SUMMARY: This notice advises the public that the Department of the Treasury, on December 20, 2002, designated the countries of Nauru and Ukraine as primary money laundering concerns pursuant to section 5318A of Title 31, U.S.C., as added by section 311 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (U.S.A. Patriot Act) Act of 2001.

DATES: The designations made by this notice are effective December 20, 2002. Comments on certain aspects of this [[Page 78860]] notice should be submitted by January 27, 2003. In making comments, please refer to the ``Public Comments Requested'' in the supplementary information portion of this preamble.

ADDRESSES: Commenters are encouraged to submit comments by electronic mail because paper mail in the Washington, DC area may be delayed. Comments submitted by electronic mail may be sent to  regcomments@do.treas.gov  with the caption in the body of the text, ``Attn: Section 311--Designation of Jurisdictions.'' Comments also may be submitted by paper mail (preferably and original and three copies) to Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220 ``Attn: 311--Designation of Jurisdictions.'' Comments should be sent by one method only. Comments may be inspected at the Department of the Treasury between 10 a.m. and 4 p.m., in Washington, DC. Persons wishing to inspect the comments submitted must request an appointment by telephoning (202) 622-0990 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Enforcement, Department of the Treasury, (202) 622-0400; Office of the Assistant General Counsel (Enforcement), (202) 622-1927; or the Office of the Assistant General Counsel (Banking and Finance), (202) 622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Designation of Nauru and Ukraine as Primary Money-Laundering Concerns

This document formally designates the countries of Nauru and Ukraine as primary money-laundering concerns under 31 U.S.C. 5318A, as added by section 311(a) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (U.S.A. Patriot Act) Act of 2001 (Pub. L. 107-56) (the Act).

II. Imposition of Special Measures

The Department of the Treasury places these jurisdictions, and those with whom they have dealings, upon notice of its intent, after appropriate consultation, to follow this designation with the imposition of special measures authorized by section 5318A(a). With respect to Nauru, Treasury intends to impose the special measure described in section 5318A(b)(5), which will prohibit financial dealings by U.S. financial institutions with any Nauru licensed institution, unless otherwise excepted. Under the terms of section 5318A(a)(2)(C), this special measure can be imposed only by promulgation of a rule. Treasury intends to initiate a rulemaking shortly.

With respect to Ukraine, Treasury intends to impose one or more of the information-gathering and record-keeping requirements of the special measures described in section 5318A(b)(1) through (4). Those special measures can be imposed by an order, which is limited in duration to 120 days, and which may be extended indefinitely through a rulemaking (see section 5318A(a)(2) and (3)). Treasury intends to issue an order while simultaneously initiating a rulemaking to impose special measures on Ukraine.

III. Public Comments Requested

The Department of the Treasury solicits comments from all interested persons concerning the appropriate special measures to impose on Ukraine. Specifically, Treasury solicits comments from the financial sector, including domestic financial institutions and domestic financial agencies, concerning its ability to comply with orders or regulations that impose actions under special measures one through four authorized by section 5318A(a). Treasury has also determined to propose imposition of special measure five upon Nauru, but solicits comments from any institution licensed by Nauru as to reasons the institution should be excepted from the prohibitions imposed under this measure. The prohibitions of special measure five would not apply to the Bank of Nauru.

IV. Background

On October 26, 2001, the President signed into law the U.S.A. Patriot Act. Title III of the Act makes a number of amendments to the anti-money laundering provisions of the Bank Secrecy Act (BSA), which are codified in subchapter II of chapter 53 of title 31, United States Code. These amendments are intended to make it easier to prevent, detect, and prosecute international money laundering and the financing of terrorism.

BSA section 5318A, as added by section 311 of the Act, authorizes the Secretary of the Treasury (Secretary) to designate a foreign jurisdiction, institution, class of transactions or type of account as being of ``primary money laundering concern,'' and to impose one or more of five ``special measures'' with respect to such a jurisdiction, institution, class of transactions, or type of account. The Secretary has delegated his authority under section 5318A to the Under Secretary of the Treasury (Enforcement).



Section 5318A specifies those factors that the Secretary must consider before designating a jurisdiction, institution, transaction, or account as of ``primary money laundering concern.'' The evaluation of these factors against the summary of the administrative record, as subsequently set forth in this designation, has resulted in the conclusion that both jurisdictions are of primary money laundering concern.\1\



\1\ The following factors, in accordance with the requirements of section 5318A(c)(2)(A), are considered to be potentially relevant factors in evaluating the necessity of designating Nauru and Ukraine. Nauru and Ukraine meet the majority of these factors. First, whether organized criminal groups, international terrorists, or both, have transacted business within the designated jurisdiction. Second, with respect to its banking practices, Treasury must also evaluate (1) The extent to which the jurisdiction or financial institutions operating in the jurisdiction offer bank secrecy or special regulatory advantages to non-residents or nondomiciliaries of the jurisdiction; (2) the substance and quality of administration of the bank supervisory and counter-money laundering laws of the jurisdiction; (3) the relationship between the volume of financial transactions occurring in the jurisdiction and the size of the economy of the jurisdiction; and (4) the extent to which the jurisdiction is characterized as an offshore banking or secrecy haven by credible international organizations or multilateral expert groups. Third, with respect to its enforcement mechanisms, Treasury must evaluate whether the United States has a mutual legal assistance treaty with the jurisdiction, and determine the experience of United States law enforcement officials and regulatory officials in obtaining information about transactions originating in, or routed through to, such jurisdiction. Finally, Treasury must evaluate the extent to which the jurisdiction is characterized by high levels of official or institutional corruption.

Once the Secretary has considered the factors, consulted with the Secretary of State and the Attorney General (or their designees), and made a finding that a jurisdiction is a primary money laundering concern, the Secretary is authorized to impose one or more of the five ``special measures'' described in 5318A(b). These special measures can be imposed individually, jointly, or in combination with respect to a designated ``primary money laundering concern.'' Four of the special measures impose information-gathering and record-keeping requirements upon those domestic financial institutions and agencies dealing either directly with the jurisdiction designated as one of primary money laundering concern, or dealing with those having direct dealings with the designated jurisdiction.\2\ Those four measures require: (1) Keeping records and filing reports on particular transactions, including the identities of the participants in the transactions and the beneficial owners of the funds involved; (2) obtaining information on the beneficial ownership of any account [[Page 78861]] opened or maintained in the United States by a foreign person or a foreign person's representative; (3) identifying and obtaining information about customers permitted to use, or whose transactions are routed through, a foreign bank's ``payable-through'' account; or (4) identifying and obtaining information about customers permitted to use, or whose transactions are routed through, a foreign bank's `correspondent'' account.

\2\ Treasury is currently examining the extent of the applicability of these requirements on those financial institutions enumerated under the U.S.A. Patriot Act.

Under the fifth special measure, a domestic financial institution or agency may be prohibited from opening or maintaining in the United States a correspondent account or a payable-through account for or on behalf of a foreign financial institution if the account involves the designee.

In selecting which special measures to impose, the Secretary must consider a number of factors.\3\ In addition, imposition of special measures (1) through (4) requires consultation with the Chairman of the Board of Governors of the Federal Reserve System, any other appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act), the Secretary of State, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the National Credit Union Administration Board, and any other agencies and interested parties as the Secretary may find appropriate. Imposition of special measure (5) requires consultation with the Secretary of State, the Attorney General and the Chairman of the Board of the Federal Reserve System.

\3\ In determining generally what special measures to select and to impose, the Secretary, in consultation with the agencies and ``interested parties'' set forth immediately above, must consider the following factors: (1) Whether similar action has been or is being taken by other nations or multilateral groups; (2) whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States; (3) the extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular jurisdiction, institution or class of transactions; and (4) the effect of the action on United States national security and foreign policy.

The Treasury intends, after consultation as provided above, to impose the fifth special measure with respect to Nauru, and actions under special measures one through four with respect to Ukraine. Section 5318A lists several factors that the Secretary must consider, in consultation with the Secretary of State and the Attorney General, before imposing these special measures. Pursuant to section 5318A, any of these first four special measures can be imposed by order, regulation or as otherwise permitted by law. Special measures imposed by an order can be effective for not more than 120 days, unless subsequently continued by a regulation promulgated before the end of the 120-day period.

The fifth special measure can only be imposed through the issuance of a regulation. The issuance of the fifth measure also requires consultation with the Chairman of the Federal Reserve.

A. NAURU

At one point in time, the island of Nauru had one of the highest per capita incomes in the developing world due to the mining and export of phosphates, a funding source expected to be completely depleted within five to ten years. Most of the funds emanating from the phosphate mining, originally contained in the country's trust funds, have been depleted through waste, poor investments and fraud. In addition to these problems, the Nauru government itself has been characterized by extensive instability.

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B. UKRAINE

Ukraine suffers from widespread corruption. On Transparency International's 2002 Corruption Perception Index, Ukraine ranked eighty-fifth out of the 102 listed countries. \5\ Prosecutions of corruption are based upon the law ``On Combating Corruption,'' that was passed in October 1995. This law is, however, rarely enforced, and on the rare occasions when it is enforced, it is normally aimed at lower or middle-level state employees. With respect to the economy, the Ukrainian system is primarily a cash-based system, with limited use of non-cash financial instruments. The banking system of Ukraine has only been in existence for approximately ten years and contains several deficiencies, including the lack of any record-keeping requirements for banks. While the current banking legislation prohibits the opening of anonymous accounts, there nonetheless remain within the system thousands of anonymous, coded, or numbered accounts containing a total of more than U.S. $20,000,000. In addition, there is a thriving gray or black market system within Ukraine. With regard to recordkeeping requirements, the secrecy laws in the banking sector of Ukraine provide administrative authorities with limited access to customer account information. Furthermore, although banks in Ukraine are required to report both large-scale and dubious transactions, they are not subject to penalty or sanction for failing to make such reports, thus making the requirement wholly voluntary. In addition, non-bank financial institutions are under no obligation to identify beneficial owners when their clients appear to be acting on behalf of another party.

\5\ Transparency International (TI) is an international non- governmental organization devoted to combating corruption. One of its services is to conduct surveys of businesses and analysts (both within and outside the country) in order to determine this annual ranking. Each year, a composite index is compiled and Ukraine has consistently been near the bottom of this ranking. TI's annual Corruption Perceptions Index (``CPI'') is cited by the world's media as the leading index in the field. The CPI ranks countries by perceived levels of corruption among public officials.

The FATF identified Ukraine in September 2001 as being non- cooperative in the fight against money laundering and placed Ukraine on the NCCT list. Ukraine was placed on the NCCT list because it lacked an effective anti-money laundering regime, including an efficient and mandatory system for reporting suspicious transactions to a financial intelligence unit, adequate customer identification provisions, and sufficient resources devoted to combating money laundering. Currently, Ukraine does not have a comprehensive anti-money laundering law that meets international standards. On the basis of Ukraine's lack of an adequate anti-money laundering regime, the FATF decided that counter- measures should take effect on December 15, 2002, unless Ukraine enacted comprehensive legislation that meets international standards.

On November 28, 2002, Ukraine's Supreme Council (Parliament) passed a Law on Prevention and Counteraction of the Legalization (Laundering) of the Proceeds from Crime, and the President of Ukraine signed the Law on December 7. Notwithstanding this new legislation, the system for reporting suspicious transactions remains so constrained as to be virtually ineffective. Additionally, the statute contains contradictory language regarding the ability of Ukraine's financial intelligence unit to share information with law enforcement. Thus, the unit's authority to fulfill this fundamental responsibility remains very much in doubt.

Having analyzed the legislation, FATF has determined it to be inadequate and has called on its members to apply counter-measures.



On the basis of FATF's determination, an evaluation of the factors set forth in section 311 and the appropriate consultations, the Secretary has determined reasonable grounds exist for concluding that Ukraine is a ``primary money laundering concern.'' Furthermore, unless Ukraine demonstrates that it has taken proactive steps to address the concerns giving rise to its designation, Treasury anticipates issuing a notice of proposed rule making, subsequent to this designation, concurrent with an order imposing actions under special measures one through four for a period of 120 days. While this order is in effect, the imposition of a final rule imposing these measures would be evaluated. There are two measures under consideration by Treasury. U.S. financial institutions would be required to identify and record the nominal or beneficial owners of accounts with any one of the following characteristics: (1) The accountholder has an address in Ukraine; (2) $50,000 or more is transferred from a U.S. account into an account in the Ukraine; or (3) $50,000 or more is transferred from an account in the Ukraine into a U.S. account. A broader requirement would require U.S. financial institutions to identify and record the beneficial owners involved in a financial transaction that is captured electronically and that is over $50,000.

V. Designation of Nauru and Ukraine as Primary Money Laundering Concerns

By virtue of the authority vested in me as Under Secretary of the Treasury, including section 5318A of title 31, United States Code, for the foregoing reasons I hereby designate the countries of Nauru and Ukraine as ``primary money laundering concerns'' for purposes of section 5318A of title 31, United States Code. [[Page 78863]]

Dated: December 20, 2002.
Jimmy Gurul[eacute],
Under Secretary of the Treasury.
Richard S. Carro,
Senior Advisory to the General Counsel, (Regulatory Affairs).