On May 18, the U.S. District Court for the District of Columbia granted the U.S. Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN’s) motion to dismiss a civil action brought by shareholders of an Andorran privately-held bank, Banca Privada d’Andorra (BPA), challenging FinCEN’s issuance of a Notice of Finding (NOF) identifying BPA as a “primary money laundering concern” and Notice of Proposed Rulemaking (NPRM) to impose special measures against BPA pursuant to Section 311 of the USA PATRIOT Act that would prohibit U.S. banks from maintaining correspondent accounts for BPA. The court ruled that FinCEN’s withdrawal of the notices, following the seizure of the bank by the Andorran financial regulator, rendered the shareholders’ claims moot. This dismissal provides important support for FinCEN’s use of the Section 311 tool, particularly when foreign regulators choose to take action under their own law following the issuance by FinCEN of a finding of primary money laundering concern against a foreign financial institution.
Section 311 of the USA PATRIOT Act (‘‘Section 311’’), codified at 31 U.S.C. § 5318A, grants FinCEN the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of ‘‘primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” to address that concern. The first four special measures include imposing certain recordkeeping and reporting requirements concerning the customers and activities of the targeted institution, while the fifth and most severe special measure authorizes Treasury to “…prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution.” The first four special measures may be imposed temporarily by order; the fifth special measure may be imposed only through rulemaking.
In March 2015, FinCEN published a NOF identifying BPA as a “primary money laundering concern” and, accordingly, also issued a NPRM proposing to impose the fifth special measure against BPA. See 80 Fed. Reg. 13464, 13464 (Mar. 13, 2015); 80 Fed. Reg. 13304, 13304 (Mar. 13, 2016). FinCEN explained in the NOF that its finding was based on its conclusion that several of BPA’s high-level management had facilitated financial transactions on behalf of third party money launderers providing services for individuals and organizations involved in organized crime, corruption, human trafficking, trade-based money laundering, and fraud, and that BPA had weak anti-money laundering controls that had allowed its customers to conduct transactions through the U.S. financial system that disguised the origin and ownership of the funds. See 80 Fed. Reg. at 13465-66.
Following the publication of the notices, but before FinCEN published a final rule, the Andorran government took control of the bank and developed plans for its liquidation. A month later, two of the majority shareholders of BPA filed suit against FinCEN, levying substantive and procedural challenges under the Administrative Procedure Act (APA) and the Due Process Clause. In March 2016, during the pendency of the litigation, FinCEN withdrew both the NOF and the NPRM, noting that the Andorran government had seized BPA and taken measures to strip its “good assets” and transfer them to a new financial institution that would be owned by the Andorran government, and that these steps “sufficiently protect[ed] the U.S. financial system from the money laundering risks previously associated with BPA,” making “the imposition of § 311 special measures no longer justifiable.” 81 Fed. Reg. 11648, 11649 (Mar. 4, 2016). FinCEN then moved to dismiss the shareholders’ suit on the basis that any controversy had been rendered moot.
The Court, in granting FinCEN’s motion to dismiss, determined that FinCEN had proven that the shareholders had no reasonable expectation that the alleged violation would recur, because FinCEN lacked any basis for imposing special measures against BPA in the light of the Andorran government’s actions, and that the Court could grant no meaningful remedy given that the BPA shareholders had sought only equitable relief in the form of vacatur of the NOF and NPRM, which FinCEN had already withdrawn. Significantly, in response to the plaintiffs’ claims that only a judicial determination that the NOF and NRPM were unlawful would remedy the damage done to BPA as a result of the preliminary notices – because such a determination might encourage the Andorran government to reverse its seizure of BPA– the Court suggested that the plaintiffs, had they requested it, would not have had grounds for such additional relief because relief under an APA claim will normally be limited to vacatur of the agency’s order. The Ciceros have said that they will appeal the court’s decision.
The case is an important win for FinCEN, in an area with very little case law, because it limits the ability of foreign targets to successfully challenge FinCEN’s findings of “primary money laundering concern” and proposed implementation of special measures in situations where FinCEN later withdraws these notices prior to issuance of a final rule. Such cases are most likely to occur where, as here, a foreign sovereign chooses to take over or liquidate the target of a Section 311 action under its own authorities following FinCEN’s announcement of proposed special measures. This has happened a number of times in the past (see, e.g., JSC Credex Bank (81 Fed. Reg. 14408 (Mar. 17, 2016)); Lebanese Canadian Bank SAL (80 Fed. Reg. 60575 (Oct. 7, 2015)); and First Merchant banks (73 Fed. Reg. 19452 (Apr. 10, 2008)). The Ciceros argued that FinCEN’s conduct demonstrated “a textbook example” of a defendant seeking to evade judicial review of its actions, alleging that FinCEN issues §311 notices so that foreign regulators act to dismantle the foreign bank, then withdraws the notice before issuing a final rule to moot any subsequent challenge. The D.C. District Court rejected this argument, however, noting FinCEN does not always follow this pattern of conduct. In FBME Bank Ltd. v. Lew, for example, FinCEN issued a final rule imposing the fifth special measure against a Tanzanian-chartered commercial bank operating in Cyprus, despite action by Cypriot authorities against the bank. In that case, FinCEN did not withdraw the proposed rule, and plaintiffs were able to successfully challenge the rulemaking proceeding, winning a preliminary injunction against FinCEN’s implementation of the final rule. See FBME, 125 F. Supp. 3d 109, 129 (D.D.C. 2015).
The D.C. District Court has stayed and remanded the FBME case pending FinCEN’s second attempt at rulemaking for the implementation of Section 311 special measures against that bank. To remedy the Court’s concerns that the FBME NOF, NPRM, and final rule together provided insufficient notice to the bank of the basis for the agency’s action, FinCEN reopened the comment period for the rule in November 2015 and published the unclassified and otherwise non-protected information upon which it relied in making its determination. See 80 Fed. Reg. 74064 (Nov. 27, 2015). Following comments on the re-opened rule, FinCEN published a new final rule in March 2016, which FBME likewise has challenged, with cross motions for summary judgment currently before the court for resolution. It remains to be seen whether FinCEN will continue to publish this level of supporting evidence in future Section 311 actions. If FinCEN does make this information regularly available in future Section 311 proceedings, it may provide red flags and other details to banks, in addition to those found already in FinCEN’s NOFs, NPRMs and final rules, useful for identifying money laundering and other suspicious activity, as well as indicators of specific money laundering issues that FinCEN is focused on. FinCEN and other regulators also may expect U.S. financial institutions and financial agencies to keep apprised of and consider such information in designing and administering their anti-money laundering programs and filing suspicious activity reports (SARs).