Pursuant to Section 311 of the of the USA Patriot Act, FinCEN is authorized to designate foreign financial institutions as being “of primary money laundering concern” and to take any of five “special measures” against institutions so designated. FinCEN can impose the most severe, fifth special measure—allowing it to prohibit or restrict domestic financial institutions from opening or maintaining correspondent accounts for designated foreign financial institutions—only by issuing a regulation under the Administrative Procedure Act (APA). Ongoing litigation surrounding a Section 311 designation implicates the important question of how much FinCEN must explain itself under the APA, and the extent to which FinCEN must provide objective comparative benchmarks—such as the practices of other financial institutions—when it concludes that an institution has engaged in an unacceptably high degree of suspicious transactions.

On July 22, 2014, FinCEN issued a Notice of Finding designating FBME Bank Ltd., a Tanzanian- chartered bank operating primarily out of Cyprus, as an institution of primary money laundering concern based on its alleged involvement in money laundering and other illicit activity. FinCEN later promulgated a final rule imposing the special measure. Before the rule took effect, FBME brought suit against FinCEN seeking an order declaring the final rule unlawful and permanently enjoining its enforcement. FBME alleged, inter alia, that FinCEN violated the APA by failing to give FBME sufficient notice of the rule’s factual and legal basis and had acted arbitrarily and capriciously by failing to properly consider alternative measures against FBME.

On August 27, 2015, the District Court for the District of Columbia granted FBME’s preliminary injunction. The court ruled that FBME likely would be able to show that FinCEN failed to disclose to FBME the information that led to the designation, preventing FBME from responding. The court also ruled that FBME likely could show that FinCEN erred by failing to consider alternative, less onerous sanctions.

Rather than appealing the injunction, FinCEN successfully sought a voluntary remand to permit it to revise its rulemaking regarding FBME. FinCEN published its second final rule on March 31, 2016, again concluding that FBME is of primary money laundering concern and that the fifth special measure is appropriate. The parties filed cross-motions for summary judgment. On September 20, 2016, the district court issued a detailed opinion and again remanded, finding that FinCEN had not meaningfully responded to FBME’s criticism of FinCEN’s treatment of aggregate Suspicious Activity Report (SAR) data, including the bank’s critique that FinCEN provided no comparative benchmarks referencing other similarly situated banks to support its claim that FBME-facilitated transactions were the subject of an unusually high number of SAR filings.

On December 1, 2016, FinCEN published a supplement to its final rule that attempted to respond to FBME’s comments, and the bank has filed additional pleadings. The district court has not yet ruled to resolve the issue. The outcome may provide valuable insight into the degree to which FinCEN may be compelled under Section 311—and perhaps in other enforcement contexts—to explain, under the guise of a procedural challenge, the substantive and objective merits of its decision that a particular institution has engaged in an unacceptable number of suspicious transactions.

As the district court explained in its September 2016 opinion, “FinCEN provides no comparative benchmarks referencing other banks to support its assertions that FBME has a ‘large number’ of shell company customers or that the Bank has facilitated a ‘high volume’ of U.S. dollar transactions by such shell companies. . . . Nor does the agency attempt to explain why such benchmarks may be unnecessary, or infeasible to provide, or how else the agency may have applied its expertise and regulatory experience in the absence of specific benchmarks.” Whether FinCEN can provide such benchmarks, or compellingly argue that such benchmarks are not necessary to evaluate adequately its decisions, is an issue that should be closely watched.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.