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11 August 2007
[Federal Register: August 9, 2007 (Volume 72, Number 153)]
[Rules and Regulations]
[Page 44768-44775]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09au07-15]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA29
Financial Crimes Enforcement Network; Anti-Money Laundering
Programs; Special Due Diligence Programs for Certain Foreign Accounts
AGENCY: Financial Crimes Enforcement Network, Treasury.
ACTION: Final rule.
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SUMMARY: The Financial Crimes Enforcement Network is issuing this final
rule to implement the enhanced due diligence requirements for
correspondent accounts for certain foreign banks set forth in section
312 of the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA
PATRIOT Act), Pub. L. No. 107-56. Section 312 requires U.S. financial
institutions to establish due diligence and, where necessary, enhanced
due diligence, policies, procedures, and controls reasonably designed
to detect and report money laundering through correspondent accounts
and private banking accounts established or maintained by U.S.
financial institutions for non-U.S. persons. We issued final rules
implementing the due diligence requirements for correspondent accounts
and the due diligence and enhanced due diligence requirements for
private banking accounts for non-U.S. persons on January 4, 2006. This
final rule completes the section 312 rulemaking process.
DATES: This final rule is effective September 10, 2007.
Applicability Dates: On February 5, 2008, the enhanced due
diligence provisions of this final rule will apply to correspondent
accounts for certain foreign banks established on or after such date.
On May 5, 2008, the enhanced due diligence provisions of this final
rule will apply to correspondent accounts for certain foreign banks
established before February 5, 2008. See 31 CFR 103.176(f) of this
final rule.
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, Financial Crimes Enforcement Network, (800) 949-2732.
SUPPLEMENTARY INFORMATION
I. Background
Section 312 of the USA PATRIOT Act amended the Bank Secrecy Act \1\
to add new subsection (i) to 31 U.S.C. 5318. This provision requires
each U.S. financial institution that establishes, maintains,
administers, or manages a correspondent account or a private banking
account in the United States for a non-U.S. person to subject such
accounts to certain anti-money laundering measures. In particular, a
covered financial institution \2\ must establish appropriate, specific
and, where necessary, enhanced due diligence policies, procedures, and
controls that are reasonably designed to enable the financial
institution to detect and report instances of money laundering through
these accounts.
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\1\ Bank Secrecy Act, Pub. L. No. 91-508 (codified as amended at
12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and
5316-5332).
\2\ 31 CFR 103.175(f) (defining a ``covered financial
institution'' as any one of a number of specific U.S. financial
institutions, including banks, broker-dealers, futures commission
merchants, and mutual funds).
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On May 30, 2002, we published a notice of proposed rulemaking in
the Federal Register, proposing to implement the requirements of
section 312 in their entirety.\3\ In that proposal, we set forth a
series of specific measures that covered financial institutions could,
and in some instances would be required to, apply to correspondent
accounts and private banking accounts established or maintained for
non-U.S. persons. We received comments on that proposal raising
concerns about the definitions in the proposal, the scope of the
requirements contained in the proposed rule text, and the types of
financial institutions that would be subject to the proposal's
requirements.
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\3\ Due Diligence Anti-Money Laundering Programs for Certain
Foreign Accounts, 67 FR 37736 (May 30, 2002) (First Proposed Rule).
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To have adequate time to review the comments we received in
response to the proposal, to determine the appropriate resolution of
the issues raised, and to give direction to financial institutions that
would be subject to section 312,\4\ we issued an interim final rule on
July 23, 2002.\5\ In the interim final rule, we exercised our authority
under 31 U.S.C. 5318(a)(6) to defer temporarily the application of
section 312 to certain financial institutions.\6\ For those financial
institutions that were not subject to the deferral,\7\ we provided
interim guidance for compliance with the statute by generally
describing the scope of coverage, duties, and obligations under that
provision, pending issuance of a final rule.
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\4\ Section 312(b)(2) of the Act provides that section 5318(i)
of the Bank Secrecy Act would take effect on July 23, 2002, whether
or not final rules had been issued by that date.
\5\ Due Diligence Anti-Money Laundering Programs for Certain
Foreign Accounts, 67 FR 48348 (July 23, 2002).
\6\ Pursuant to the interim final rule, banks, savings
associations, and credit unions had to comply with the correspondent
account and private banking account provisions of section 312.
Securities broker-dealers, futures commission merchants, and
introducing brokers had to comply with the private banking account
provisions of section 312. We deferred the application of section
312 to all other financial institutions.
\7\ See id.
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Thereafter, on January 4, 2006, we issued final rules implementing
section 312, excepting the enhanced due diligence provisions for
correspondent accounts established or maintained for certain foreign
banks.\8\ Also on January 4, we published a second notice of proposed
rulemaking (Second Proposed Rule or proposed rule),\9\ seeking comment
on a new approach to implementing the enhanced due diligence provisions
of section 312 with respect to correspondent accounts established or
maintained for certain statutorily designated foreign banks
(``respondent banks'').\10\
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\8\ Anti-Money Laundering Programs; Special Due Diligence for
Certain Foreign Accounts, 71 FR 496 (January 4, 2006).
\9\ Anti-Money Laundering Programs; Special Due Diligence for
Certain Foreign Accounts, 71 FR 516 (January 4, 2006).
\10\ Section 312 contains enhanced due diligence provisions for
both correspondent accounts and private banking accounts for non-
U.S. persons. Unless otherwise provided in this release, the term
``enhanced due diligence provisions'' relates exclusively to the
correspondent account provisions of section 312.
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As required by section 312, the enhanced due diligence measures
proposed would apply to correspondent accounts maintained for a foreign
bank operating under an offshore banking license,\11\ under a license
issued by a country that has been designated as being non-cooperative
with international anti-money laundering principles or procedures by an
intergovernmental group or organization of which the United States is a
member and with which designation the United States representative to
the group or organization concurs,\12\ or under a license issued by a
country designated by the Secretary of the Treasury
[[Page 44769]]
(Secretary) as warranting special measures due to money laundering
concerns.\13\ With respect to these accounts, we proposed that a
covered financial institution would be required to conduct risk-based
enhanced due diligence with regard to a correspondent account
maintained for or on behalf of such a foreign bank to guard against
money laundering and to report suspicious activity; to ascertain
whether such a foreign bank maintains correspondent accounts for other
foreign banks \14\ and, if so, to conduct appropriate due diligence;
and to identify the owners of such a foreign bank if its shares are not
publicly traded. This final rule adopts the risk-based enhanced due
diligence rule that we proposed on January 4, 2006.
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\11\ See 31 U.S.C. 5318(i)(4)(A) and 31 CFR 103.175(k) (defining
``offshore banking license'').
\12\ The Financial Action Task Force (FATF) is the only
intergovernmental organization of which the United States is a
member that has designated countries as non-cooperative with
international anti-money laundering principles (no such countries
currently are designated). The United States has concurred with all
FATF designations to date.
\13\ The Secretary is authorized under section 311 of the USA
Patriot Act, after finding that reasonable grounds exist for
concluding that a foreign jurisdiction, foreign financial
institution, international class of transaction, or type of account
is of ``primary money laundering concern,'' to require domestic
financial institutions and domestic financial agencies to take
certain statutorily defined ``special measures'' against the primary
money laundering concern. Section 311 requires the Secretary to
consult with various Federal agencies before making such a finding
or imposing special measures. For a listing of findings and
rulemakings issued pursuant to section 311, see http://www.fincen.gov/reg_section311.html
.
\14\ In the preamble to the Second Proposed Rule, we referred to
these relationships as nested accounts or nested banks. It has been
suggested that the term ``nested'' is not synonymous with indirect
use of a correspondent account. We have not employed the terminology
in this final rule.
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Finally, section 312(b)(1) of the USA PATRIOT Act provides that the
Secretary shall issue implementing regulations under this section ``in
consultation with the appropriate federal functional regulators (as
defined in section 509 of the Gramm-Leach-Bliley Act) of the affected
financial institutions.'' This final rule was developed in consultation
with the staffs of the federal functional regulators.\15\
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\15\ Section 509 of the Gramm-Leach-Bliley Act defines federal
functional regulators to include the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System,
the Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the National Credit Union Administration Board, and the
U.S. Securities and Exchange Commission. See 15 U.S.C. 6809. The
Commodity Futures Trading Commission was defined in section 321 of
the USA PATRIOT Act as a federal functional regulator for the
purposes of implementing that Act.
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II. Summary of Comments and Revisions
A. Comments
We received seven comment letters on the Second Proposed Rule.
Commenters included U.S. banks, an association of state banking
supervisors, and trade associations representing U.S. banks, foreign
banks, the futures industry, investment companies, the securities
industry, and the bond markets.\16\ Eleven trade associations
representing covered financial institutions jointly signed one of the
comment letters. In general, commenters expressed support for the risk-
based approach elaborated in the Second Proposed Rule. We respond to
the submitted comments in the Section-by-Section Analysis, below.
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\16\ The comment letters may be inspected at the Financial
Crimes Enforcement Network reading room in Vienna, Virginia between
10 a.m. and 4 p.m. Persons wishing to inspect comments must request
an appointment by telephone at (202) 354-6400 (not a toll-free
number). The comment letters are also available on our Web site at
http://www.fincen.gov/71fr516.htm.
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B. Revisions
This final rule is substantially similar to the Second Proposed
Rule. The following revisions to the rule, which we will explain more
fully in the Section-by-Section Analysis below, have been made in
response to comments received on the Second Proposed Rule.
First, the provisions requiring covered financial institutions, in
appropriate circumstances, to obtain and review ``documentation''
relating to a respondent bank's anti-money laundering program and to
``consider[ ] whether such program appears to be reasonably designed to
detect and prevent money laundering'' have been revised to require
covered financial institutions, in appropriate circumstances, to obtain
and consider ``information'' relating to a respondent bank's anti-money
laundering program in order to assess the risk of money laundering
presented by the respondent bank's account.
Second, the provision requiring a covered financial institution, in
certain circumstances, to take reasonable steps to assess and
``minimize'' money laundering risks related to the customers of their
respondent banks has been revised to require a covered financial
institution, in certain circumstances, to take reasonable steps to
assess and ``mitigate'' such money laundering risks.
III. Section-by-Section Analysis
A. Section 103.176(b)--Enhanced Due Diligence for Certain Foreign Banks
Section 103.176(b) of this final rule requires a covered financial
institution to establish enhanced due diligence procedures that, at a
minimum, include taking reasonable steps to (1) Conduct risk-based
enhanced scrutiny of correspondent accounts established or maintained
for respondent banks to guard against money laundering and to identify
and report suspicious transactions, (2) determine whether the subject
respondent bank in turn maintains correspondent accounts for other
foreign banks that enable those other foreign banks to gain access to
the respondent bank's correspondent account with the covered financial
institution and, if so, to take reasonable steps to obtain information
to assess and mitigate the money laundering risks associated with such
accounts, and (3) determine the identity of each owner of a respondent
bank whose shares are not publicly traded, and the nature and extent of
each owner's ownership interest.
The commenters generally expressed support for the risk-based
approach of the Second Proposed Rule. One commenter suggested that the
five risk factors enumerated in our rules implementing the due
diligence requirements for correspondent accounts contained in section
312 should also be applied to determine the appropriate extent of
enhanced due diligence.\17\
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\17\ As part of its general due diligence program for foreign
correspondent accounts, a covered financial institution is expected
to establish policies, procedures, and controls that include
assessing the money laundering risk of a correspondent account based
upon consideration of all the risk factors, including (1) The nature
of the foreign financial institution's business and the markets it
serves; (2) the type, purpose, and anticipated activity of the
correspondent account; (3) the nature and duration of the covered
financial institution's relationship with the foreign financial
institution; (4) the anti-money laundering and supervisory regime of
the jurisdiction that issued a charter or license to the foreign
financial institution, and its owners if applicable, to the extent
that such information is reasonably available; and (5) information
known or reasonably available to the covered financial institution
about the foreign financial institution's anti-money laundering
record. 31 C.F.R. 103.176(a)(2).
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As these five risk factors are meant to apply to all respondent
banks, including those subject to the enhanced due diligence provisions
of section 312, it would be appropriate to consider the five factors
listed in subsection (a)(2) when assessing the risk posed by a
respondent bank subject to the provisions of this final rule to help
determine the level of enhanced due diligence required. The fourth risk
factor in particular--the anti-money laundering regime of the
jurisdiction that issued a charter or license to the foreign bank and,
to the extent reasonably available, of the home jurisdiction of the
foreign bank or its parent \18\--may be especially relevant in a
covered financial institution's determination of the nature and extent
of the risks posed by the correspondent
[[Page 44770]]
accounts for the foreign banks covered by this rule and the extent of
the enhanced due diligence that is necessary and appropriate to
mitigate these risks.\19\
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\18\ 31 CFR 103.176(a)(2)(iv).
\19\ See Second Proposed Rule, 71 FR at 517 (adopting a risk-
based approach to enhanced due diligence as an alternative to
creating exceptions to the enhanced due diligence provisions for
foreign banks operating under an offshore banking license).
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1. 103.176(b)(1)--Enhanced scrutiny to guard against money
laundering. Section 103.176(b)(1) of the Second Proposed Rule would
have required a covered financial institution to conduct risk-based
enhanced scrutiny of correspondent accounts established or maintained
for respondent banks to guard against money laundering and to identify
and report suspicious transactions. This provision is adopted in the
final rule without substantial change.
Section 103.176(b)(1)(i) and (ii) of the Second Proposed Rule would
have required covered financial institutions, as part of their enhanced
due diligence programs when appropriate, to obtain and review
documentation related to a respondent bank's anti-money laundering
program and consider whether the program appears to be reasonably
designed to detect and prevent money laundering. Several commenters
questioned the utility of the requirement and expressed concern about
the cost of complying with it.
One commenter read the Second Proposed Rule as effectively
requiring a covered financial institution to perform an audit of a
respondent bank's anti-money laundering program, despite guidance in
the preamble stating that an audit was not required. Another commenter
similarly expressed concern that this and other provisions of the
Second Proposed Rule would cause covered financial institutions to
become policemen and regulators. A third commenter was concerned that
this provision ultimately would be enforced as a default or mandatory
requirement.
Other commenters additionally suggested that obtaining and
reviewing documentation frequently would be a difficult and expensive
proposition, as such documents may be written only in the native
language of a respondent bank. One commenter questioned the utility of
reviewing the documentation of a respondent bank's anti-money
laundering program and suggested that other due diligence measures,
such as reviewing and monitoring transactions conducted by the foreign
bank, would be more productive. Other commenters offered that
administering a questionnaire to a respondent bank about its anti-money
laundering practices, when appropriate, would be more effective than a
review of its anti-money laundering program documents.
In response to these comments, section 103.176(b)(1)(i) of the
final rule now requires a covered financial institution, in appropriate
circumstances, to obtain and consider information related to the anti-
money laundering program of the respondent bank to assess the risk of
money laundering presented by the respondent bank's correspondent
account. This provision of the final rule is not meant to be a
mandatory requirement. Rather, it is intended to be risk-based. We
emphasize that whether enhanced due diligence should include a
reasonable inquiry into the anti-money laundering program of a
respondent bank will depend on the extent to which reviewing the anti-
money laundering program of the respondent bank would be appropriate
based upon the nature of the correspondent account.\20\ While covered
financial institutions have discretion with respect to implementing
this provision, as with other risk-based provisions of the BSA and its
implementing regulations, a covered financial institution is
responsible for reasonably demonstrating that it is effectively
exercising that discretion on a risk-assessed basis.
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\20\ For example, a covered financial institution may maintain a
correspondent account for a respondent bank with which it has had a
longstanding relationship, for a respondent bank that only conducts
proprietary transactions through the correspondent account, for a
respondent bank that is controlled by a U.S. institution, or for a
respondent bank whose licensing or home jurisdiction is known for
maintaining a comprehensive anti-money laundering regime. In such
circumstances, a covered financial institution may determine through
experience and due diligence that reviewing information related to
the anti-money laundering program of the respondent bank will not
provide information that is relevant to the covered financial
institution's risk-assessment or monitoring of the respondent bank's
correspondent account. In contrast, a respondent bank that permits
or conducts transactions on behalf of other foreign banks, or
operates payable-through accounts, through the covered financial
institution may pose a greater money laundering risk. In such
circumstances, conducting due diligence that includes a review of
information related to the respondent bank's anti-money laundering
program may be appropriate.
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We revised this due diligence provision of the Second Proposed Rule
to clarify that covered financial institutions are expected neither to
conduct an audit of the anti-money laundering programs of their
respondent bank customers, nor to determine the extent to which the
respondent bank's anti-money laundering program is ``reasonably
designed to detect and prevent money laundering,'' which may be
difficult to determine without conducting an audit.\21\ Rather, under
the final rule, a covered financial institution is required to consider
and assess more generally the extent to which it may be exposed to
money laundering risk by the respondent bank's correspondent account.
The revision also was made to reduce the burdens associated with
reviewing documents, such as language barriers, as well as to provide
covered financial institutions with flexibility to determine how to
conduct due diligence with respect to a respondent bank's anti-money
laundering efforts.
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\21\ See, e.g., Second Proposed Rule, 71 FR at 518 (``[w]e do
not contemplate that the covered financial institution would conduct
an audit of the foreign correspondent bank's written anti-money
laundering program'').
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For example, a covered financial institution may, in appropriate
circumstances, use a questionnaire, as several commenters suggested, to
gather information related to the anti-money laundering program of a
respondent bank, provided that the questionnaire and the responses
thereto enable a covered financial institution to assess effectively
the risk of money laundering presented by the respondent bank. In
appropriate situations, such as where a covered financial institution
has a sufficient transaction history with a respondent bank, a covered
financial institution may also conduct a review of that transaction
history to assess the money laundering risk presented by the respondent
bank.
As one commenter suggested, a covered financial institution may
also, in appropriate circumstances, incorporate its enhanced due
diligence efforts into the certification process available under the
rules implementing sections 313 and 319(b) of the USA PATRIOT Act.\22\
Incorporating a questionnaire into the certification form would not
alone affect the safe harbor provided under the rules implementing
sections 313 and 319(b),\23\ provided that the covered financial
institution also obtains and maintains all of the information required
under those rules.
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\22\ See 31 CFR 103.177.
\23\ 31 CFR 103.177(b).
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We caution, however, that the certifications are subject to renewal
only every three years. Waiting until the next certification is
required before obtaining information about the respondent bank's anti-
money laundering program may not be reasonable for purposes of
complying with the enhanced due diligence provisions of section 312. We
also remind covered financial institutions incorporating a
questionnaire into their certifications that doing so will not extend
the section 313 and 319(b) safe harbor to this final rule.
[[Page 44771]]
Finally, one commenter asked whether a covered financial
institution would be required to formulate additional due diligence
measures for its accounts for foreign banks that are subject of this
final rule if the covered financial institution applies the equivalent
of enhanced due diligence required in this final rule to all of its
correspondent accounts for foreign financial institutions.\24\ If a
covered financial institution applies both the due diligence program
for foreign correspondent accounts \25\ and the enhanced due diligence
requirements of this final rule to all of its correspondent accounts
for foreign financial institutions, then the covered financial
institution would not be required to formulate additional due diligence
measures for the correspondent accounts it establishes and maintains
for foreign banks that are the subjects of this final rule.
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\24\ See 31 CFR 103.175(h) (defining ``foreign financial
institution'' to include banks, broker-dealers in securities,
futures commission merchants, and mutual funds).
\25\ 31 CFR 103.176(a).
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Section 103.176(b)(1)(iii) of the Second Proposed Rule would have
required covered financial institutions to monitor transactions to,
from, or through a respondent bank in a manner that is reasonably
designed to detect money laundering and suspicious activity. In the
preamble to the Second Proposed Rule, we emphasized that monitoring is
an important aspect of enhanced due diligence.\26\ This monitoring may
be conducted manually or electronically, may be done on an individual
account basis or by product activity, and should reflect the risk
assessment conducted by the covered financial institution on each
respondent bank subject of the enhanced due diligence provisions.
Section 103.176(b)(1)(iii) has been incorporated into the final rule
without change, and has been re-designated as Section
103.176(b)(1)(ii).
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\26\ Second Proposed Rule, 71 FR at 518.
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Section 103.176(b)(1)(iv) of the Second Proposed Rule would have
required covered financial institutions to obtain information from the
foreign bank about the identity of any person with authority to direct
transactions through any correspondent account that is a payable-
through account, and the sources and beneficial owners of funds or
other assets in the payable-through account. This provision has been
incorporated into the final rule without change, and has been re-
designated as Section 103.176(b)(1)(iii).
2. 103.176(b)(2)--Foreign bank customers. Section 103.176(b)(2) of
the Second Proposed Rule would have required a covered financial
institution to determine whether a respondent bank in turn maintains
correspondent accounts for other foreign banks that enable those other
foreign banks to gain access to the respondent bank's account with the
covered financial institution. If such a situation exists, the Second
Proposed Rule would have required the covered financial institution to
take reasonable steps to assess and minimize the potential money
laundering risk posed by the respondent bank's accounts for those other
foreign banks.
Commenters were concerned about the extent to which they would be
expected to obtain lists of foreign bank customers from their
respondent banks, for the purposes of complying with section
103.176(b)(2).\27\ One commenter, for example, stated that it may not
be possible to obtain a list of the foreign bank customers of
respondent banks due to strict privacy laws in some countries.\28\ Two
commenters suggested that there are situations where it is unlikely,
due to the nature of the correspondent account, that funds transfers
will be conducted through the account, and therefore the covered
financial institution should not be required to obtain lists of, or
other information about, foreign bank customers of their respondent
banks.
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\27\ Other commenters requested clarification that the
provisions of subsection (b)(2) are risk-based.
\28\ One commenter expressed the view that it should not be
required to obtain the anti-money laundering programs of the foreign
bank customers of a respondent bank. Section 103.176(b)(2) does not
contain such a requirement. Obtaining and considering information
related to the anti-money laundering program of a foreign respondent
bank, and not the program of its foreign bank customers, is set
forth in this final rule as an enhanced due diligence procedure when
appropriate. See 31 CFR 103.176(b)(1)(i).
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As a general rule, we do not expect that a covered financial
institution will request and obtain lists of foreign bank customers
from their respondent banks. We do expect, however, that covered
financial institutions, based upon their risk assessment of a
respondent bank and as part of their enhanced due diligence efforts,
will make appropriate inquiries about such factors as the nature of the
foreign bank customers the respondent bank serves (if any) and the
extent to which transactions for any such foreign bank customer may be
conducted through the respondent bank's correspondent account. The
covered financial institution also could consult bank reference guides,
and monitor or otherwise assess transaction activity to the extent it
may contain foreign bank customer information.\29\
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\29\ In situations where it is unlikely that funds transfers
will be conducted through a correspondent account, covered financial
institutions may determine that it would not be necessary to obtain
a list of the respondent bank's foreign bank customers. We note,
however, that correspondent accounts that may not be used to conduct
funds transfers nonetheless may be used to launder money and conduct
other illicit financial activity.
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There may be circumstances, such as in the highest risk situations,
where it may be necessary and appropriate to request and obtain the
identity of a respondent bank's foreign bank customers directly from
the respondent bank. If obtaining such information in appropriate
circumstances is not possible--including by monitoring account
activity--the covered financial institution should determine, pursuant
to section 103.176(d) of this final rule, how to proceed in light of
the particular circumstances.
One commenter expressed concern that covered financial institutions
may be held responsible, according to the provisions of section
103.176(b)(2), for monitoring and reporting suspicious activity of the
foreign bank customers of their respondent banks. The obligation to
monitor for and report suspicious activity arises from the rules
implementing 31 U.S.C. 5318(g). Under those rules, covered financial
institutions must report suspicious activity involving any of their
accounts to the extent they know, suspect, or have reason to suspect a
violation of law or regulation, including suspicious activity attempted
or conducted by, at, or through correspondent accounts they establish
or maintain for respondent banks.\30\ Such activity may involve the
respondent bank's foreign bank customers.
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\30\ See 31 CFR 103.15(a) (suspicious activity reporting
requirements for mutual funds), 31 CFR 103.17(a) (same for futures
commission merchants), 31 CFR 103.18(a) (for banks), and 31 CFR
103.19(a) (for broker-dealers in securities). See also In the Matter
of the Federal Branch of Arab Bank PLC, FinCEN enforcement action
2005-2 (Aug. 17, 2005) and In the Matter of the New York Branch of
ABN Amro Bank N.V., FinCEN enforcement action 2005-5 (Dec. 19, 2005)
(financial institutions responsible for monitoring the transactions
through correspondent accounts maintained on behalf of foreign
financial institutions), available at http://www.fincen.gov/reg_enforcement.html
.
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One commenter was concerned by the level of due diligence that may
be required by the use of the word ``minimize'' in section
103.176(b)(2) of the Second Proposed Rule and suggested replacing with
the word mitigate. Accordingly, in this final rule, we have revised the
relevant clause to require a covered financial institution to ``take
reasonable steps to obtain
[[Page 44772]]
information relevant to assess and mitigate money laundering risks
associated with the foreign bank's correspondent accounts for other
foreign banks'' \31\ as the commenter suggested.
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\31\ Emphasis added.
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Finally, commenters sought clarification as to whether section
103.176(b)(2) is risk-based. The first part of this sub-paragraph
requires a covered financial institution to take reasonable steps to
``[d]etermine whether the foreign bank for which the correspondent
account is established or maintained in turn maintains correspondent
accounts for other foreign banks that use the foreign correspondent
account established or maintained by the covered financial
institution.'' Making that initial determination is not dependent on
the risks associated with a particular respondent bank.
However, once a covered financial institution has taken reasonable
steps to make such a determination, it may ``take reasonable steps to
obtain information relevant to assess and mitigate money laundering
risks associated with the foreign bank's correspondent accounts for
other foreign banks, including, as appropriate, the identity of those
foreign banks,'' as section 103.176(b)(2) provides and the authorizing
statute contemplates. A covered financial institution may take a risk-
based approach when determining what steps to gather due diligence
information are appropriate.
3. 103.176(b)(3)--Identification of the owners of foreign banks.
Section 103.176(b)(3) of the Second Proposed Rule would require a
covered financial institution to take reasonable steps to identify the
owners of a respondent bank if the respondent bank's shares are not
publicly traded. The section defined an owner as ``any person who
directly or indirectly owns, controls, or has the power to vote 10
percent or more of any class of securities'' of the respondent bank.
One commenter suggested that we increase the proposed 10% threshold
for identifying the interest of the owners of respondent banks to 25%
for banks that are considered to represent a relatively low level of
money laundering risk. Other commenters requested clarification that
the provisions of subsection (b)(3) are risk-based.
After consideration, we adopted the proposed threshold into the
final rule without change. The final rule covers three specific and
relatively small categories of foreign banks that have been designated
by statute. We believe that tiered ownership thresholds would undermine
the benefit of identifying the owners of high-risk respondent banks
while not appreciably reducing the burden of identifying such owners.
Accordingly, we have not adopted a risk-based approach to section
103.176(b)(3).
B. Section 103.176(c)--Foreign Banks Subject to Enhanced Due Diligence
Section 103.176(c) of the Second Proposed Rule set forth the types
of foreign banks for which enhanced due diligence would be required, as
provided by section 312 of the USA PATRIOT Act. The enhanced due
diligence provisions would apply to foreign banks operating under (1)
An offshore banking license; \32\ (2) a license issued by a country
designated as being non-cooperative with international anti-money
laundering principles or procedures by an intergovernmental group or
organization of which the United States is a member and with which
designation the United States representative to the group or
organization concurs; \33\ or (3) a license issued by a country
designated by the Secretary as warranting special measures due to money
laundering concerns.\34\ The final rule adopts this provision without
change.
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\32\ See supra note 11.
\33\ See supra note 12.
\34\ See supra note 13.
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One commenter suggested that we reinstate the proposed exception
from the enhanced due diligence requirements of section 312 for an
offshore bank that ``has been found, or is chartered in a jurisdiction
where one or more foreign banks have been found, by the Board of
Governors of the Federal Reserve System under the Bank Holding Company
Act or the International Banking Act, to be subject to comprehensive
supervision or regulation on a consolidated basis by the relevant
supervisors in that jurisdiction.'' \35\ After consideration, we did
not include such an exception in this final rule.
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\35\ See First Proposed Rule, 67 FR at 37743.
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We believe that the risk-based provisions of the final rule are
better suited to addressing the various risk profiles of respondent
banks subject to enhanced due diligence than the proposed exception.
Thus, when dealing with an offshore booking location of a bank located
in a country with a strong anti-money laundering regime, for example, a
covered financial institution ordinarily will not be required to
conduct enhanced due diligence to the same degree as it would with a
stand-alone offshore bank.\36\
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\36\ See supra note 19 and accompanying text (recognizing that
the anti-money laundering and supervisory regime of the jurisdiction
that issued a charter or license to a foreign bank may be
particularly relevant in assessing the money laundering risk posed
by the foreign bank and a mitigating risk factor for the purposes of
complying with the enhanced due diligence provisions, as also may be
the regime of the home jurisdiction of the foreign bank or its
parent to the extent relevant information is readily available).
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One commenter was concerned that a covered financial institution
may be cited for a violation of this final rule if it failed to subject
an account established or maintained for a high-risk foreign bank to
the enhanced due diligence requirements of the rule even when the
foreign bank was not in one of the three designated categories of banks
subject to enhanced due diligence. However, section 103.176(b) is
expressly limited to the foreign banks enumerated at section
103.176(c). With respect to high-risk foreign banks not enumerated in
section 103.176(c), a failure to apply appropriate due diligence to a
correspondent account maintained for such a foreign bank would
constitute a violation of the general due diligence provisions of the
correspondent account rule,\37\ but not the enhanced due diligence
provisions of this final rule.
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\37\ See 31 CFR 103.176(a).
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C. Section 103.176(d)--Special Procedures
According to the provisions of proposed section 103.176(d), a
covered financial institution would be required to establish special
procedures for circumstances in which appropriate due diligence or
enhanced due diligence cannot be performed with respect to a
correspondent account. We received no comments on this provision of the
Second Proposed Rule. It has been adopted in this final rule without
change.
D. Section 103.176(e) and (f)--Applicability Rules
This final rule revises section 103.176(e) and adds new section (f)
to reflect the applicability dates of the obligations under this
section. The Second Proposed Rule did not address the issue of
applicability dates. We are mindful, however, of the obligations that
will result from the statutory requirement that enhanced due diligence
apply to all correspondent accounts maintained for certain foreign
banks, regardless of when the accounts were opened. Effective 180 days
after the date of publication of this final rule, the requirements of
this final rule will
[[Page 44773]]
apply to correspondent accounts opened on or after that date. Effective
270 days after the date of publication of this final rule, the rule's
requirements will apply to all correspondent accounts opened prior to
the date that is 180 days after the date of publication of this final
rule.
Section 103.176(f)(2) contains a special implementation rule for
banks. This special implementation rule requires banks that have been
subject to the provisions of our interim final rule \38\ to continue to
comply with the existing enhanced due diligence requirements for
correspondent accounts of section 312 until the effective dates
described in section 103.176(f)(1) are triggered.
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\38\ See supra note 5 and accompanying text.
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Section 103.176(f)(3) contains a special implementation rule for
all other covered financial institutions. This section provides that
securities broker-dealers, futures commission merchants, introducing
brokers, mutual funds, and trust banks or trust companies that have a
federal regulator are not required to comply with the enhanced due
diligence provisions until the effective dates described in section
103.176(f)(1) are triggered.
E. Section 103.176(g)--Exemptions
New section 103.176(g) restates and conforms the exemption for
certain financial institutions from the due diligence and enhanced due
diligence requirements of section 103.176.
IV. Regulatory Flexibility Act
We certified that the January 4, 2006 proposed rule would not have
a significant economic impact on a substantial number of small
entities. We made this certification because the proposed rule would
provide guidance concerning certain mandated enhanced due diligence
requirements in section 312 of the Act, and because the financial
institutions that would be covered by the rule tend to be larger
institutions.
One commenter expressed concern that the final rule will make it
prohibitive for smaller institutions to engage in the foreign
correspondent banking business. However, this final rule does not
impose significant new burdens on covered financial institutions of any
size. Since at least 2002, the depository institutions covered by this
rule have been subject to an interim final rule containing
substantially similar enhanced due diligence requirements.\39\ Other
covered financial institutions have been required to establish and
maintain anti-money laundering programs reasonably designed, among
other things, to prevent money laundering through correspondent
accounts generally.\40\
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\39\ Due Diligence Anti-Money Laundering Programs for Certain
Foreign Accounts, 67 FR 48348 (July 23, 2002).
\40\ See Anti-Money Laundering Programs for Financial
Institutions, 67 FR 21110 (April 29, 2002) (establishing anti-money
laundering program requirements for federally regulated depository
institutions, broker-dealers in securities, futures commission
merchants, and introducing brokers in commodities). See also Anti-
Money Laundering Program for Mutual Funds, 67 FR 21117 (April 29,
2002).
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Because the terms of the interim rule and the final rule are
substantially similar, and because the single comment does not provide
evidence of any significant economic impact created by the interim or
final rule, we believe that the final rule will not have a significant
economic impact on a substantial number of small businesses. We also
note that even if, as the comment asserts, the rule made foreign
correspondent banking prohibitive for small entities, this would
establish neither that a substantial number of small entities engage in
foreign correspondent banking, nor that any that do derive significant
revenue from such business.
Moreover, we have incorporated flexibility into this final rule,
particularly by shifting from the prescriptive approach to compliance
proposed in the First Proposed Rule to the risk-based approach adopted
in this final rule. This flexibility will permit each covered financial
institution to tailor its enhanced due diligence program for
statutorily designated foreign banks \41\ to fit its size and the risks
of its customer base.
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\41\ See supra text accompanying footnotes 11-13.
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For these reasons, it is hereby certified, pursuant to the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.), that this final rule
will not have a significant economic impact on a substantial number of
small businesses.
V. Executive Order 12866
This final rule is not a ``significant regulatory action'' as
defined in Executive Order 12866. Accordingly, a regulatory assessment
is not required.
VI. Paperwork Reduction Act
The collection of information contained in this final rule has been
approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and was assigned
Office of Management and Budget Control Number 1506-0046. 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 control number
assigned by the Office of Management and Budget.
The only requirements in the final rule that are subject to the
Paperwork Reduction Act are set forth in 31 CFR 103.176(b)(1)(i),
103.176(b)(1)(iii)(A), and 103.176(b)(3), requiring covered financial
institutions to obtain information relating to certain foreign banks'
anti-money laundering programs, when appropriate, to obtain information
from such foreign banks about the identity of any person with authority
to direct transactions through a correspondent account that is a
payable-through account and the sources and beneficial owner of funds
or other assets in the payable-through account, when appropriate, and
to obtain the identity of certain owners of any such foreign bank that
is privately owned and the nature and extent of the ownership interest.
The estimated annual average burden associated with this collection of
information was one hour per recordkeeper. We estimated that there
would be 28,163 recordkeepers, for a total of 28,163 annual burden
hours.\42\ We received two comments on this burden estimate.
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\42\ Second Proposed Rule, 71 FR at 519.
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One commenter argued that the burden would ``number into the
hundreds of hours, at a minimum.'' The number of burden hours set forth
under the Paperwork Reduction Act is designed to be an average,
however, and includes recordkeepers subject to the provisions of this
final rule that may not maintain correspondent accounts for statutorily
designated foreign banks. Moreover, the number of burden hours pertains
only to the collection of information when appropriate, and not to the
review of the information.
Another commenter suggested that the number of burden hours may be
two hours per year instead of one hour. We accept that estimate and,
accordingly, have adjusted our final estimate of burden hours to two
hours per recordkeeper.
Comments concerning the accuracy of this recordkeeping burden
estimate and suggestions for reducing this burden should be sent
(preferably by fax (202-395-6974)) to Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Office
of Management and Budget, Paperwork Reduction Project (1506),
Washington, DC 20503 (or by the internet to ahunt@omb.eop.gov), with a
copy by regular mail to Financial Crimes Enforcement Network, P.O. Box
39, Vienna, VA 22183, ``ATTN: Regulation Identifier Number 1506-AA29''
or by electronic mail to
[[Page 44774]]
regcomments@fincen.treas.gov with the caption ``ATTN: Regulatory
Information Number 1506-AA29'' in the body of the text.
List of Subjects in 31 CFR Part 103
Banks, Banking, Brokers, Counter-money laundering, Counter-
terrorism, Currency, Foreign banking, Reporting and recordkeeping
requirements.
Authority and Issuance
0
For the reasons set forth above, we are amending subpart I of 31 CFR
Part 103 as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
0
1. The authority citation for part 103 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, secs. 311, 312, 313, 314, 319, 326, 352,
Pub. L. 107-56, 115 Stat. 307.
0
2. In subpart I, amend Sec. 103.176 by adding paragraphs (b) and (c),
revising paragraphs (d) and (e), and adding paragraphs (f) and (g) to
read as follows:
Sec. 103.176 Due diligence programs for correspondent accounts for
foreign financial institutions.
* * * * *
(b) Enhanced due diligence for certain foreign banks. In the case
of a correspondent account established, maintained, administered, or
managed in the United States for a foreign bank described in paragraph
(c) of this section, the due diligence program required by paragraph
(a) of this section shall include enhanced due diligence procedures
designed to ensure that the covered financial institution, at a
minimum, takes reasonable steps to:
(1) Conduct enhanced scrutiny of such correspondent account to
guard against money laundering and to identify and report any
suspicious transactions in accordance with applicable law and
regulation. This enhanced scrutiny shall reflect the risk assessment of
the account and shall include, as appropriate:
(i) Obtaining and considering information relating to the foreign
bank's anti-money laundering program to assess the risk of money
laundering presented by the foreign bank's correspondent account;
(ii) Monitoring transactions to, from, or through the correspondent
account in a manner reasonably designed to detect money laundering and
suspicious activity; and
(iii)(A) Obtaining information from the foreign bank about the
identity of any person with authority to direct transactions through
any correspondent account that is a payable-through account, and the
sources and beneficial owner of funds or other assets in the payable-
through account.
(B) For purposes of paragraph (b)(1)(iii)(A) of this section, a
payable-through account means a correspondent account maintained by a
covered financial institution for a foreign bank by means of which the
foreign bank permits its customers to engage, either directly or
through a subaccount, in banking activities usual in connection with
the business of banking in the United States.
(2) Determine whether the foreign bank for which the correspondent
account is established or maintained in turn maintains correspondent
accounts for other foreign banks that use the foreign correspondent
account established or maintained by the covered financial institution
and, if so, take reasonable steps to obtain information relevant to
assess and mitigate money laundering risks associated with the foreign
bank's correspondent accounts for other foreign banks, including, as
appropriate, the identity of those foreign banks.
(3)(i) Determine, for any correspondent account established or
maintained for a foreign bank whose shares are not publicly traded, the
identity of each owner of the foreign bank and the nature and extent of
each owner's ownership interest.
(ii) For purposes of paragraph (b)(3)(i) of this section:
(A) Owner means any person who directly or indirectly owns,
controls, or has the power to vote 10 percent or more of any class of
securities of a foreign bank. For purposes of this paragraph
(b)(3)(ii)(A):
(1) Members of the same family shall be considered to be one
person; and
(2) Same family has the meaning provided in Sec.
103.175(l)(2)(ii).
(B) Publicly traded means shares that are traded on an exchange or
an organized over-the-counter market that is regulated by a foreign
securities authority as defined in section 3(a)(50) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(50)).
(c) Foreign banks to be accorded enhanced due diligence. The due
diligence procedures described in paragraph (b) of this section are
required for any correspondent account maintained for a foreign bank
that operates under:
(1) An offshore banking license;
(2) A banking license issued by a foreign country that has been
designated as non-cooperative with international anti-money laundering
principles or procedures by an intergovernmental group or organization
of which the United States is a member and with which designation the
U.S. representative to the group or organization concurs; or
(3) A banking license issued by a foreign country that has been
designated by the Secretary as warranting special measures due to money
laundering concerns.
(d) Special procedures when due diligence or enhanced due diligence
cannot be performed. The due diligence program required by paragraphs
(a) and (b) of this section shall include procedures to be followed in
circumstances in which a covered financial institution cannot perform
appropriate due diligence or enhanced due diligence with respect to a
correspondent account, including when the covered financial institution
should refuse to open the account, suspend transaction activity, file a
suspicious activity report, or close the account.
(e) Applicability rules for general due diligence. The provisions
of paragraph (a) of this section apply to covered financial
institutions as follows:
(1) General rules--(i) Correspondent accounts established on or
after July 5, 2006. Effective July 5, 2006, the requirements of
paragraph (a) of this section shall apply to each correspondent account
established on or after that date.
(ii) Correspondent accounts established before July 5, 2006.
Effective October 2, 2006, the requirements of paragraph (a) of this
section shall apply to each correspondent account established before
July 5, 2006.
(2) Special rules for certain banks. Until the requirements of
paragraph (a) of this section become applicable as set forth in
paragraph (e)(1) of this section, the due diligence requirements of 31
U.S.C. 5318(i)(1) shall continue to apply to any covered financial
institution listed in Sec. 103.175(f)(1)(i) through (vi).
(3) Special rules for all other covered financial institutions. The
due diligence requirements of 31 U.S.C 5318(i)(1) shall not apply to a
covered financial institution listed in Sec. 103.175(f)(1)(vii)
through (x) until the requirements of paragraph (a) of this section
become applicable as set forth in paragraph (e)(1) of this section.
(f) Applicability rules for enhanced due diligence. The provisions
of paragraph (b) of this section apply to covered financial
institutions as follows:
[[Page 44775]]
(1) General rules--(i) Correspondent accounts established on or
after February 5, 2008. Effective February 5, 2008, the requirements of
paragraph (b) of this section shall apply to each correspondent account
established on or after such date.
(ii) Correspondent accounts established before February 5, 2008.
Effective May 5, 2008, the requirements of paragraph (b) of this
section shall apply to each correspondent account established before
February 5, 2008.
(2) Special rules for certain banks. Until the requirements of
paragraph (b) of this section become applicable as set forth in
paragraph (f)(1) of this section, the enhanced due diligence
requirements of 31 U.S.C. 5318(i)(2) shall continue to apply to any
covered financial institutions listed in Sec. 103.175(f)(1)(i) through
(vi).
(3) Special rules for all other covered financial institutions. The
enhanced due diligence requirements of 31 U.S.C. 5318(i)(2) shall not
apply to a covered financial institution listed in Sec.
103.175(f)(1)(vii) through (x) until the requirements of paragraph (b)
of this section become applicable, as set forth in paragraph (f)(1) of
this section.
(g) Exemptions--(1) Exempt financial institutions. Except as
provided in this section, a financial institution defined in 31 U.S.C.
5312(a)(2) or (c)(1), or Sec. 103.11(n) is exempt from the
requirements of 31 U.S.C. 5318(i)(1) and (i)(2) pertaining to
correspondent accounts.
(2) Other compliance obligations of financial institutions
unaffected. Nothing in paragraph (g) of this section shall be construed
to relieve a financial institution from its responsibility to comply
with any other applicable requirement of law or regulation, including
title 31, United States Code, and this part.
Dated: August 2, 2007.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. E7-15467 Filed 8-8-07; 8:45 am]
BILLING CODE 4810-02-P