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Latvian Bank Faces Exclusion as a "Primary Money Laundering Concern" Based on North Korean Ties and Other Misdeeds

February 15, 2018

By: Carolyn H. Kendall

On February 12, 2018, the Financial Crimes Enforcement Network (“FinCEN”), a division of the Treasury Department charged with enforcing the anti-money laundering provisions Bank Secrecy Act (“BSA”), branded ABLV Bank, AS as a “financial institution of primary money laundering concern”  and announced its intention, via a notice of proposed rulemaking, to effectively exclude ABLV Bank from the U.S. financial system by prohibiting U.S. banks from opening or maintaining correspondent accounts in ABLV Bank’s name or on its behalf. The designation of ABLV Bank as a primary money laundering concern takes effect immediately; the imposition of this prohibition against correspondent accounts will take effect when FinCEN issues a final rule after expiration of the administrative comment period on April 13, 2018.

FinCEN alleges that ABLV Bank, based in Riga, Latvia, has made money-laundering a “pillar of the bank’s business practices.” The bank’s client base is primarily comprised of non-Latvian shell companies with opaque ownership, which use the bank to launder money and fund illegal activities. Of particular import is FinCEN’s finding that ABLV Bank has facilitated transactions related to North Korea’s procurement and export of ballistic missiles, in violation of various sanctions regimes.  

This designation – the first of 2018 and one of only a handful made in the past several years – appears to be part of the government’s crackdown on North Korea’s weapons program and comes on the heels of the Trump Administration’s imposition of new sanctions targeting those supporting North Korea’s weapons program in late January, 2018. When the Treasury Department imposed sanctions in January, Treasury Secretary Steven Mnuchin stated that the Department “continues to systematically target individuals and entities financing the Kim regime and its weapons programs, including [those] complicit in North Korean sanctions evasion schemes.” This action against ABLV Bank appears to be another step in furtherance of this administration priority.

FinCEN’s Authority Under Section 311

FinCEN is charged with enforcing the BSA’s anti-money laundering provisions. The USA PATRIOT Act amended the BSA in 2001 to authorize FinCEN’s Director to require domestic banks and financial institutions to take certain “special measures” against foreign financial institutions designated by FinCEN as primary money laundering concerns. 31 U.S.C. § 5318A.

First, FinCEN must determine that “reasonable grounds exist for concluding” that the foreign financial institution is a “primary money laundering concern.” 31 U.S.C. § 5318A(c). This is done by reference to three factors:

  1. Whether the foreign entity facilitates money laundering or has laundered money, including activity by terrorist or entities involved in proliferation of weapons of mass destruction or missiles;
  2. Whether the foreign entity is used for legitimate business; and
  3. The extent to which the designation advances the policy of prohibiting money laundering, terrorist financing, and other financial crimes.

31 U.S.C. § 5318A(c)(2)(B).

After making this determination, which is discussed in a notice of proposed rulemaking and done in “consultation” with the Secretary of State and the Attorney General, FinCEN must decide which of the five “special measures,” alone or in combination, is appropriate to address the money laundering and terrorism financing risk posed by the foreign financial institution. Although five “special measures” are available, the most frequently employed is the fifth, which prohibits U.S. banks and financial institutions from maintaining correspondent relationships with the designated foreign bank. This sanction effectively cuts off the designated foreign bank from the U.S. financial system by prohibiting U.S. financial institutions from processing transactions on behalf of the foreign bank, either directly or through indirect correspondent banking relationships.    

FinCEN’s Actions Against ABLV Bank  

This week, FinCEN identified ABLV Bank as a primary money laundering concern and proposed imposing the fifth “special measure” sanction on it. Although not large by international banking standards, ABLV Bank is Latvia’s largest bank by assets. According to FinCEN, the bank’s customer base is almost exclusively comprised of “high-risk shell companies registered in secrecy jurisdictions” with ties to former Soviet Union member nations. According to the bank’s “own risk rating methodology . . . [,] 90 percent of ABLV’s customers are high-risk,” accounting for the difficulty in verifying the identities and business activities of such non-resident corporate customers. However, the bank fails to mitigate these risks by refusing to gather adequate information on customers’ identities and transactions, and by creating fraudulent documentation for customer due diligence files.

FinCEN determined that ABLV Bank’s business model depends on promoting and orchestrating clients’ money laundering, sanctions evasion, and other illicit activities. According to the notice of proposed rulemaking, “ABLV is considered innovative and forward leaning in its approaches to circumventing financial regulations.” FinCEN found that ABLV Bank:

  • Solicits the business of high-risk shell companies that enables money laundering;
  • Intentionally maintains inadequate internal controls and assists in circumvention of internal controls related to customer identification, anti-money laundering, and combating terrorism financing;
  • Assists customers’ illicit activity by creating fraudulent documents “of the highest quality” to support their schemes;
  • Actively obstructs enforcement of Latvian anti-money laundering and anti-terrorism financing controls and uses bribery to influence Latvian officials and protect its business;
  • Facilitated transactions for sanctioned or designated entities connected with North Korea’s weapons program, despite announcing a “No Tolerance” policy for transactions related to North Korea in Summer 2017;
  • Facilitated the theft of over $1 billion in assets from several Moldovan banks;
  • Disguised prohibited currency trades through the creation of false documentation by bank employees; and
  • Facilitated money laundering and corruption payments on behalf of wealthy individuals, including those designated by OFAC, from former Soviet Union nations.

FinCEN concluded that ABLV Bank “is used extensively for illicit purposes,” is a primary money laundering concern, and uses its correspondent banking relationships to facilitate these illicit transactions on behalf of shell company customers. Accordingly, FinCEN determined that imposition of the fifth “special measure” is necessary to protect the U.S. financial system and combat money laundering and terrorism financing. The fifth “special measure” must be imposed by the issuance of a final rule, which is several months away. For now, the comment period on FinCEN’s proposed rulemaking is open until April 13, 2018.

Imposition of the fifth “special measure” historically has been relatively rare, with only one imposition in 2017 and two in 2016. It is possible that additional designations will be made as this tool is employed to support the administration’s various strategic and diplomatic agendas against North Korea and others. 
 

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.

About the Author:

Carolyn Kendall

Carolyn H. Kendall conducts internal investigations and defends corporations, officers and other individuals facing criminal and civil investigation. Her practice includes matters relating to potential criminal tax and money laundering violations, as well as allegations involving securities violations, mortgage and financial institution fraud, the Federal Anti-Kickback Statute and Stark Law, and other fraud and regulatory statutes. She also assists clients in offshore account disclosure and compliance via IRS disclosure programs (OVDP and Streamlined Procedures). Learn More.