With lawsuit against FinCEN and US Treasury Secretary, Macau bank fights its ‘death sentence’
By Daniela Guzman
June 11, 2014
One of the most potent anti-money laundering tools in the enforcement arsenal of US regulators is being challenged in a Washington, DC courtroom, in a lawsuit by a small Macau bank whose ties to the US financial system were severed by order of the Financial Crimes Enforcement Network.
Banco Delta Asia (BDA) is suing the US Treasury’s FinCEN for its application of Section 311 of the Patriot Act, sometimes called a “death sentence” for non-US institutions who rely on access to US dollar clearing through correspondent accounts. Treasury Secretary Jack Lew and FinCEN Director Jennifer Shasky Calvery are also named as defendants in the complaint.
The lawsuit challenges the application of one of the “special measures” of Section 311 to BDA, as well as the very constitutionality of the provision. It claims that the regulator’s designation of the bank in 2005 as an institution of “primary money laundering concern” lacked evidentiary support and was conducted “without observance of procedure required by law,” according to the complaint.
Additionally, the complaint alleges that the rule itself violates the US Constitution, arguing that “Section 311 unconstitutionally delegates legislative power to the Executive Branch.”
The case was originally filed in March 2013. A court document filed in late May of this year suggests that FinCEN and the plaintiffs may be in talks to negotiate a settlement outside the courtroom.
Section 311 of the Patriot Act amended the Bank Secrecy Act to add a provision on “special measures for jurisdictions, financial institutions, international transactions, or types of accounts of primary money laundering concern.” The five “special measures” laid out in Section 311 are some of the more powerful enforcement tools available to US regulators, and the fifth is typically regarded as the harshest.
It prohibits US banks from maintaining correspondent accounts for institutions designated as a “primary money laundering concern” by administrative order of the US Treasury. This measure has been used 17 times against financial institutions since the Patriot Act was enacted in 2001, in some cases causing their demise.
In September 2005, FinCEN first signaled it was considering imposing the special measure on BDA with a notice of proposed rulemaking, asserting that the North Korean government was using the Macau bank as a channel for money laundering and other illegal activities. The notice also stated that the bank had inadequate AML controls and regulatory oversight. BDA did have a number of accounts with ties to North Korean customers and banks. FinCEN did not designate the country of North Korea and its banks as a primary money laundering concern.
BDA fights ‘death sentence’ amid possible settlement
BDA may have an uphill battle ahead to prove its constitutional claims, says Jim Byrne, the director of the Institute of International Banking Law and Practice. He notes the US government is free to exercise its power over US banks and their correspondent relationships, including prohibiting their business with banks like Banco Asia Delta.
“The question comes down to whether the procedures followed were proper and provided due notice. If not, then more “t”s will have to be crossed and “I”s dotted but there is no doubt that a finding that North Korea is a money laundering threat would not be unreasonable and that a prohibition of dealing with banks that facilitate its actions would be justified,” Byrne said.
Banco Asia Delta survived the measure, despite financial difficulties. In the past, however, the imposition of the fifth special measure under Section 311 has indeed been a “death sentence” for financial institutions. Liberty Reserve, a web-based virtual currency transfer system, was put on FinCEN’s Section 311 list in 2013, and was shut down shortly after.
In another recent case, the measure was used on Lebanese Canadian Bank, which is now defunct and is attempting to settle a lawsuit with the US Treasury for laundering money for terrorist organizations.
After suit, Treasury sought delay
Delta Asia Group, the holding company of BDA, and its chairman Stanley Au filed the lawsuit in March 2013, claiming that FinCEN failed to provide specific facts and evidentiary support for its allegations the bank served as a conduit for North Korean money laundering. The plaintiffs also allege that the bank was deprived of the opportunity to comment meaningfully on the proposed rulemaking or to challenge the evidence, while being ignored by FinCEN during remediation efforts.
The complaint argues that FinCEN did not identify any specific illicit conduct that had actually been facilitated by or through accounts at BDA, nor did it explain why it had arranged the return of $23 million in frozen funds to allegedly “high risk” customers in the Spring of 2005.
By April 2007, all US banks had closed their correspondent accounts with BDA, as well as some non-US institutions that feared they would face sanctions for doing business with the blacklisted bank. After two administrative petitions to FinCEN requesting it rescind the special measure, BDA filed its lawsuit.
The US Treasury succeeded in staying the lawsuit for over a year while the agency entered into discussions with BDA, according to a document released last week by the District Court of the District of Columbia that explains the status of the pending litigation. The case has been stayed until February 2015 as Treasury seeks to work with the bank to “allay FinCEN’s concerns.”
State Department official calls BDA ‘sacrificial lamb’
A State Department official who helped create the US financial strategy regarding North Korea testified before Congress in 2007 shortly before the measure took effect. David Asher, as quoted in a New York Times article “The Money Trail that Linked North Korea to Macao,” told Congress that the US has allegedly uncovered voluminous evidence of North Korean money laundering at several banks in Macau but chose BDA for sanctions because it was an “easy target in the sense that it was not so large that its failure would bring down the financial system.”
According to Asher, Banco Delta Asia was a “sacrificial lamb” in US financial policy on Macau. He explained to Congress that “Banco Delta was a symbolic target. We were trying to kill the chicken to scare the monkeys, and the monkeys were big Chinese banks doing business in North Korea.”
If not settled, case may raise questions on selective use of Section 311
Byrne, from the Institute of International Banking Law and Practice, said that the claim that there are greater offenders may not have bearing in the case.
“While selective enforcement of AML provisions may be problematic, it probably comes down to a matter of discretion in matters involving US foreign and economic policy to which our courts should probably defer,” Byrne said.
In an effort to alleviate the US Treasury’s apprehension about the bank before the final ruling came into effect, BDA also retained Deloitte Touche Tomatsu to advise on a new and improved AML program. Later KPMG vetted the compliance program as “effective” in a review organized by the Macau Monetary Authority.
In the preamble to the Final Rule, FinCEN acknowledged that Macau authorities “have taken a number of additional important steps since the September 2005 Notice of Proposed Rulemaking . . . to address the reported money laundering risks and systemic vulnerabilities.”
Recent court filings suggest that FinCEN and the plaintiff are in talks to negotiate a settlement outside the courtroom. However, larger questions over enforcement policies may arise if the case remains in court.
“The inability to access the US banking system would be fatal for most banks,” Byrne said.
“That reality provides the US with an important weapon which can serve to protect our interests and citizens as long as it is not abused,” he continued. “The matter of abuse, whether this was due process observed, is important and is the most positive aspect of this case. The courts will be able to review the exercise of discretion from that perspective.”