltd. (Ireland), and Notice: Pursuant to U.S. regulations issued First Merchant Trust Ltd. (Ireland), and under section 311 of the USA PATRIOT Act, identify a funds transfer order that on its their branches, are included in the 31 CFR 103.189, we are prohibited from face listed First Merchant Bank as the definition, although FinCEN establishing, maintaining, administering, or originator’s or beneficiary’s financial understands that First Merchant Bank managing a correspondent account for, or on institution, or otherwise referenced First behalf of, First Merchant Bank or any of its Merchant Bank. An appropriate currently has only the four subsidiaries subsidiaries (including FMB Finance Ltd. mentioned here. FinCEN will provide screening mechanism could be the First Merchant International Inc. First mechanism used by a covered financial information regarding the existence or Merchant Finance Ltd. and First Merchant establishment of any other subsidiaries Trust Ltd.). The regulations also require us to institution to comply with sanctions programs administered by OFAC. as it becomes available; however, notify you that you may not provide First FinCEN specifically solicits comments covered financial institutions should Merchant Bank or any of its subsidiaries with access to the correspondent account you hold on the requirement under the proposed take commercially reasonable measures at our financial institution. If we become rule that a covered financial institution to determine whether a customer is a aware that First Merchant Bank or any of its take reasonable steps to screen its subsidiary of First Merchant Bank. subsidiaries is indirectly using the correspondent accounts to identify any correspondent account you hold at our B. 103.189(b)—Requirements for financial institution, we will be required to indirect use of such accounts by First Covered Financial Institutions take appropriate steps to block such access, Merchant Bank. including by terminating your account. Notifying its correspondent account For purposes of complying with the holders and taking reasonable steps to The purpose of the notice requirement proposed rule’s prohibition on the identify any indirect use of its is to help ensure cooperation from correspondent accounts by First opening or maintaining of correspondent account holders in Merchant Bank in the manner discussed correspondent accounts for, or on behalf denying First Merchant Bank access to above are the minimum due diligence of, First Merchant Bank, FinCEN the U.S. financial system, as well as to requirements under the proposed rule. expects that a covered financial increase awareness within the Beyond these minimum steps, a covered institution will take such steps that a international financial community of financial institution should adopt a risk- reasonable and prudent financial the risks and deficiencies of First based approach for determining what, if institution would take to protect itself Merchant Bank. However, FinCEN does from loan or other fraud or loss based not require or expect a covered financial any, additional due diligence measures on misidentification of a person’s status. institution to obtain a certification from it should implement to guard against the its correspondent account holders that indirect use of its correspondent 1. Prohibition on Direct Use of indirect access will not be provided in accounts by First Merchant Bank, based Correspondent Accounts order to comply with this notice on risk factors such as the type of requirement. Instead, methods of services it offers and the geographic Section 103.189(b)(1) of the proposed locations of its correspondent account rule prohibits all covered financial compliance with the notice requirement could include, for example, transmitting holders. institutions from establishing, a one-time notice by mail, fax, or e-mail A covered financial institution that obtains maintaining, administering, or to a covered financial institution’s knowledge that a correspondent account is managing a correspondent account in correspondent account customers, being used by a foreign bank to provide the United States for, or on behalf of, informing them that they may not indirect access to First Merchant Bank must First Merchant Bank. The prohibition take all appropriate steps to block such indirect access, including, when necessary, would require all covered financial 20 Again, for purposes of the proposed rule, a terminating the correspondent account. A institutions to review their account correspondent account is defined as an account covered financial institution may afford the records to ensure that they maintain no established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank a reasonable opportunity to take accounts directly for, or on behalf of, foreign bank, or handle other financial transactions corrective action prior to terminating the First Merchant Bank. related to the foreign bank. correspondent account. Should the foreign

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bank refuse to comply, or if the covered economic impact on a substantial denying access to the U.S. financial financial institution cannot obtain adequate number of small entities. FinCEN system, as well as to increase awareness assurances that the account will no longer be understands that First Merchant Bank within the international financial used for impermissible purposes, the covered currently maintains only a few financial institution must terminate the community of the risks and deficiencies account within a commercially reasonable correspondent accounts in the United of First Merchant Bank. The information time. This means that the covered financial States, and that those accounts are required to be maintained by 31 CFR institution should not permit the foreign maintained at large banks. Thus, the 103.189(b)(3)(i) will be used by Federal bank to establish any new positions or prohibition on maintaining such agencies and certain self-regulatory execute any transactions through the accounts will not have a significant organizations to verify compliance by account, other than those necessary to close impact on a substantial number of small covered financial institutions with the the account. A covered financial institution entities. In addition, all U.S. persons, provisions of 31 CFR 103.189. The class may reestablish an account closed under the including U.S. financial institutions, proposed rule if it determines that the of financial institutions affected by the account will not be used to provide banking currently exercise some degree of due disclosure requirement is identical to services indirectly to First Merchant Bank. diligence in order to comply with U.S. the class of financial institutions FinCEN specifically solicits comment on the sanctions programs administered by affected by the recordkeeping requirement under the proposed rule that a OFAC, which can be easily modified to requirement. The collection of covered financial institution block indirect monitor for the use of correspondent information is mandatory. access to First Merchant Bank, once such accounts by First Merchant Bank. Thus, Description of Affected Financial indirect access is identified. the special due diligence that would be Institutions: Banks, broker-dealers in 3. Reporting Not Required required by this proposed rulemaking— securities, futures commission i.e., the one-time transmittal of notice to Section 103.189(b)(3) of the proposed merchants and introducing brokers, and correspondent account holders and rule clarifies that the rule does not mutual funds maintaining screening of transactions to identify any impose any reporting requirement upon correspondent accounts. indirect use of a correspondent any covered financial institution that is Estimated Number of Affected account—is not expected to impose a not otherwise required by applicable Financial Institutions: 5,000. significant additional economic burden Estimated Average Annual Burden law or regulation. A covered financial upon small U.S. financial institutions. institution must, however, document its Hours per Affected Financial FinCEN invites comments from compliance with the requirement that it Institution: The estimated average members of the public who believe notify its correspondent account holders burden associated with the collection of there will be a significant economic that they may not provide First information in this proposed rule is 1 impact on small entities. Merchant Bank with access to the hour per affected financial institution. Estimated Total Annual Burden: correspondent account maintained at VI. Paperwork Reduction Act the covered financial institution. 5,000 hours. The collection of information FinCEN specifically invites comments IV. Request for Comments contained in this proposed rule is being on: (a) Whether the proposed collection submitted to the Office of Management FinCEN invites comments on all of information is necessary for the and Budget for review in accordance aspects of the proposal to prohibit the proper performance of the mission of with the Paperwork Reduction Act of opening or maintaining of FinCEN, including whether the 1995 (44 U.S.C. 3507(d)). Comments on correspondent accounts for or on behalf information shall have practical utility; the collection of information should be of First Merchant Bank, and specifically (b) the accuracy of FinCEN’s estimate of sent (preferably by fax (202–395–6974)) invites comments on the following the burden of the proposed collection of to Desk Officer for the Department of the matters: information; (c) ways to enhance the 1. The appropriate form, scope, and Treasury, Office of Information and quality, utility, and clarity of the timing of the notice to correspondent Regulatory Affairs, Office of information required to be maintained; account holders that would be required Management and Budget, Paperwork (d) ways to minimize the burden of the under the rule; Reduction Project (1506), Washington, required collection of information, 2. The appropriate scope of the DC 20503 (or by e-mail to including through the use of automated proposed requirement for a covered [email protected]), with a copy to collection techniques or other forms of financial institution to take reasonable FinCEN by mail or e-mail at the information technology; and (e) steps to identify any indirect use of its addresses previously specified. estimates of capital or start-up costs and correspondent accounts by First Comments on the collection of costs of operation, maintenance, and Merchant Bank; information should be received by purchase of services to maintain the 3. The appropriate steps a covered September 23, 2004. In accordance with information. financial institution should take once it the requirements of the Paperwork identifies an indirect use of one of its Reduction Act of 1995, 44 U.S.C. VII. Executive Order 12866 correspondent accounts by First 3506(c)(2)(A), and its implementing This proposed rule is not a significant Merchant Bank; and regulations, 5 CFR 1320, the following regulatory action for purposes of 4. The impact of the proposed special information concerning the collection of Executive Order 12866, ‘‘Regulatory measure upon any legitimate information as required by 31 CFR Planning and Review.’’ transactions conducted with First 103.189 is presented to assist those Merchant Bank by United States persons wishing to comment on the List of Subjects in 31 CFR Part 103 businesses, United Nations agencies, information collection. Administrative practice and and non-governmental and private The collection of information in this procedure, Banks and banking, Brokers, voluntary organizations doing business proposed rule is in 31 CFR Counter-money laundering, Counter- in or operating in the ‘‘TRNC.’’ 103.189(b)(2)(i) and 31 CFR terrorism, and Foreign banking. 103.189(b)(3)(i). The disclosure V. Regulatory Flexibility Act requirement in 31 CFR 103.189(b)(2)(i) Authority and Issuance It is hereby certified that this is intended to ensure cooperation from For the reasons set forth in the proposed rule will not have a significant correspondent account holders in preamble, part 103 of title 31 of the

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Code of Federal Regulations is proposed States for, or on behalf of, First ACTION: Proposed rule. to be amended as follows: Merchant Bank. (2) Special due diligence of SUMMARY: EPA proposes to approve a PART 103—FINANCIAL correspondent accounts to prohibit revision to the Missouri State RECORDKEEPING AND REPORTING indirect use. (i) A covered financial Implementation Plan (SIP) which OF CURRENCY AND FINANCIAL institution shall apply special due pertains to a state rule and maintenance TRANSACTIONS diligence to its correspondent accounts plan applicable to the Doe Run Resource that is reasonably designed to guard Recycling Lead Facility at Buick, 1. The authority citation for part 103 against their indirect use by First Missouri. This revision revises certain is revised to read as follows: Merchant Bank. At a minimum, that furnace production limits at the facility, Authority: 12 U.S.C. 1829b and 1951–1959; special due diligence must include: which are contained in the state rule 31 U.S.C. 5311–5314, 5316–5332; title III, (A) Notifying correspondent account and maintenance plan. secs. 311, 312, 313, 314, 319, 326, 352, Pub. holders that they may not provide First Approval of this revision will ensure L. 107–56, 115 Stat. 307. Merchant Bank with access to the consistency between the state and 2. The undesignated center heading correspondent account maintained at federally-approved rule and preceding §103.185 is removed. the covered financial institution; and maintenance plan, and ensure Federal 3. Subpart I of part 103 is proposed (B) Taking reasonable steps to identify enforceability of the revised state rule to be amended by adding new § 103.189 any indirect use of its correspondent and maintenance plan. as follows: accounts by First Merchant Bank, to the DATES: Comments on this proposed extent that such indirect use can be action must be received in writing by § 103.189 Special measures against First determined from transactional records September 23, 2004. Merchant Bank. maintained in the covered financial ADDRESSES: Comments may be mailed to (a) Definitions. For purposes of this institution’s normal course of business. Judith Robinson, Environmental section: (ii) A covered financial institution Protection Agency, Air Planning and (1) Correspondent account has the shall take a risk-based approach when Development Branch, 901 North 5th same meaning as provided in deciding what, if any, additional due Street, Kansas City, Kansas 66101. § 103.175(d)(1)(ii). diligence measures it should adopt to Comments may also be submitted (2) Covered financial institution has guard against the indirect use of its electronically or through hand delivery/ the same meaning as provided in correspondent accounts by First courier; please follow the detailed § 103.175(f)(2) and also includes: Merchant Bank. instructions in the ADDRESSES section of (i) A futures commission merchant or (iii) A covered financial institution the direct final rule which is located in an introducing broker registered, or that obtains knowledge that a the rules section of this Federal required to register, with the correspondent account is being used by Register. Commodity Futures Trading the foreign bank to provide indirect Commission under the Commodity access to First Merchant Bank, shall take FOR FURTHER INFORMATION CONTACT: Exchange Act (7 U.S.C. 1 et seq.); and all appropriate steps to block such Judith Robinson at (913) 551–7825, or (ii) An investment company (as indirect access, including, where by e-mail at [email protected]. defined in section 3 of the Investment necessary, terminating the SUPPLEMENTARY INFORMATION: In the Company Act (15 U.S.C. 80a–3)) that is correspondent account. final rules section of the Federal an open-end company (as defined in (3) Recordkeeping and reporting. (i) A Register, EPA is approving the state’s section 5 of the Investment Company covered financial institution is required SIP revision as a direct final rule Act (15 U.S.C. 80a–5)) and that is to document its compliance with the without prior proposal because the registered, or required to register, with notice requirement set forth in Agency views this as a noncontroversial the Securities and Exchange paragraph (b)(2)(i)(A) of this section. revision amendment and anticipates no Commission under section 8 of the (ii) Nothing in this section shall relevant adverse comments to this Investment Company Act (15 U.S.C. require a covered financial institution to action. A detailed rationale for the 80a–8). report any information not otherwise approval is set forth in the direct final (3) First Merchant Bank means any required to be reported by law or rule. If no relevant adverse comments headquarters, branch, office, or regulation. are received in response to this action, subsidiary of First Merchant Bank OSH Dated: August 18, 2004. no further activity is contemplated in Ltd operating in the ‘‘Turkish Republic William J. Fox, relation to this action. If EPA receives of Northern Cyprus’’ (‘‘TRNC’’) or in any Director, Financial Crimes Enforcement relevant adverse comments, the direct other jurisdiction, including FMB Network. final rule will be withdrawn and all Finance Ltd (British Virgin Islands), [FR Doc. 04–19267 Filed 8–23–04; 8:45 am] public comments received will be addressed in a subsequent final rule First Merchant International Inc BILLING CODE 4810–02–P (Bahamas), First Merchant Finance Ltd based on this proposed action. EPA will (Ireland), and First Merchant Trust Ltd not institute a second comment period (Ireland). ENVIRONMENTAL PROTECTION on this action. Any parties interested in (4) Subsidiary means a company of AGENCY commenting on this action should do so which more than 50 percent of the at this time. Please note that if EPA voting stock or analogous equity interest 40 CFR Part 52 receives adverse comment on part of is owned by another company. this rule and if that part can be severed (b) Requirements for covered financial [R07–OAR–2004–MO–0002; FRL–7805–2] from the remainder of the rule, EPA may institutions—(1) Prohibition on direct Approval and Promulgation of adopt as final those parts of the rule that use of correspondent accounts. A Implementation Plans; State of are not the subject of an adverse covered financial institution shall Missouri comment. For additional information, terminate any correspondent account see the direct final rule which is located that is established, maintained, AGENCY: Environmental Protection in the rules section of this Federal administered, or managed in the United Agency (EPA). Register.

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