Section 311 of USA Patriot Act

Town of Metula at the Israel-Lebanon border – the site of 2006 rocket attacks by Hizbollah

On September 25, 2019, the Southern District of New York dismissed a complaint brought by victims of rocket attacks in Israel perpetrated in 2006 by Hizbollah, operating in Lebanon. Kaplan v. Lebanese Canadian Bank, SAL, Civ. No. 08 Civ. 7253, 2019 U.S. Dist. LEXIS 162505 (S.D.N.Y. Sept. 20, 2019). The Complaint was brought under the Anti-Terrorism Act, 18 USC 2333 (“ATA”). In it, the Plaintiffs alleged that the Lebanese Canadian Bank, SAL (“LCB”) provided banking services to five members of Hizbollah (“Hizbollah affiliates”), and by doing so, they materially supported an act of international terrorism.

Specifically, the Complaint alleged, among other things, that LCB failed to take certain due diligence measures, including reviewing public sources, and as a result continued to bank with members of Hizbollah. According to the Complaint, the bank’s customers’ afficilation with Hizbollah was “notorious public knowledge” due to news articles, reports, and Hizbollah’s own media sources. The Plaintiffs alleged that, even if the bank did not have actual knowledge, the bank at least should have known because it had a duty to perform due diligence on its customers, monitor and report suspicious or illegal banking activities, and not provide banking services to terrorist organizations.

Although the Kaplan case arises in the context of international terrorism and potential liability under the ATA, its analysis and conclusions can apply to more mundane state law tort claims against financial institutions by investors or consumers defrauded by the institution’s (former) customers. These claims often attempt to bootstrap allegations that a bank knew should have known about the customer’s fraud scheme due to the bank’s anti-money laundering (AML) monitoring and reporting obligations under the Bank Secrecy Act (“BSA”). As we have blogged, courts hold that evidence of an imperfect AML program and potential red flags about a customer fall short of the high bar required to sustain a claim for aiding and abetting a fraud or other tort against third party non-customers.


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The Financial Crimes Enforcement Network (FinCEN) issued a press release today, entitled “New FinCEN Division Focuses on Identifying Primary Foreign Money Laundering Threats.”

The announcement states that this new Division will focus on topics about which we have blogged repeatedly:  Section 311 of the USA Patriot Act and threats posed to the financial system by

Alleged Illicit Activity Included Transactions Promoting North Korea’s Missile Program and an Institutional Commitment to Laundering Money

On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act.  We previously have blogged about FinCEN’s powers pursuant to Section 311 of the U.S. Patriot Act to designate institution “of primary money laundering concern” and impose a special measure which effectively cuts off the bank’s access to the U.S. financial system by requiring U.S. institutions as well as foreign institutions that create an indirect link between the foreign institution and the U.S. to sever ties with the designated bank.

Finding that ABLV was a foreign financial institution of primary money laundering concern, FinCEN proposed a prohibition under the fifth special measure restricting domestic financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV. FinCEN stated that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices by orchestrating money laundering schemes, soliciting high-risk shell company activity that enables the bank and its customers to launder funds, maintaining inadequate controls over high-risk shell company accounts, and seeking to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.  Indeed, included in the illicit financial activity were transactions for parties connected to the U.S. and U.N.-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.

ABLV shot back last Thursday stating that the allegations were based “on assumptions and information that is currently unavailable to the bank,” but that they were “continuing check into these allegations” and were open to cooperation with U.S. authorities.  As a result of FinCEN’s finding, Monday morning, the European Central Bank (“ECB”) halted all payments by ABLV pending further investigation into the allegations set forth in FinCEN’s Notice of Proposed Rulemaking (“NPRM”).
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As widely reported, the Spanish police raided last year the Madrid offices of the Chinese state-run Industrial and Commercial Bank of China (“ICBC”), the world’s biggest bank by assets. In the nearly 18 months following that raid and the numerous arrests made at that time, very little information about this money laundering investigation became known publically. That is, until Reuters recently published a lengthy article resulting from its review of “thousands of pages of confidential case submissions” and its “interviews with investigators and former ICBC employees.” The article raises numerous questions regarding the enforcement of European money laundering laws against Chinese banks operating abroad, as well as certain unique political and diplomatic considerations that may exist in those enforcement efforts. Below, we will compare these efforts with similar U.S. enforcement efforts, which are potentially gaining steam.
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On May 23, the federal court of appeals for the District of Columbia Circuit rejected an appeal by the majority shareholders in Banca Privada d’Andorra S.A. (“BPA”) regarding claims that FinCEN violated the Administrative Procedure Act when issuing a March 2015 Notice of Finding that the Andorran bank was a financial institution “of primary money

“Sometimes, the third time really is the charm” wrote the District Court for the District of Columbia on April 14, 2017. In its opinion, the court upheld FinCEN’s imposition of the Patriot Act’s fifth special measure against FBME Bank Ltd., a Tanzanian chartered bank operating primarily out of Cyprus.  The court previously had twice blocked FinCEN’s attempt to prevent FBME Bank from conducting banking business in the United States.  However, the district court granted FinCEN’s motion for summary judgment and lifted the stay blocking FinCEN’s final rule.  Last week, the D.C. Circuit refused to reinstate the full stay of judgment pending appeal noting simply that FBME Bank had “not satisfied the stringent requirements for a stay pending appeal,” without addressing any of the specific merits questions that remained before it. Thus, for the time being, the district court’s judgment upholding FinCEN’s rule finding that FBME Bank was “of primary money laundering concern” remains in place.  FBME Bank may no longer utilize correspondent banks in the United States.

FinCEN SealThe potentially broader implications for other banks and future actions are as follows: under the logic of the judgment which the Court of Appeals just declined to stay, FinCEN does not need to look to comparative or other objective benchmarks involving other similarly-situated banks to support a claim in an enforcement action that transactions occurring at the bank in question involved an unacceptably high number of SAR filings, use of shell companies, or other indicia of suspicious activity.  Rather, findings based on selected, absolute data may suffice.
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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.


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