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From Banking and Finance Law Daily, August 28, 2015

FinCEN’s final rule against FBME is suspended pending challenge

By Lisa M. Goolik, J.D.

The U.S. District Court for the District of Columbia has granted a request by FBME Bank Ltd. for a preliminary injunction temporarily enjoining the Financial Crimes Enforcement Network from enforcing a final rule that would prohibit U.S. financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME. The court concluded that FBME is likely to prevail on the merits of its claims that FinCEN violated the Administrative Procedures Act (APA). Accordingly, the final rule will not take effect until the court enters a final judgment in FBME’s action (FBME Bank Ltd. v. Lew, Aug. 27, 2015, Cooper, C.).

Background. According to FinCEN, FBME was established in 1982 in Cyprus as the Federal Bank of the Middle East, Ltd., a subsidiary of the private Lebanese bank, the Federal Bank of Lebanon. In 1986, FBME changed its country of incorporation to the Cayman Islands, and its banking presence in Cyprus was re-registered as a branch of the Cayman Islands entity. In 2003, FBME left the Cayman Islands and incorporated and established its headquarters in Tanzania. While FBME’s headquarters in Tanzania is widely regarded as the largest bank in Tanzania based on its $2 billion asset size, it has only four Tanzania-based branches. FBME transacts over 90 percent of its global banking business and holds over 90 percent of its assets in its Cyprus branch.

On July 17, 2014, FinCEN issued notice that it had found FBME to be a “foreign financial institution of primary money laundering concern” under Section 311 of the USA PATRIOT Act and proposed the imposition of “special measure five” against the bank (see Banking and Finance Law Daily, July 18, 2014). In support of its proposal, FinCEN alleged that an FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah. FBME has also provided financial services to a financial advisor for a major transnational organized crime figure. At least one FBME customer was a front company for a U.S.-sanctioned Syrian entity, the Scientific Studies and Research Center (SSRC), which used its FBME account to process transactions through the U.S. financial system.

On July 21, 2014, the Central Bank of Cyprus (CBC) issued a decree announcing that it would formally place FBME’s Cyprus branch “under resolution,” allowing the CBC to take numerous unilateral measures to protect FBME’s depositors. On July 24, 2014, the Bank of Tanzania took over management of FBME’s headquarters in Tanzania because of the potential effects of the CBC’s actions on the Tanzanian banking system.

As a result, on July 23, 2015, FinCEN determined that finalizing the proposed rule and imposing special measure five was warranted and necessary to protect the U.S. financial system (see Banking and Finance Law Daily, July 24, 2015). While FinCEN “carefully considered” material FBME submitted in response to the proposal, FinCEN stated that it continued to have serious concerns regarding FBME’s potential to be used wittingly or unwittingly for illicit purposes.

FBME challenge. According to FBME, after FinCEN issued its notice of proposed rulemaking, U.S. financial institutions holding correspondent accounts on behalf of FBME terminated their relationships with the bank, and other financial institutions abroad held FBME’s U.S. dollar correspondent accounts in suspension pending imposition of the final rule. FBME argued that once the final rule takes effect, the remaining banks with which FBME maintains U.S. dollar correspondent accounts will liquidate those accounts, “effectively excommunicating FBME from the global financial system, and potentially permanently depriving the bank of its U.S. dollar assets.”

As a result, FBME filed suit on Aug. 7, 2015, and moved for a preliminary injunction. The bank alleged that the final rule is invalid because: (1) FinCEN failed to provide it adequate notice of the basis of its findings as required by the APA; (2) FinCEN acted arbitrarily and capriciously under the APA by, among other things, not considering all relevant facts or the imposition of less punitive measures; and (3) FinCEN violated the bank’s constitutional due process rights.

APA notice requirements. The APA requires that before an agency may promulgate a rule, it must provide “[g]eneral notice” of the rule and “give interested persons an opportunity to participate in the rule making.” The notice must include “sufficient detail on its content and basis in law and evidence to allow for meaningful and informed comment.”

FBME claimed that FinCEN violated the requirement because it never divulged all of the documents or facts on which its rulemaking was premised, violating its duty under the APA to provide detail on the rule’s evidentiary basis and the information it used to reach its conclusions. FinCEN responded that the APA does not require it to disclose all information at the level of detail that FBME requested, “particularly where the specific information sought by FBME is classified or prohibited from disclosure by [statute].”

The court concluded that the notice that FinCEN provided as part of its rulemaking was not defective simply because FinCEN withheld substantial amounts of classified information yet relied on that information in promulgating its rule. The court noted that the PATRIOT Act explicitly contemplates that the Treasury Department may rely on classified information when imposing special measures against entities of primary money laundering concern. “Congress therefore clearly contemplated a rulemaking procedure that would involve agency reliance on classified information, despite the fact that the Treasury Department would not be able to disclose that information,” wrote the court.

In addition, the court determined that to the extent that FinCEN may have relied on information contained in Suspicious Activity Reports, which it could not disclose under the Bank Secrecy Act, the summary information that FinCEN provided was sufficient to put FBME on notice that FinCEN might rely on information derived from those SARs.

However, the court found that FBME was likely to succeed in showing that FinCEN violated the APA’s notice requirements because FinCEN also relied on non-classified, non-protected documents that it failed to publicly disclose during the notice-and-comment period. FinCEN’s acknowledged that it relied upon additional non-classified, non-protected documents that it failed to provide to FBME until FBME’s action. “As a result, FBME never had the opportunity to contest the veracity, credibility, or relevance of the information contained in these documents,” the court explained.

Moreover, the court concluded that although FBME “received substantially more process than any organization” and that FinCEN continued to consider comments submitted by FBME after the deadline, “that additional process cannot compensate for the defect in the notice that FinCEN provided to FBME.”

Arbitrary and capricious. FBME also claimed that the final rule is arbitrary and capricious under the APA in that it reflects FinCEN’s failure to: (1) consider viable and obvious, less-punitive alternatives to the prohibition in the fifth special measure, such as the imposition of a fine or a special monitor; (2) consider relevant data in promulgating the rule; and (3) adequately explain how the rule satisfies Section 311’s requirements.

While the court rejected FBME’s second and third arguments, the court concluded that FinCEN’s failure to consider, as an alternative to the final rule, the imposition of conditions on the opening or maintaining of correspondent accounts, rather than the full prohibition of opening or maintaining such accounts, appeared to have violated the APA. “While it is implicit in the Final Rule why the first four special measures were not viable alternatives, nowhere in the record does the agency explain why conditions on the opening or maintaining of such accounts for FBME could not protect the U.S. financial system against the risks posed by FBME,” the court noted.

Public interest. While the court recognized the “grave threat to national security” that terrorist financing poses, it noted that FBME’s current inability to access the U.S. banking system and transact business in U.S. dollars as a result of the issuance of the notice of proposed rulemaking minimized any potential harm to the government and the public from enjoining the final rule.

The case is No. 15-cv-01270 (CRC).

Attorneys: Derek Lawrence Shaffer (Quinn Emanuel Urquhart & Sullivan, LLP) for FBME Bank Ltd., and FBME Ltd.

Companies: FBME Bank Ltd.

MainStory: TopStory BankingOperations BankSecrecyAct EnforcementActions

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