U.S. judge blocks Treasury AML action against Tanzanian bank FBME

The U.S. Treasury Department's push to use an extraterritorial Patriot Act power to sever foreign banks from the U.S. financial system was slowed on Thursday by a District Court judge in Washington who preliminarily blocked an attempt to use the power against Tanzanian-chartered FBME Bank Ltd.

The ruling by U.S. District Court judge Christopher R. Cooper did not find that Treasury's Financial Crimes Enforcement Network (FinCEN) erred in targeting FBME, a commercial bank that operates mainly in Cyprus, over its allegedly grave anti-money laundering weaknesses. Instead, it focused on what Cooper described as FinCEN "procedural errors."

When issuing a preliminary injunction preventing a FinCEN Section 311 final rule issued in July from taking effect on Thursday, Judge Cooper found merit in FBME's claim that the Treasury bureau failed to comply with the Administrative Procedure Act (APA) when acting against the bank. The APA governs the manner in which administrative agencies may propose and establish regulations.

"It is enough at this stage that FBME is likely to succeed in showing that FinCEN did not fulfill its procedural obligations under the APA," Judge Cooper wrote in his ruling.

A FinCEN spokeswoman did not respond to a request for comment. 

Derek Shaffer, a partner with law firm Quinn Emanuel Urquhart & Sullivan LLP, which sued FinCEN on behalf of FBME and its Cayman Islands holding company, said the preliminary injunction "is not the end of our challenge to what we contend was unfair, invalid action by FinCEN." 

"We are pleased with the Court's decision to grant a preliminary injunction that prohibits FinCEN's Final Rule from taking effect pending final adjudication. We look forward to the proceedings ahead," Shaffer said in a statement emailed to Thomson Reuters.

Judge Cooper found that FinCEN "provided insufficient notice of non-classified, non-protected information during the rulemaking proceeding," thereby failing to give FBME an opportunity to respond. 

He added that it should have considered "imposition of conditions on the opening or maintaining of correspondent accounts, rather than the full prohibition of opening or maintaining such accounts." 

What these findings will ultimately mean remains unclear.

Judge Cooper's ruling said the Court "need not now articulate what remedy it would order if it ultimately finds for FBME on the merits of its claim." 

The case involves a so-called Section 311 finding by FinCEN, which in July 2014 issued a proposed rule against FBME. 

FinCEN's proposal found FBME to be "of primary money laundering concern" and initiated a "special measure five" penalty, a Section 311 sanction that prohibits U.S. financial institutions from opening or maintaining correspondent accounts or payable-through accounts for the targeted party.

In its lawsuit, FBME said FinCEN's proposed rule was enough to cause U.S. banks to shutter its correspondent accounts. It said foreign banks placed its accounts "in suspension" pending a final rule, however.

Judge Cooper's ruling stated that FBME "currently exists in a state of purgatory" and that without a preliminary injunction, it would "cross the Styx tomorrow."

This is not the first legal challenge over a Section 311 action. 

As reported by Thomson Reuters, in 2013, Macau-based bank Banco Delta Asia, its parent, Hong Kong-based Delta Asia Group Ltd, and its chairman Stanley Au, sued FinCEN and its director, Jennifer Shasky Calvery. That case is unresolved and the parties have been in talks for more than a year.

Among other things, BDA said FinCEN's action against it in 2007, which severed it from the U.S. financial system, was taken "without statutorily or constitutionally adequate procedure, without adequate evidentiary support, and based on improper considerations." 

A lawyer representing BDA did not respond to a request for comment on what effect Judge Cooper's decision might have on BDA's legal fight.

Both the lawsuit by FBME and the one by BDA were brought in U.S. District Court in Washington.

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