“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.

As we previously blogged, 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 pursuant to Section 311 of the USA Patriot Act.  As one of the most severe measures, FinCEN may prevent a foreign financial institution from having correspondent accounts at U.S. financial institutions by issuing a regulation under the Administrative Procedures Act (“APA”).  On July 22, 2014, FinCEN issued a Notice of Finding designating FBME Bank as an institution of primary money laundering and later promulgated a final rule imposing the special measure.  FinCEN’s actions were based on a concern related to FBME Bank’s alleged involvement in money laundering and links to organizations such as Hezbollah.  Soon thereafter the court preliminarily enjoined the rule (on FBME Bank’s motion) finding that FBME Bank likely would be able to show that FinCEN failed to disclose to FBME Bank the information that led to the designation, preventing FBME Bank from responding to it and that FinCEN erred by failing to consider alternative, less onerous sanctions.  FinCEN sought a voluntary remand to revise its rulemaking and correct the deficiencies.  FinCEN promulgated a second final rule on March 31, 2016, again concluding that FBME Bank is of primary money laundering concern and that the fifth special measure is appropriate.

In its September 2016 opinion, the court rejected most of FBME Bank’s challenges to the second final rule but agreed with the bank that FinCEN had not adequately responded to comments made by the bank during the notice-and-comment period. The court ordered the agency to respond to four concerns about its use of SARs and continued the injunction:

  1. FinCEN relied on SARs, which included much legal activity (along with illicit transactions), making the SARs an unreliable indicator of money laundering by the bank;
  2. FinCEN’s reliance on absolute rather than proportional SARs data;
  3. FinCEN dismissed FBME Bank’s alternative explanation for the increase in the number of SARs. For example, FBME Bank argued that the Cypriot financial crisis in 2013 led to restrictions on withdrawals that increased legitimate transactions resembling money laundering; and
  4. FinCEN did not respond to FBME Bank’s criticism that FinCEN provided no comparative benchmarks referencing other similarly-situated banks to support its claim that FBME Bank-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 Bank’s comments.

In February of this year, we queried whether the court would accept FinCEN’s explanation that such benchmarks were not necessary to evaluate adequately its decisions.  Surprisingly, the third time was the charm for FinCEN, which ultimately did not have to provide much in the way of the substantive and objective merits of its decision that FBME Bank engaged in an unacceptable number of suspicious transactions to convince the court to lift its injunction.

As to the first concern (SARs’ Inclusion of Too Much Legitimate Activity), FinCEN argued that the SARs data upon which it relied more likely understated illegal activity than overstated it. This was so particularly in light of allegations that the bank had poor AML controls which possibly allowed illicit transactions to proceed unreported.  The SARs data, FinCEN argued, was primarily valuable as qualitative evidence “in that many of the SARs related to FBME Bank describe typical indicators of shell company activity.”   Thus, FinCEN was concerned not only about the high number of shell companies, but also about the lack of transparency related to their apparent nature, business purpose or lack thereof, and use.

As for FinCEN’s use of absolute rather than proportional SARs data, FBME Bank argued that the number of illegal transactions was only a small percentage of the bank’s activities. In response, FinCEN conceded that its focus was on absolute rather than relative data, explaining that the volume of suspicious transactions was a more useful metric than proportional data which “may allow significant volumes of money to pass through large banks.”  The court refused to address the validity of FinCEN’s logic relating to its reliance on absolute numbers rather than proportional data.

The court refused to address the validity of FinCEN’s logic relating to its reliance on absolute numbers rather than proportional data.

According to the court, these claims by the bank were “beyond the scope of the Court’s review of this motion, which is limited to considering whether FinCEN adequately responded to FBME’s comments regarding SARs data – not evaluating whether the agency properly applied the statutory factors.” Moreover, the court stated that there was no reason to conclude that the controlling statute, 31 U.S.C. § 5318A, actually required consideration of proportional data.  Thus, FinCEN simply had no duty to consider proportional data, at least in this case, and was free to focus entirely on selected, problematic transactions when evaluating the bank. Even if consideration by FinCEN of some proportional data was required, the court stated that FinCEN’s interpretation of the statutory factors dictating its investigative requirements set forth in 31 U.S.C. § 5318A(c)(2)(B)(i) was reasonable and noted that FinCEN had indeed considered the extent of FBME Bank’s legitimate activity.

The court was skeptical of some of FinCEN’s explanations relating to its response to FBME Bank’s alternate explanations of increased SAR filings. Ultimately, however, the court distilled FinCEN’s position to the following: FinCEN did not materially rely on any increase in the number of SAR filings involving FBME Bank during the Cypriot financial crisis as compared to past periods of time in the analysis.  Rather, FinCEN’s analysis rested on FBME Bank’s financial activity from 2006 to 2014 (not simply the crisis occurring from 2013 to 2014).  Indeed, FinCEN stated that it relied more on the various determinations of FBME Bank’s weak AML controls and the nature of the SARs (“the shell company transactions, the lack of transparency, and the other signals of money laundering”) than the absolute numbers filed.

Finally, and possibly most concerning, FinCEN argued – and the court accepted – that it was not required to establish an objective threshold or benchmark for the number of SARs that would present a concern. The court held that it was within FinCEN’s authority and judgment not to set benchmarks which could end up setting a target for banks or customers wishing to evade money laundering controls.  Additionally, the court noted that setting a threshold also may have the opposite effect of encouraging banks to relax their compliance programs if they believed they were below the limit.  This finding was similar to the finding regarding the lack of a need to focus on proportional data – the implication being that FinCEN has broad discretion in a specific enforcement action to focus on a particular bank, without necessarily comparing its conduct to the conduct of other banks, and to focus even further on particular transactions within that single bank, without necessarily comparing those problematic transactions to all other transactions within that bank.  This apparent outcome may beg the question:  when FinCEN concludes — and asserts in a filing and a press release — that a financial institution had an “unusually high” number of problematic transactions, that number was “unusually high” as compared to what?