March 15, 2007
On March 14, 2007, Stuart Levey, the Undersecretary for Terrorism and Financial Intelligence at the U.S. Treasury Department, announced the issuance of a final rule under Section 311 of the USA PATRIOT Act that, in 30 days, will bar U.S. banks and certain other financial institutions from opening, maintaining, or managing correspondent accounts for Macau-based Banco Delta Asia and its subsidiaries (collectively, "BDA"). BDA also will be prohibited from directly or indirectly accessing the U.S. financial system. These measures are identical to the measures imposed against the Commercial Bank of Syria (Syria) and the Syrian Lebanese Commercial Bank (Lebanon) last April.
The announcement follows an 18-month investigation that began when the Treasury Department designated BDA as a financial institution of "primary money laundering concern" in 2005 because of some of its dealings with North Korean clients. Additionally, press reports indicate that the results of this investigation may enable overseas regulators to release some of the approximately $24 million that was frozen following the 2005 designation. Those frozen funds have recently become a major stumbling block in the United States’ negotiations with North Korea regarding its nuclear program.
In September 2005, the Treasury Department designated BDA as a financial institution of "primary money laundering concern" based on its determination that BDA is used to facilitate and promote money laundering and other financial crimes, particularly in connection with alleged North Korean counterfeiting, smuggling, and drug trafficking. At the same time, the Treasury Department issued a Notice of Proposed Rulemaking proposing that U.S. banks and other financial institutions prohibit BDA from directly or indirectly opening or maintaining correspondent accounts in the United States. Following the Treasury Department’s action, many U.S. and foreign banks began voluntarily terminating their relationships with BDA, and the Macanese government intervened, froze all funds held by the bank in accounts relating to North Korea, and cooperated with the Treasury Department’s investigation. The Macanese authorities also took substantial steps to strengthen Macau’s anti-money laundering and anti-terrorist regime.
This issue resurfaced recently when North Korea reportedly linked the release of the frozen funds to its willingness to enter into and abide by an agreement to halt development of its nuclear weapons program.
Undersecretary Levey said that the Treasury Department decided to isolate BDA from the entire U.S. financial system because the investigation confirmed that BDA was willing to turn a blind eye to the illegal activities of some of its clients and that its client due diligence practices were grossly inadequate. The final rule does not target Macau as a jurisdiction of primary money laundering concern; it only targets BDA as a financial institution. The rule applies to U.S. banks, securities broker-dealers, futures commission merchants and introducing brokers, and mutual funds. Because nearly all U.S. financial institutions have already voluntarily terminated their relationships with BDA, the Treasury Department’s action merely should formalize the current situation. However, the covered U.S. financial institutions now also will have to take reasonable due diligence measures, consistent with the regulations, to ensure that the correspondent accounts of other foreign financial institution clients are not being used to conduct transactions on behalf of BDA.
In addition, press reports indicate that the conclusion of the investigation and the Treasury Department’s action may pave the way for the Macanese government to release between $8 million and $12 million of the frozen funds because the information gathered during the investigation may assist Macanese authorities in identifying some of the frozen accounts as unlikely to have a connection to illicit activities. This action, in turn, should remove one of the stumbling blocks to reaching an agreement to halt development of North Korea’s nuclear program.
Undersecretary Levey did leave open the possibility that the rule could be rescinded in the future if BDA were to address the concerns of the Department and demonstrate responsible management and business practices.
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© 2007 Gibson, Dunn & Crutcher LLP
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