MassPoint’s Founder and Principal, Hdeel Abdelhady, discussed the legal significance and potential commercial implications of the NYDFS’ enforcement action against Habib Bank at a time of correspondent banking derisking.
On July 20, 2017, Representative Ted Budd (R-NC) introduced in the House of Representatives H.R. 3321, the “National Strategy for Combating Terrorist, Underground, and Other Illicit Financing Act.” The purpose of H.R. 3321 is to “require the establishment of a national strategy for combating the financing of terrorism and related financial crimes, and for other purposes.” As summarized by the House Financial Services Committee, which will meet to markup the bill on July 25, 2017, H.R. 3321 would among other measures “require the President, acting through the Treasury Secretary, to develop and publish a whole-of-government strategy to combat money laundering and terrorist financing.”
the enforcement of OFAC-administered sanctions by a state agency—even against banks by a banking regulator operating in a dual banking system—raises fundamental constitutional and other legal questions. Chief among them is the overarching question of whether U.S. states have authority to directly or effectively enforce OFAC-administered sanctions, particularly independently and prior to enforcement by competent federal authorities—namely OFAC. This question and some of the legal issues and policy and practical considerations appertaining to it are discussed in detail in a forthcoming publication. This document provides a summary preview of some of the key legal issues discussed in that publication. Additional summary previews may be provided separately.
With respect to foreign correspondent banking, the Guidelines’ clarifications are designed to respond to the withdrawal of correspondent banking relationships (derisking) that have adversely affected banks and, in some cases, entire regions. Accordingly, Annex 2 of the Guidelines includes a list of risk factors that “correspondent banks should consider in their risk assessment of money laundering and financing of terrorism associated with correspondent banking.”
On April 27, 2017, I attended a Congressional hearing on “Safeguarding the Financial System from Terrorist Financing,” held by the House Committee on Financial Services’ Subcommittee on Terrorism and Illicit Finance (the “Subcommittee”). The sole witness was Mr. Jamal El-Hindi, Acting Director of the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury charged with protecting the financial system from money laundering, terrorism financing and other illicit activities. The hearing’s purposes were to examine the methods and efficacy of FinCEN data collection, processing and information sharing and whether the Bank Secrecy Act (BSA) and USA PATRIOT Act should be amended to improve FinCEN’s anti-money laundering (AML) and counter-terrorism financing (CFT) capacities and performance. In this brief MassPoint update, I highlight BSA data collection and usage numbers and some of the questions and issues that appeared to be of particular interest and/or concern to Congress members in attendance, taking into account the nature and frequency of the questions asked, the tone of questions, and related requests for additional or clarifying information from FinCEN.
On February 13, 2017, Senator Bob Casey (D-PA) introduced in the Senate the “Stop Terrorist Operational Resources and Money Act” (the “STORM Act”). The purpose of the STORM Act is to “establish a designation for jurisdictions permissive to terrorism financing, to build the capacity of partner nations to investigate, prosecute, and hold accountable terrorist financiers, to impose restrictions on foreign financial institutions that provide financial services for terrorist organizations, and for other purposes.” The STORM Act would permit the President to designate a country as a “Jurisdiction of Terrorism Financing Concern” upon determining that “government officials know, or should know, that activities are taking place within the country that substantially finance the operations of, or acts of international terrorism by, foreign terrorist organizations.”
The Trump Administration's positions on countering the financing of terrorism were articulated by Treasury Secretary nominee Steven Mnuchin during his confirmation hearings, where he expressed his commitment to working unilaterally and multilaterally to combat terrorism financing (see, for example, hearing segment starting at 55:18). The Administration's interest in strengthening CFT is shared on the other side of Pennsylvania Avenue, where the U.S. House of Representatives' Committee on Financial Services recently released the results of a 2-year investigation of terrorism financing and, among other measures, recommended that the United States adopt a "whole-of-government" strategy to combat terrorism financing.
Among those added to the SSIL on July 30 are the Russian Direct Investment Fund (RDIF) and other entities identified by OFAC as being owned 50% or more by Russian state development bank Vnesheconombank (VEB). VEB itself was added to the SSIL on July 16, 2014, the same day on which OFAC first issued Directive 1, the relevant financial services sanctions implementing measure discussed in detail below (as applicable to the VEB-owned entitles and generally). The July 30 action is significant more for its likely practical impact, rather than its immediate legal meaning. This is so because the relevant VEB-owned entities, while not previously listed on the SSIL, have nevertheless been subject to Sectoral Sanctions since July 16, 2014.[iii] The VEB’s sanctioned status as of July 16, 2014 was imputed to its owned entities on the same day by operation of OFAC’s “50% Rule,” which attaches to entities owned 50% or more by one or more SSIL entities (individually or in the aggregate) the sanctions status of their owner(s), even if such owned entities are not separately listed on the SSIL. The 50% Rule significantly expands the potential scope of Sectoral Sanctions and corresponding compliance obligations. Effectively, the 50% Rule requires parties to determine, at every link in the ownership chain (vertically and horizontally), whether one or more SSIL entities (alone or in the aggregate) directly or indirectly owns 50% or more of a relevant entity. This can be particularly burdensome where corporate structures are complex and/or opaque.
Enforcement authorities in the US and Asia reportedly are investigating financial institutions for potentially corrupt employment and business relationships with family members of government officials. The investigations underscore policy links between anti-corruption and anti-money laundering regimes where dealings with Politically Exposed Persons (PEPs) are involved. This article, published by Hdeel Abdelhady in Butterworths Journal of Banking and Financial Law, briefly discusses the pending investigations and the anti-corruption-AML policy nexus, and suggests, with respect to PEPs and more generally, that financial institutions facilitate fluidity in their compliance programs to allow for the sharing of information and adaptation of compliance protocols across (sometimes impermeable) internal functional and disciplinary lines.