Imposition of Special Measure Regarding Al-Huda Bank as a Financial Institution of Primary Money Laundering Concern

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Financial Crimes Enforcement Network</SUBAGY> <CFR>31 CFR Part 1010</CFR> <RIN>RIN 1506-AB65</RIN> <SUBJECT>Imposition of Special Measure Regarding Al-Huda Bank as a Financial Institution of Primary Money Laundering Concern</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Financial Crimes Enforcement Network (FinCEN), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> FinCEN is issuing this final rule to prohibit covered U.S. financial institutions from opening or maintaining a correspondent account for, or on behalf of Al-Huda Bank, a foreign financial institution based in Iraq found to be of primary money laundering concern pursuant to section 311 of the USA PATRIOT Act. The rule further requires covered U.S. financial institutions to take reasonable steps not to process transactions for the correspondent account of a foreign banking institution in the United States if such a transaction involves Al-Huda Bank. It also requires covered institutions to apply special due diligence to their foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving Al-Huda Bank. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective August 2, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> The FinCEN Regulatory Support Section at 1-800-767-2825 or electronically at <E T="03">frc@fincen.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">A. Statutory Provisions</HD> On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (USA PATRIOT Act). Title III of the USA PATRIOT Act amended the anti-money laundering (AML) provisions of the Bank Secrecy Act (BSA) to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. <SU>1</SU> <FTREF/> Section 311 of the USA PATRIOT Act (section 311), codified at 31 U.S.C. 5318A, grants the Secretary of the Treasury (Secretary) authority, upon finding that reasonable grounds exist for concluding that one or more financial institutions operating outside of the United States is of primary money laundering concern, to require domestic financial institutions and domestic financial agencies to take certain “special measures.” The authority of the Secretary to administer the Bank Secrecy Act (BSA) and its implementing regulations has been delegated to FinCEN. <SU>2</SU> <FTREF/> <FTNT> <SU>1</SU>  The BSA, as amended, is the popular name for a collection of statutory authorities that FinCEN administers that is codified at 12 U.S.C. 1829b, 1951-1960 and 31 U.S.C. 5311-5314, 5316-5336, and includes other authorities reflected in notes thereto. Regulations implementing the BSA appear at 31 CFR Chapter X. </FTNT> <FTNT> <SU>2</SU>  Pursuant to Treasury Order 180-01 (Jan. 14, 2020), the authority of the Secretary to administer the BSA, including, but not limited to, 31 U.S.C. 5318A, has been delegated to the Director of FinCEN. </FTNT> The five special measures set out in section 311 are safeguards that may be employed to defend the U.S. financial system from money laundering and terrorist financing risks. The Secretary may impose one or more of these special measures in order to protect the U.S. financial system from such threats. Through special measures one through four, the Secretary may impose additional recordkeeping, information collection, and reporting requirements on covered domestic financial institutions and domestic financial agencies—collectively, “covered financial institutions.”  <SU>3</SU> <FTREF/> Through special measure five, the Secretary may prohibit, or impose conditions on, the opening or maintaining in the United States of a correspondent account for or on behalf of a foreign banking institution, if such correspondent account involves the foreign financial institution found to be of primary money laundering concern. <SU>4</SU> <FTREF/> <FTNT> <SU>3</SU>  31 U.S.C. 5318A(b)(1)-(b)(4). </FTNT> <FTNT> <SU>4</SU>  31 U.S.C. 5318A(b)(5). </FTNT> <HD SOURCE="HD2">B. Al-Huda Bank</HD> Al-Huda Bank is a private commercial bank registered and headquartered in Baghdad, Iraq, with five branch locations in Baghdad, Karbala, and Nasiriyah, Iraq. Al-Huda Bank has no subsidiaries or branches outside of Iraq and is regulated by the Central Bank of Iraq (CBI). Al-Huda Bank has no direct U.S. correspondent banking relationships but interacts with the U.S. financial system indirectly through U.S. dollar (USD) correspondent accounts at six foreign financial institutions. In other words, Al-Huda Bank interacts with foreign banks that themselves have correspondent accounts with U.S. banks. <HD SOURCE="HD1">II. FinCEN's Section 311 Rulemaking Regarding Al-Huda Bank</HD> <HD SOURCE="HD2">A. Finding</HD> In a notice of proposed rulemaking (NPRM) published in the <E T="04">Federal Register</E> on January 31, 2024, FinCEN found that reasonable grounds exist for concluding that Al-Huda Bank is a foreign financial institution of primary money laundering concern pursuant to 31 U.S.C. 5318A. <SU>5</SU> <FTREF/> <FTNT> <SU>5</SU>  89 FR 6074 (Jan. 31, 2024). </FTNT> As described in the NPRM, FinCEN assesses that Al-Huda Bank has exploited its access to USD to support designated foreign terrorist organizations (FTOs), including Iran's Islamic Revolutionary Guard Corps (IRGC) and IRGC-Quds Force (IRGC-QF), as well as Iran-aligned Iraqi militias Kata'ib Hizballah (KH) and Asa'ib Ahl al-Haq (AAH). <SU>6</SU> <FTREF/> Since its establishment, Al-Huda Bank has been controlled and operated by the IRGC and IRGC-QF. Moreover, the chairman of Al-Huda Bank is complicit in Al-Huda Bank's illicit financial activities, including money laundering through front companies that conceal the true nature of and parties involved in illicit transactions, ultimately enabling the financing of terrorism. <FTNT> <SU>6</SU>  The U.S. Department of State has authority to designate organizations as FTOs. The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has also designated the IRGC, IRGC-QF, KH, and AAH pursuant to multiple sanctions authorities. </FTNT> Given the nature of Iraq's economy and trade relationships, Iraqi businesses that import goods into Iraq rely on wire transfers of USD from the CBI account at the Federal Reserve Bank of New York (FRBNY), a process known as the wire auction, or more generally the “CBI dollar auction.”  <SU>7</SU> <FTREF/> Many Iraqi businesses and financial institutions use the CBI dollar auction for legitimate purposes. However, FinCEN assesses that Al-Huda Bank has deliberately embarked on a strategy that relies on exploiting the CBI dollar auction to support designated FTOs, including the IRGC, IRGC-QF, KH, and AAH, with the support of the Iranian government. Al-Huda Bank has actively supported terrorist groups and abused the CBI dollar auction through numerous money laundering typologies, including use of fraudulent documentation to obscure the ultimate beneficiaries of the transactions. Given these facts, FinCEN assesses that there is a high risk of Al-Huda Bank exploiting USD correspondent relationships to support its money laundering and terrorist financing activity. <FTNT> <SU>7</SU>  The CBI dollar auction comprises both (1) the wire auction, and (2) bulk USD banknote shipments to Iraq which the CBI sells to exchange houses and banks in return for Iraqi dinar (IQD). The latter is known as the “cash auction” and is a separate process from the wire auction. Al-Huda Bank's known illicit finance activities described herein are related to the wire auction. </FTNT> <HD SOURCE="HD3">1. Al-Huda Bank Has Exploited Its Access to USD Through the Wire Auction</HD> Individual Iraqi businesses that import goods into Iraq rely on wire transfers of USD from CBI's account at the FRBNY. The wire auction, a part of what is known as the CBI dollar auction, is the mechanism by which the CBI provides USD to facilitate the purchase of imports. When Iraq sells oil in the international petroleum markets, the revenues are credited in USD to the CBI's account at the FRBNY. Iraqi companies with accounts at Iraqi banks can then access the CBI dollar auction to purchase USD with IQD to pay for imports. USD are transferred from the CBI's FRBNY account to an Iraqi bank, and onward to a third-country bank on behalf of a third-country exporter. Many Iraqi businesses and their banks use the CBI dollar auction for its intended, legitimate purpose of facilitating imports of goods. However, FinCEN assesses that Al-Huda Bank has deliberately embarked on a strategy that relies on illegitimate exploitation of the CBI dollar auction to support designated FTOs, including the IRGC, IRGC-QF, KH, and AAH, with the support of the Iranian government. With the knowledge of Al-Huda Bank's chairman, Al-Huda Bank's abuse of the CBI dollar auction was obfuscated through the application of numerous money laundering typologies, including the use of fraudulent documentation, fake deposits, identity documents of the deceased, fake companies, and counterfeit IQD, which were used to purchase USD and support terrorist groups and militias. For years, Al-Huda Bank has been involved in these deceptive money laundering activities. Examples of three of these money laundering typologies are discussed below: (1) fraudulent documentation; (2) stolen identities; and (3) counterfeit IQD. Al-Huda Bank's use of these money laundering typologies also risks exposing covered financial institutions to Al-Huda Bank's exploitation of USD c ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 60k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━