Divergent State and Federal Approaches to AML and Sanctions Threats from China
On November 4, the Friday before the U.S. election, the New York Department of Financial Services (DFS) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced separate enforcement actions targeted at the AML and sanctions threats emanating from China. While DFS explicitly set forth its allegations against a Chinese state bank, the U.S. Treasury Department indirectly signaled its increased pressure on China. FinCEN and the Office of Foreign Assets Control (OFAC) will likely directly target China in the near future.
Agricultural Bank of China
DFS announced that the Agricultural Bank of China, that country’s third largest bank, entered into a Consent Order to resolve violations of New York law requirements involving its compliance program (3 N.Y.C.R.R. § 116.2), books and records (New York Banking Law § 200-c), and reports to the DFS Superintendent (3 N.Y.C.R.R. § 300.1). The bank agreed to pay $215 million and engage an independent monitor to implement an effective compliance program and conduct an 18-month look-back into additional potential violations. The bank will likely pay significantly more than the initial $215 million required to maintain its New York banking license.
China-based North Korean Cover Companies
FinCEN announced its final rule imposing the strongest available “special measure” to address the money laundering risks from North Korea. Last June, FinCEN released a finding that North Korea is a jurisdiction of “primary money laundering concern” pursuant to its Section 311 authority, codified at 31 U.S.C. 5318A. The agency concurrently released a notice of proposed rulemaking, which was essentially adopted in the final rule. This rule prohibits covered financial institutions from providing North Korean banks direct or indirect access to U.S. correspondent accounts. FinCEN aims to prevent indirect access through special due diligence requirements. (See, 31 C.F.R. §1010.659 (3)) Part of this process requires financial institutions to notify certain respondents that its correspondent accounts cannot be used to indirectly provide North Korean banks access to the U.S. financial system.
Interestingly, neither the press release nor the final rule reference China’s direct role in providing North Korea with access to the U.S. financial system. The June 2016 notice of finding sets forth the U.S. government’s allegations that North Korea accesses the international financial system through its network of China-based cover companies. By not addressing this allegation directly in the press release or the final rule, it appears that the U.S. Treasury Department will rely upon banks to deliver this message through the special due diligence requirements.
 This rule defines “covered financial institution” to generally include an insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); a commercial bank; an agency or branch of a foreign bank in the United States; a Federally insured credit union; a savings association; a corporation acting under section 25A of the Federal Reserve Act (12 U.S.C. 611); a trust bank or trust company; a broker or dealer in securities; a futures commission merchant or an introducing broker-commodities; and a mutual fund.