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FBME Bank Ltd. v. Lew

United States District Court, D. Columbia.

August 27, 2015

FBME BANK LTD., et al., Plaintiffs,
v.
LEW, et al., Defendants

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          For FBME BANK LTD., FBME LTD., Plaintiffs: Derek Lawrence Shaffer, QUINN EMANUEL URQUHART & SULLIVAN, LLP, Washington, DC.

         For JACOB J. LEW, in his official capacity as Secretary of the Treasury, DEPARTMENT OF TREASURY, JENNIFER SHASKY CALVERY, in his official capacity as Director of the Financial Crimes Enforcement Network, FINANCIAL CRIMES ENFORCEMENT NETWORK, Defendants: Lynn Yuhee Lee, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Civil Division-Federal Programs Branch, Washington, DC; Amy E. Powell, U.S. DEPARTMENT OF JUSTICE, Washington, DC.

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         MEMORANDUM OPINION

         CHRISTOPHER R. COOPER, United States District Judge.

         On July 29, 2015, the U.S. Treasury Department's Financial Crimes Enforcement Network (" FinCEN" ) promulgated a Final Rule under Section 311 of the USA PATRIOT Act of 2001 imposing a " special measure" against FBME Bank Ltd. (" FBME" or " the Bank" ), a Tanzanian-chartered commercial bank that operates mainly in Cyprus. The measure--the fifth and most serious authorized by the statute--prohibits domestic financial institutions from maintaining correspondent bank accounts with FBME. The Final Rule, which is scheduled to take effect tomorrow, August 28, 2015, is designed to prevent FBME from continuing to do business in the United States or in U.S. dollars. Congress empowered the Secretary of the Treasury to impose this special measure through notice-and-comment rulemaking, following a finding that a nondomestic financial institution is of " primary money laundering concern" and thus a threat to national security and the U.S. financial system. 31 U.S.C. § 5318A. Congress also empowered the agency to consider classified information in formulating a rule under this section, and to provide that information " to the reviewing court ex parte and in camera." Id. § 5318A(f) (italics added). In other words, the imposition of this special measure involves a quasi-adjudicative rulemaking process through which the agency may rely on classified information unavailable to the target of the rule.

         After the Secretary issued a Notice of Finding that FBME is an institution of primary money laundering concern and a Notice of Proposed Rulemaking to impose this special measure, U.S. banks holding correspondent accounts on behalf of FBME terminated their relationships with the Bank, and other banks abroad held FBME's U.S. dollar correspondent accounts in suspension pending imposition of the Final Rule. In the event the Final Rule takes effect on August 28, 2015, U.S. banks will be wholly prohibited from transacting with, or processing transactions on behalf of, FBME. FBME contends that this will prompt remaining banks with which FBME maintains U.S. dollar correspondent accounts to liquidate those accounts, effectively excommunicating FBME from the global financial system, and potentially permanently depriving the Bank of its U.S. dollar assets. Put differently, FBME maintains that it currently exists in a state of purgatory, and will cross the Styx tomorrow, barring this Court's grant of its Motion for a Preliminary Injunction.

         To avoid that predicament, FMBE and its Cayman Islands holding company have filed suit and moved to preliminarily enjoin the Final Rule. The Bank alleges that the Rule is invalid because (1) FinCEN failed to provide it adequate notice of the basis of its findings as required by the Administrative Procedure Act (" APA" ); (2) FinCEN acted arbitrarily and capriciously under the APA by, among other things, not considering all relevant facts or the imposition of less punitive measures; and (3) FinCEN violated the Bank's constitutional due process rights. FBME argues that a preliminary injunction is warranted because it is likely to prevail on the merits of its claims and it will be irreparably harmed should the Final Rule go into effect. The Bank also argues that the balance of the

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equities and the public interest weigh in favor of an injunction.

         The Court has reviewed both the public and nonpublic materials upon which FinCEN relied in issuing the Final Rule, as well as the submissions and arguments of the parties. Based on the present record, the Court is not inclined to second guess FinCEN's exercise of its broad discretion in finding that FBME poses a primary money laundering concern, or its resulting imposition of the fifth special measure. The Court therefore finds that FBME has not established a likelihood of success on the merits of its claim that FinCEN's ultimate finding is arbitrary and capricious under the APA. That conclusion, however, does not relieve the agency of its obligation to adhere to the APA's procedural requirements. If anything, FinCEN's reliance on nonpublic and classified evidence to impose a serious sanction against a single institution required it to hew even more closely to the APA's demands than it might have in a garden-variety rulemaking. These requirements included providing and enabling FMBE to respond to all the public information upon which FinCEN relied and explaining in the rule why potentially viable but less drastic alternative penalties were not chosen. Because the agency does not appear to have satisfied those requirements, and because FBME has demonstrated that it will likely be irreparably harmed should the Final Rule take effect, the Court will grant FBME's Motion for a Preliminary Injunction.

         I. Background

         A. Statutory Background

         Following September 11, 2001, Congress enacted legislation amending federal money-laundering laws in an effort to combat the financing of global terrorism. As part of this effort, Congress passed the USA PATRIOT Act, Pub. L. No. 107-56, 115 Stat. 272 (2001). Section 311 of the Act authorizes the Secretary of the Treasury to direct domestic financial institutions and agencies to take an array of " special measures" if the Secretary " finds that reasonable grounds exist for concluding" that a financial institution " operating outside the United States . . . is of primary money laundering concern." 31 U.S.C. § 5318A(a)(1).

         Before " making a finding that reasonable grounds exist for concluding" that a foreign financial institution is of primary money laundering concern, the Secretary must consider any information that he or she deems relevant, in addition to the following factors:

(i) the extent to which such financial institutions . . . are used to facilitate or promote money laundering . . . , including any money laundering activity by organized criminal groups, international terrorists, or entities involved in the proliferation of weapons of mass destruction or missiles;
(ii) the extent to which such institutions . . . are used for legitimate business . . . ; and
(iii) the extent to which such action is sufficient to ensure . . . that the purposes of this subchapter continue to be fulfilled, and to guard against international money laundering and other financial crimes.
Id.

         Once the Secretary determines that reasonable grounds exist to deem a particular foreign financial institution of primary money laundering concern, he or she may take any of five " special measures" imposing obligations on U.S. financial institutions. Id. § 5318A(b). The first four special measures involve obtaining

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information from domestic financial institutions, and include requiring those institutions to provide (1) additional recordkeeping and reporting of certain financial transactions, (2) information relating to beneficial ownership of accounts, (3) information relating to certain payable-through accounts, and (4) information relating to certain correspondent accounts. Id. In the most severe cases, the Secretary may--by notice-and-comment rulemaking only--impose a fifth special measure. This measure " prohibit[s], or impose[s] conditions upon, the opening or maintaining in the United States of a correspondent account . . . by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution," deemed by the Secretary to be of primary money laundering concern. Id. § 5318A(a)(1).[1] In other words, imposing this measure has the effect of eliminating or curtailing a foreign banking institution's access to the U.S. financial system and to transactions involving the U.S. dollar. See A Fearful Number, The Economist (June 6, 2015), http://www.economist.com/news/finance-and-economics/21653673-bank-rejects-american-accusations-it-abetted-financial-crime-fearful .

         In selecting which special measure to impose, the Secretary must consider the following factors:

(i) whether similar action has been or is being taken by other nations or multilateral groups;
(ii) 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;
(iii) 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, class of transactions, or type of account; and
(iv) the effect of the action on United States national security and foreign policy.

         The Secretary of the Treasury has delegated implementation of this statutory provision to the Director of FinCEN, a bureau of the Department " tasked with safeguarding the United States financial system from illicit use and combating money laundering." Defs.' Opp'n Mot. Prelim. Inj. at 9.

         B. Factual and Procedural Background

         On July 15, 2014, FinCEN made a finding that reasonable grounds existed to conclude that FBME Bank Ltd. was an institution of primary money laundering concern, and it published a notice explaining this finding in the Federal Register on July 22, 2014. See 79 Fed.Reg. 42639 (July 22, 2014) (" Notice of Finding" or " NOF" ). In this finding, FinCEN concluded that " FBME [had] facilitated a substantial volume of money laundering through the Bank for many years" and that it had maintained weak anti--money laundering controls. Specific findings in the Notice include:

o " [T]he head of an international narcotics trafficking and money laundering network has used shell companies'

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accounts at FBME to engage in financial activity."
o " [A]n FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah."
o " [A] financial advisor for a major transnational organized crime figure . . . banked entirely at FBME in Cyprus [and] maintained a relationship with the owners of FBME."
o " FBME facilitated the transfer of over $100,000 to an FBME account involved in a High Yield Investment Program (" HYIP" ) fraud against a U.S. person. . . . [T]he FBME customer operating the alleged HYIP was indicted in the United States District Court for the Northern District of Ohio for wire fraud and money laundering related to the HYIP fraud."
o " FBME facilitated the unauthorized transfer of over $100,000 to an FBME account from a Michigan-based company that was the ...

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