US: FinCEN issues three warning notices

The warnings relate to the Republic of Uzbekistan, Cyprus and Iran and to what the US Treasury sees as increased threats from those countries - but it's not acting alone: the comments come on the heels of concerns expressed by the FATF.

For businesses outside the US, the question will arise as to whether they may be affected under the correspondent banking provisions of the USA PATRIOT Act if they conduct USD business with any of those referred to in the notices.

Notices, verbatim, below:

Issued: March 20, 2008Subject: Guidance to Financial Institutions on the Money Laundering Threat Involving the Republic of Uzbekistan

The Financial Crimes Enforcement Network (FinCEN) is issuing this advisory to inform banks and other financial institutions operating in the United States of serious deficiencies in the anti-money laundering systems of the Republic of Uzbekistan. On February 28, 2008, the Financial Action Task Force (FATF) issued a statement on developments in Uzbekistan that represent a significant vulnerability within the international financial system. Recent actions taken by the Government of Uzbekistan have weakened the jurisdiction's anti-money laundering and combating the financing of terrorism (AML/CFT) regime. FATF thus called for financial institutions to take the risk arising from these deficiencies into account when performing due diligence.

The Government of Uzbekistan has taken a series of legal actions that undermine the jurisdiction's AML/CFT regime. Uzbekistan had made progress in addressing AML/CFT deficiencies by enacting an AML/CFT law that went into effect in January, 2006. However, the Government of Uzbekistan subsequently suspended implementation of the law through a series of decrees until January 1, 2013.

Among other things, the decrees suspend the authority of Uzbekistan's financial intelligence unit to collect and analyze information on, and monitor, financial and property transactions; identify possible money laundering and terrorist financing mechanisms and channels; share information on identified crimes with law enforcement agencies for criminal prosecution; and cooperate and exchange information with foreign agencies and international organizations on AML/CFT issues based on international obligations and agreements of Uzbekistan. The decrees also suspend reporting, programmatic, and customer identification/due diligence requirements for covered entities. Moreover, the decrees subject reports to secrecy legislation and call for the General Prosecutor to strengthen bank secrecy "to prevent interference with activities of banking and other credit organizations" (Presidential Decree No. PP-565, January 12, 2007). The most recent decree (No. PP-3968, February 20, 2008) prohibits financial institutions, law enforcement, and other supervising bodies from inquiring about the sources of cash deposits in any amount, upon threat of civil or criminal penalty.

As a result of these actions, banks and other financial institutions operating in the United States should take the risk arising from the deficiencies in Uzbekistan's AML/CFT regime into account for increased due diligence. 31 C.F.R. § 103.176 requires covered financial institutions to apply due diligence to correspondent accounts maintained for foreign financial institutions. Under this regulation, covered financial institutions must establish due diligence programs that include appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States. In addition, consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. part 103, if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report.

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Issued: March 20, 2008Subject: Guidance to Financial Institutions on the Money Laundering Threat Involving the Turkish Cypriot Administered Area of Cyprus

The Financial Crimes Enforcement Network (FinCEN) is issuing this advisory to inform banks and other financial institutions operating in the United States of serious deficiencies in the anti-money laundering regime of the Turkish Cypriot administered area of Cyprus. On February 28, 2008, the Financial Action Task Force (FATF) issued a statement on the need for financial institutions to pay special attention to money laundering and financing of terrorism risks in transactions with financial institutions operating in the Turkish Cypriot administered area of Cyprus.

Cyprus has been de facto divided since 1974. The southern two thirds of the country is under the control of the Government of the Republic of Cyprus. The northern one third of the country is under the control of a Turkish Cypriot administration that in 1983 proclaimed itself the ''Turkish Republic of Northern Cyprus" ("TRNC"). The United States does not recognize the "TRNC," nor does any country other than Turkey. This advisory refers only to financial institutions in the area administered by Turkish Cypriots, which are not controlled or supervised by authorities of the Government of the Republic of Cyprus.

A two-tiered banking system exists within the Turkish Cypriot administered area of Cyprus, including a group of offshore banks that can effectively opt out of many rules and regulations governing their operating conditions, including anti-money laundering and combating the financing of terrorism (AML/CFT) requirements. While the Turkish Cypriot "Central Bank" is not an internationally recognized banking supervisor, it does impose some level of regulatory scrutiny on its onshore banks. The offshore banks, however, are almost entirely exempt from supervision. As of the time of publication of this advisory, 24 onshore banks and 14 offshore banks are believed to operate in the Turkish Cypriot administered area.1 Collectively, banks in the Turkish Cypriot administered area do not have the ability to initiate or receive SWIFT wire transfers without the assistance of third-country based financial institutions. For this reason, transactions involving banks in the Turkish Cypriot administered area may not be readily apparent to financial institutions. In addition to AML/CFT deficiencies present in the banking sector, casinos operating in the Turkish Cypriot administered area have been noted as being conduits for money laundering.

Turkish Cypriot authorities have begun to take steps to address some of the major deficiencies in the area's AML/CFT regime, including the passage of an anti-money laundering law and the establishment of an "Anti-Money Laundering Committee." However, the Turkish Cypriot administered area continues to lack an operational financial intelligence unit and new legislation intended to fix many of these deficiencies has not been fully implemented. While the FATF and United States government welcome ongoing efforts by the Turkish Cypriot authorities to address these shortcomings, the existing deficiencies present an ongoing money laundering and financing of terrorism vulnerability to the international financial system.

Thus, banks and other financial institutions operating in the United States should give enhanced scrutiny to any transaction with a financial institution operating in the Turkish Cypriot administered area of Cyprus. Banks and other financial institutions should further note that transactions involving wire transfers from banks in the Turkish Cypriot administered area may not be readily apparent and consider the additional risks this may pose.

31 C.F.R. § 103.176 requires covered financial institutions to apply due diligence to correspondent accounts maintained for foreign financial institutions. Under this regulation, covered financial institutions must establish due diligence programs that include appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States. In addition, consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. part 103, if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report.

1See U.S. Department of State, 2008 International Narcotics Control Strategy Report, issued March 1, 2008 (INCSR).

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Issued: March 20, 2008Subject: Guidance to Financial Institutions on the Continuing Money Laundering Threat Involving Illicit Iranian Activity

The Financial Crimes Enforcement Network (FinCEN) is issuing this advisory to supplement information previously provided1 on serious deficiencies present in the anti-money laundering systems of the Islamic Republic of Iran. The Financial Action Task Force (FATF) stated in October 2007 that Iran's lack of a comprehensive anti-money laundering and combating the financing of terrorism (AML/CFT) regime represents a significant vulnerability in the international financial system. In response to the FATF statement, Iran passed its first AML law in February 2008. The FATF, however, reiterated its concern about continuing deficiencies in Iran's AML/CFT system in a statement on February 28, 2008. Further, on March 3, 2008, the United Nations Security Council passed Resolution 1803 (UNSCR 1803), calling on all states to exercise vigilance over activities of financial institutions in their territories with all banks domiciled in Iran and their branches and subsidiaries abroad. The FATF statement, combined with the UN's specific call for vigilance, illustrates the increasing risk to the international financial system posed by the Iranian financial sector, including the Central Bank of Iran.

Iran's AML/CFT deficiencies are exacerbated by the Government of Iran's continued attempts to conduct prohibited proliferation related activity and terrorist financing. Through state-owned banks, the Government of Iran disguises its involvement in proliferation and terrorism activities through an array of deceptive practices specifically designed to evade detection. The Central Bank of Iran and Iranian commercial banks have requested that their names be removed from global transactions in order to make it more difficult for intermediary financial institutions to determine the true parties in the transaction. They have also continued to provide financial services to Iranian entities designated by the UN Security Council in its Resolutions 1737 and 1747. The U.S. Department of the Treasury is particularly concerned that the Central Bank of Iran may be facilitating transactions for sanctioned Iranian banks.

UNSCR 1803 calls on member states to exercise vigilance over the activities of financial institutions in their territories with all banks domiciled in Iran, and their branches and subsidiaries abroad. While Bank Melli and Bank Saderat were specifically noted, the United States urges all financial institutions to take into account the risk arising from the deficiencies in Iran's AML/CFT regime, as well as all applicable U.S. and international sanctions programs, with regard to any possible transactions with the following Iranian institutions:

Privately Owned Iranian Financial Institutions

Financial institutions also are reminded of the existing U.S. sanctions that are administered by the Department of the Treasury's Office of Foreign Assets Control (OFAC) with respect to Iran and the Government of Iran, including but not limited to Iranian Government-owned banks, as well as other sanctions imposed on Iranian entities that have been linked to terrorist activity and the proliferation of weapons of mass destruction. Information about these sanctions is available on OFAC's website at http://www.treasury.gov/offices/enforcement/ofac/.

1See "Guidance to Financial Institutions on the Increasing Money Laundering Threat Involving Illicit Iranian Activity," FIN-2007-A001, October 16, 2007.