Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 1 of 57 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA FBME BANK LTD., et al., Plaintiffs, v. Case No. 15-cv-01270 (CRC) JACOB LEW, in his official capacity as Secretary of the Treasury, et al., Defendants. OPPOSITION TO DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 2 of 57 TABLE OF CONTENTS Table of Authorities........................................................................................................................ iv Glossary ...........................................................................................................................................x Introduction ......................................................................................................................................1 Background ......................................................................................................................................2 Argument .........................................................................................................................................5 I. Standards of Review ................................................................................................5 II. FinCEN’s Second Rulemaking Failed To Abide by Statutory and Constitutional Procedural Requirements .................................................................6 A. B. III. FBME Is Entitled to Due Process ................................................................8 1. FBME satisfies any applicable property requirements ....................8 2. FBME is due more process than entities designated as terrorists .........................................................................................13 FinCEN Unlawfully Relied on Secret Evidence ........................................15 1. FinCEN withheld unclassified and unprotected evidence .............15 2. FinCEN withheld unclassified SARs .............................................20 3. FinCEN appears to have withheld other information as privileged .......................................................................................21 4. FinCEN failed to mitigate its use of classified evidence ...............22 C. FinCEN Failed To Provide a Neutral Decisionmaker and Oral Hearing .......................................................................................................23 D. FinCEN Failed To Conduct the Required Consultations ...........................25 FinCEN’s Second Final Rule Is Arbitrary and Capricious ....................................26 A. FinCEN Unreasonably Ignored Contrary Evidence ..................................27 1. FinCEN failed to respond to criticisms of its SARs analysis ........27 2. FinCEN refused to address CBC’s shortcomings ..........................28 i. FinCEN relied on CBC’s discredited 2015 findings ii 28 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 3 of 57 ii. 3. FinCEN ignored extensive evidence of CBC’s misconduct 33 FinCEN unreasonably found FBME lacks effective AML controls ...........................................................................................35 i. ii. iii. FinCEN refused to credit FBME for EY’s and KPMG’s positive compliance determinations and FBME’s improvements in response 36 FinCEN failed to refute FBME’s demonstration that CBC’s fines were baseless, inapplicable, and unfair 38 FinCEN relied on discredited allegations 38 B. FinCEN Failed To Apply § 311’s Statutory Factors Appropriately ...........40 C. FinCEN Imposed an Excessive Penalty Without Adequately Considering Alternatives ............................................................................41 D. FinCEN’s Review of Privileged Materials Tainted the Rulemaking .........44 Conclusion .....................................................................................................................................45 iii Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 4 of 57 TABLE OF AUTHORITIES Cases *Abourezk v. Reagan, 785 F.2d 1043 (D.C. Cir. 1986), affirmed by an equally divided Court, 484 U.S. 1 (1987)........................................... 20, 21 Aero Continente, S.A. v. Newcomb C.A., No. 04-1168, ECF No. 8 (D.D.C. July 16, 2004) ..............................................................11 *American Radio Relay League, Inc. v. FCC, 524 F.3d 227 (D.C. Cir. 2008)..................................................................................... 27, 35 American-Arab Anti-Discrimination v. Reno, 70 F.3d 1045 (9th Cir. 1995) ....................................................................................... 22, 25 Bismullah v. Gates, 501 F.3d 178 (D.C. Cir. 2007)........................................................................................... 23 Butte County v. Hogen, 613 F.3d 190 (D.C. Cir. 2010)..................................................................................... 28, 35 Campbell v. U.S. Department of Justice, 164 F.3d 20 (D.C. Cir. 1998)............................................................................................... 5 Chrebet v. County of Nassau, 24 F. Supp. 3d 236, 245 (E.D.N.Y. 2014), affirmed, 606 F. App’x 15 (2d Cir. 2015).......................................................................... 13 Cierco v. Lew, No. 15-1641, ECF 42 (D.D.C. May 18, 2016) ................................................................... 6 College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 666 (1999) .......................................................................................................... 12 Concrete Pipe & Productions of California, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602 (1993) .......................................................................................................... 24 Daimler AG v. Bauman, 134 S. Ct. 746 (2014) .................................................................................................... 9, 10 *District Hospital Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015)................................................................................. 35, 37, 38 *FBME Bank Ltd. v. Lew, 125 F. Supp. 3d 109 (D.D.C. 2015) .................................................................... 1, 6, 15, 23 iv Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 5 of 57 Forcade v. Knight, 416 F. Supp. 1025 (D.D.C. 1976) ..................................................................................... 20 Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011) ...................................................................................................... 9, 10 Goss v. Lopez, 419 U.S. 565 (1975) ............................................................................................................ 1 *Gray Panthers v. Schweiker, 652 F.2d 146 (D.C. Cir. 1980)........................................................................................... 25 *Greene v. McElroy, 360 U.S. 474 (1959) ............................................................................................................ 5 GSS Group Ltd. v. National Port Authority, 680 F.3d 805 (D.C. Cir. 2012)............................................................................................. 9 Hamdan v. Rumsfeld, 548 U.S. 557 (2006) ........................................................................................................ 2, 5 Holder v. Humanitarian Law Project, 561 U.S. 1 (2010) .............................................................................................................. 14 Holy Land Foundation for Relief and Development v. Ashcroft, 219 F. Supp. 57 (D.D.C. 2002) ......................................................................................... 14 Holy Land Foundation for Relief and Development v. Ashcroft, 333 F.3d 156 (D.C. Cir. 2003)........................................................................................... 13 Jifry v. FAA, 370 F.3d 1174 (D.C. Cir. 2004) ........................................................................................... 5 Judulang v. Holder, 132 S. Ct. 476 (2011) .......................................................................................................... 5 Kiareldeen v. Ashcroft, 273 F.3d 542 (3d Cir. 2001) ........................................................................................ 22, 23 *KindHearts for Charitable Humanitarian Development, Inc. v. Geithner, 647 F. Supp. 2d 857 (N.D. Ohio 2009) (“KindHearts I”) ........................................... 18, 25 *KindHearts for Charitable Humanitarian Development, Inc. v. Geithner, 710 F. Supp. 2d 537 (N.D. Ohio 2010) (“KindHearts II”) ......................................... 22, 23 Lorillard, Inc. v. U.S. FDA, 56 F. Supp. 3d 37 (D.D.C. 2014), vacated on other grounds, 810 F.3d 827 (D.C. Cir. 2016) ................................................ 45 v Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 6 of 57 Los Angeles v. David, 538 U.S. 715 (2003) .......................................................................................................... 19 Mai v. Carolina Holdings, Inc., 696 S.E.2d 769 (N.C. Ct. App. 2010) ............................................................................... 12 Mathews v. Eldridge, 424 U.S. 319 (1976) .......................................................................................................... 25 Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) .......................................................................................................... 12 MetLife, Inc. v. Financial Stability Oversight Council, --- F. Supp. 3d ----, 2016 WL 1391569 (D.D.C. Mar. 30, 2016) ...................................... 40 *Michigan v. EPA, 135 S. Ct. 2699 (2015) ............................................................................................ 8, 40, 41 *National Council of Resistance of Iran v. U.S. Department of State, 251 F.3d 192 (D.C. Cir. 2001).................................................................................... passim Overby v. National Ass’n of Letter Carriers, 595 F.3d 1290 (D.C. Cir. 2010)......................................................................................... 24 People’s Mojahedin Organization of Iran v. U.S. Department of State, 182 F.3d 17 (D.C. Cir. 1997) (“People’s Mojahedin I”) ........................................... 8, 9, 14 *People’s Mojahedin Organization of Iran v. U.S. Department of State, 613 F.3d 220 (D.C. Cir. 2010) (“People’s Mojahedin II”) .................................... 18, 22, 25 Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998) .......................................................................................................... 12 Rafeedie v. INS, 795 F. Supp. 13 (D.D.C. 1992) ......................................................................................... 22 Ralls Corp. v. Committee on Foreign Investment in the United States, 2014 U.S. Dist. Lexis 177868 (D.D.C. Nov. 6, 2014) ...................................................... 21 *Ralls Corp. v. Committee on Foreign Investment in the United States, 758 F.3d 296 (D.C. Cir. 2014)..................................................................................... 18, 25 San Jacinto Savings & Loan v. Kacal, 928 F.2d 697 (5th Cir. 1991) ............................................................................................. 13 SEC v. Chenery Corp., 318 U.S. 80 (1943) .............................................................................................................. 8 vi Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 7 of 57 *States Marine Lines, Inc. v. Federal Maritime Commission, 376 F.2d 230 (D.C. Cir. 1967)................................................................................. 1, 20, 21 United States ex rel. Landis v. Tailwind Sports Corp., --- F. Supp. 3d ----, 2016 WL 141615 (D.D.C. Jan. 12, 2016).......................................... 18 United States v. Abu Khatallah, No. 14-cr-141, ECF 134 (D.D.C. Nov. 18, 2015) ............................................................. 23 United States v. All Assets Held in Account Number XXXXXXXX, 83 F. Supp. 3d 360 (D.D.C. 2015) .................................................................................... 10 *United States v. James Daniel Good Real Property, 510 U.S. 43 (1993) .................................................................................................. 1, 15, 25 United States v. Sum of $70,990,605, 128 F. Supp. 3d 350 (D.D.C. 2015) .................................................................................... 9 United States v. United States District Court for the Eastern District of Michigan, 407 U.S. 297 (1972) ............................................................................................................ 5 United States v. Vongxay, 594 F.3d 1111 (9th Cir. 2010) ........................................................................................... 24 Westar Energy, Inc. v. FERC, 473 F.3d 1239 (D.C. Cir. 2007)......................................................................................... 41 Wint v. Yeutter, 902 F.2d 76 (D.C. Cir. 1990)............................................................................................... 6 *Withrow v. Larkin, 421 U.S. 35 (1975) ...................................................................................................... 23, 24 Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952) ............................................................................................................ 5 Yuba Natural Resources, Inc. v. United States, 821 F. 2d. 638 (Fed. Cir. 1987) ......................................................................................... 12 Zweibon v. Mitchell, 516 F.2d 594 (D.C. Cir. 1975) (en banc)............................................................................. 5 Statutes 28 U.S.C. § 1292 ........................................................................................................................... 14 31 U.S.C. § 5318 ........................................................................................................................... 20 31 U.S.C. § 5318A (“§ 311 of the USA PATRIOT Act”) ...................................................... passim vii Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 8 of 57 5 U.S.C. § 553 ............................................................................................................................... 14 50 U.S.C. § 1701 ........................................................................................................................... 13 8 U.S.C. § 1189 ....................................................................................................................... 13, 14 Other Authorities 31 C.F.R. § 1020.320 .................................................................................................................... 20 70 Fed. Reg. 21362 (Apr. 26, 2005) ............................................................................................. 42 71 Fed. Reg. 39606 (July 13, 2006) .............................................................................................. 42 73 Fed. Reg. 19452 (Apr. 10, 2008) ............................................................................................... 6 77 Fed. Reg. 59747 (Oct. 1, 2012).................................................................................................. 6 80 Fed. Reg. 45057 (July 29, 2015) (“First Final Rule”) ............................................................. 14 80 Fed. Reg. 60575 (Sept. 28, 2015) .............................................................................................. 6 80 Fed. Reg. 74064 (Nov. 27, 2015) (“2015 Notice”) ...................................................... 16, 19, 20 81 Fed. Reg. 11496 (Mar. 4, 2016) ................................................................................................. 6 81 Fed. Reg. 14408 (Mar. 17, 2016) ............................................................................................... 6 81 Fed. Reg. 18480 (Mar. 31, 2016) (“Second Final Rule”) ................................................. passim Code of Conduct for United States Judges, Canon 3 .................................................................... 20 David Cole, Enemy Aliens, 54 STAN. L. REV. 953 (2002) ............................................................. 22 Executive Order 13224, 66 Fed. Reg. 49079 (Sept. 23, 2001) ..................................................... 13 FinCEN, Potential Money Laundering Risks Related to Shell Companies (Nov. 9, 2006), https://goo.gl/jAJgEA ....................................................................................................... 39 H.R. Conf. Rep. 108-381 (2003)................................................................................................... 22 H.R. Rep. 107-250 (2001)............................................................................................................. 26 MONEYVAL, Special Assessment of the Effectiveness of Customer Due Diligence Measures in the Banking Sector in Cyprus (Apr. 24, 2013), https://goo.gl/38jT4X ............................. 31 North Carolina Rule of Professional Conduct 1.15 ...................................................................... 12 viii Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 9 of 57 Whoops Apocalypse, THE ECONOMIST (Feb. 27, 2016), http://goo.gl/NxoUWS .................................................. 6 ix Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 10 of 57 GLOSSARY The following abbreviations, acronyms, and defined terms appear in this brief: 2015 Notice: 80 Fed. Reg. 74064 (Nov. 27, 2015) AML: anti–money laundering APA: Administrative Procedure Act AR: Administrative Record CBC: EY: Central Bank of Cyprus Ernst & Young FBME: FBME Bank Ltd. FBME MSJ: FinCEN: Memorandum in Support of Plaintiffs’ Motion for Summary Judgment, ECF 62-1 Financial Crimes Enforcement Network First Final Rule: Gov’t MSJ: 80 Fed. Reg. 45057 (July 29, 2015) Defendants’ Motion for Summary Judgment & Memorandum in Support, ECF 61 IOLTA account: Interest on Lawyers Trust Account MONEYVAL: Committee of Experts on the Evaluation of Anti-Money Laundering and the Financing of Terrorism NOF: Notice of Finding Notice of Finding: Peters Decl.: 79 Fed. Reg. 42639 (July 22, 2014), AR0075–77 Declaration of M. Elizabeth Peters, ECF 62-3 Privileged Materials: ECF 52-5 & 52-6 PWC: PriceWaterhouseCoopers Saab Decl.: SARs: Declaration of Ayoub-Farid Saab, ECF 62-2 suspicious activity reports Second Final Rule: 81 Fed. Reg. 18480 (Mar. 31, 2016) x Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 11 of 57 SSRC: USD: Scientific Studies and Research Center United States dollar Wyllie Decl.: Declaration of Graeme Scott Wyllie, ECF 3-5 xi Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 12 of 57 INTRODUCTION The core principles and precedents warranting vacatur of FinCEN’s dismal process are not novel or controversial. “Secrecy is not congenial to truth-seeking.”1 Because “fairness can rarely be obtained by secret, one-sided determination of facts decisive of rights,” there is “[n]o better instrument . . . for arriving at truth than to give a person in jeopardy of serious loss notice of the case against him and opportunity to meet it.”2 Those precepts animate our adversarial legal system and due process; with them comes the “fundamental” rule that “an accused should not be subjected to punishment on the basis of secret evidence.” States Marine Lines, Inc. v. Federal Maritime Commission, 376 F.2d 230, 239 (D.C. Cir. 1967). The defects still plaguing these proceedings are those of an agency that has come to covet secrecy and opacity to excess. It is, to be sure, established that the Government may resort to secret, classified evidence on a strictly limited basis, as and if warranted to preserve national security. But that extraordinary departure from cherished principles is rightly minimized and confined by necessity. Here, in contrast, FinCEN has exacerbated its procedural deprivations, even withholding essential information that it has no good reason to withhold, as confirmed by the fact that it has publicly disclosed this information after the fact as basis for sanctioning FBME. This Court has already foreclosed such an unjust approach, holding it unlawful to withhold unclassified and unprotected evidence when it preliminarily enjoined the First Final Rule.3 FBME Bank Ltd. v. Lew, 125 F. Supp. 3d 109, 120–23 (D.D.C. 2015). Apparently recognizing that FinCEN’s latest rule is due to be vacated, the Government now resorts to arguing that the Court previously erred by holding that FinCEN must divulge to 1 Goss v. Lopez, 419 U.S. 565, 580 (1975) (citation omitted). U.S. v. James Daniel Good Real Property, 510 U.S. 43, 55 (1993) (citation omitted). 3 Abbreviations, acronyms, and defined terms in FBME’s opening brief are carried over to this brief and are also re-defined in the Glossary, above. 2 1 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 13 of 57 FBME all unclassified information and materials the agency relies upon. MSJ”) at 43–44. ECF 61 (“Gov’t Far from calling into question the correctness of this Court’s prior holding, however, FinCEN’s persistent game of “hide the ball” confirms the imperative for that holding. The Government also argues that FinCEN could both rely on and withhold individual suspicious activity reports (“SARs”), and that FinCEN could rely on classified evidence without employing established procedural protections and without accounting for what are (at the very least) real, troubling questions about illicit taint. If the Government’s procedural and substantive arguments are now accepted, they will do much to place FinCEN and its shrouded proceedings beyond the reach of judicial review and the rule of law. The Court should not accept them. The Government’s chosen approach to extinguishing FBME is secretive, opaque, unexplained, and, we must submit, underhanded. Such an approach is every bit as “abhorrent” to the international financial community as it is “to free men” everywhere.4 Governing law now points to vacatur of FinCEN’s Second Final Rule and denial of FinCEN’s request for summary judgment on a plethora of procedural and substantive grounds. BACKGROUND The Government’s account of the relevant background is similar to ours, compare Gov’t MSJ at 5–20, with ECF 62-1 (“FBME MSJ”) at 4–14, yet it omits or misstates certain facts. We highlight four examples at the outset, before discussing additional ones in the sections below. Consultation Requirement: The Government begins with the “Statutory and Regulatory Background,” which purports to describe at some length the legal requirements for imposing the fifth special measure under § 311. Gov’t MSJ at 5–9. Neither in this section nor anywhere else, however, does the Government mention the requirement that FinCEN “shall consult with” 4 Hamdan v. Rumsfeld, 548 U.S. 557, 634 n.67 (2006) (citation omitted). 2 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 14 of 57 specified federal officials before imposing this measure. (c)(4)(A); see also FBME MSJ at 4–6. 31 U.S.C. § 5318A(a)(4)(a), (b)(5), The omission is telling. FBME has noted FinCEN’s ostensible disregard of its statutory obligations to consult, see FBME MSJ at 21–22, 39–40, 51, and the same disregard is evident in counsel’s purported defense of the agency’s process. North Carolina Property: The next background section—entitled “Factual and Procedural Background”—says nothing about FBME’s property in North Carolina even though that property has been featured in this litigation dating back to FBME’s Complaint, ECF 1 at 6. As now further documented, there is some $291,435.97 held in escrow in a North Carolina bank account for FBME (which FBME cannot access because of FinCEN’s actions), and there are approximately 50 lots at a North Carolina residential community on which FBME holds liens. FBME MSJ at 8–9; AR3998 ¶¶ 37–38; ECF 62-3 (“Peters Decl.”) ¶¶ 24–37 & Apps. A–K. FBME’s property and dollars in North Carolina establish FBME’s entitlement to due process under the Constitution, even as FinCEN ignores them. FinCEN’s Interactions with FBME: misrepresentations. FBME MSJ at 16–19. Beyond its omissions, the Government makes serial It continues to mischaracterize FinCEN’s interactions with FBME, claiming, for example, that there was an “active, long-running dialogue with the bank’s counsel,” that “FinCEN maintained regular communication with FBME and its counsel,” and that at the one meeting FinCEN begrudgingly held with FBME, the agency sought “to answer questions to the extent possible and articulate any concerns it had.” Gov’t MSJ at 2, 12, 13 n.4. it. Far from Throughout the rulemaking process, communications between FBME and FinCEN were a one-way street, with FBME repeatedly submitting information and asking questions, and FinCEN repeatedly blanking FBME. E.g., AR0913–43, 4399–4425; Peters Decl. ¶¶ 3–23. 3 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 15 of 57 Identification of Transactions FinCEN Found Concerning: The Government further misrepresents that, “[w]here FinCEN could, it confirmed when FBME correctly identified transactions with which FinCEN was concerned.” Gov’t MSJ at 13. this statement. One example disproves In the Notice of Finding, FinCEN accused FBME of having a customer who “is a front company for a U.S.-sanctioned Syrian entity, the Scientific Studies and Research Center (‘SSRC’).” AR0076. EY investigated and found no link between FBME and the SSRC, but it identified a few candidates (whose accounts were long closed) that came closest to fitting FinCEN’s description. AR4271–82. FBME then wrote to FinCEN, on January 26, 2015, naming the candidates EY had identified and asking FinCEN, “Did FBME accurately identify the customer in question? . . . If not, can FinCEN provide additional information that could assist FBME in further efforts to identify this accountholder . . . ?” AR4409. FinCEN responded on February 24, 2015, that “FinCEN is unable to release additional information in response to this question . . . .” AR2656 (emphasis added). When FinCEN published the Second Final Rule, however, it finally told FBME (for the first time) that “the sanctioned [Syrian] entity referenced in FinCEN’s NOF was not the individual identified by FBME.” 81 Fed. Reg. 18480, 18486 (Mar. 31, 2016). Thus, over a year after FBME had asked if it had correctly identified the customer in question, and over a year after FinCEN had falsely claimed that it was “unable” to say more, FinCEN at last came clean. But by that time, of course, the opportunity for FBME to take due account in its comments had long since passed. Cf. AR3340. Standing alone, the episode gives the lie to the Government’s notion that “[w]here FinCEN could, it confirmed when FBME correctly identified transactions with which FinCEN was concerned.” Gov’t MSJ at 13. Taken in context, it is emblematic of the sandbagging, hide-the-ball approach that has been FinCEN’s modus operandi. 4 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 16 of 57 ARGUMENT I. STANDARDS OF REVIEW The Government’s brief is half right about the applicable standards of review. MSJ at 20–21. Gov’t We agree that arbitrary-and-capricious review applies to FBME’s substantive claims and that such review is relatively narrow and deferential, although courts “retain a role, and an important one, in ensuring that agencies have engaged in reasoned decisionmaking.” Judulang v. Holder, 132 S. Ct. 476, 483–84 (2011). But the Government fails to mention that FBME’s procedural claims are reviewed de novo—i.e., without any deference to the agency. Jifry v. FAA, 370 F.3d 1174, 1182 (D.C. Cir. 2004); FBME MSJ at 14 (collecting authorities). With respect to FBME’s substantive claims, the Government notes that “heightened deference” is appropriate because this case “implicate[s] foreign affairs and national security.” Gov’t MSJ at 21. While that deserves due credit, it must be emphasized that, even for national- security matters, “deference is not equivalent to acquiescence.” Campbell v. U.S. Department of Justice, 164 F.3d 20, 30 (D.C. Cir. 1998). This Court retains the essential role of ensuring that the Government stays within legal bounds; when constitutional or statutory limits are arguably transgressed, it falls upon this Court to say what the law is. Accordingly, the Supreme Court and the D.C. Circuit have repeatedly struck down executive-branch actions in cases implicating national security and foreign affairs. E.g., Hamdan v. Rumsfeld, 548 U.S. 557 (2006); United States v. United States District Court for the Eastern District of Michigan, 407 U.S. 297 (1972); Greene v. McElroy, 360 U.S. 474 (1959); Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952); Zweibon v. Mitchell, 516 F.2d 594 (D.C. Cir. 1975) (en banc). In this case, judicial scrutiny should be still more searching, both because “FinCEN’s reliance on nonpublic and classified evidence to impose a serious sanction against a single institution require[s] it to hew even more closely to the APA’s demands than it might have in a 5 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 17 of 57 garden-variety rulemaking,” FBME, 125 F. Supp. 3d at 114, and also because this matter was already remanded once, thereby making it imperative to ensure that “[t]he agency’s action on remand [is] more than a barren exercise of supplying reasons to support a pre-ordained result.” Wint v. Yeutter, 902 F.2d 76, 81 (D.C. Cir. 1990) (Judge R. B. Ginsburg; citation omitted). As Judge Boasberg recently noted, this is the one case where FinCEN is answering to judicial review, leaving it to serve as the “standard bearer.” Cierco v. Lew, No. 15-1641, ECF 42, at 19–20 (D.D.C. May 18, 2016). Apart from this case, FinCEN’s § 311 proceedings have proved impervious to judicial review. In case, after case, after case, after case, FinCEN has prodded foreign regulators to wipe out a foreign bank and thus moot any challenge before it can be adjudicated.5 Indeed, FinCEN and CBC have here followed the same script and come within a hair’s breadth of extinguishing FBME. F. Supp. 3d at 126–27. See ECF 62-2 (“Saab Decl.”) ¶¶ 3–5, 20; FBME, 125 To the extent that the Government is now arguing to dim, and perhaps effectively banish, the light of judicial review, it is turning the dial in the wrong direction. II. FINCEN’S SECOND RULEMAKING FAILED TO ABIDE BY STATUTORY AND CONSTITUTIONAL PROCEDURAL REQUIREMENTS The Government maintains that no procedural problem infects the Second Final Rule because FBME is not entitled to due process and, even if FBME is so entitled, FinCEN’s procedures still pass muster. Gov’t MSJ at 37–53. 5 If the Government prevails in these E.g., Cierco v. Lew, No. 15-1641, ECF 42 (D.D.C. May 18, 2016) (dismissing as moot challenge to § 311 action against Banca Privada d’Andorra because FinCEN had withdrawn the action); 81 Fed. Reg. 11496, 11497 (Mar. 4, 2016) (withdrawing § 311 action against Banca Privada d’Andorra because it had caused foreign regulators to effectively dismantle the bank); 81 Fed. Reg. 14408, 14409 (Mar. 17, 2016) (same for JSC CredexBank); 80 Fed. Reg. 60575, 60576 (Sept. 28, 2015) (same for Lebanese Canadian Bank); 77 Fed. Reg. 59747, 59748 (Oct. 1, 2012) (same for Myanmar Mayflower Bank and Asia Wealth Bank); 73 Fed. Reg. 19452, 19453 (Apr. 10, 2008) (same for First Merchant Bank); see also Whoops Apocalypse, THE ECONOMIST (Feb. 27, 2016), http://goo.gl/NxoUWS (noting criticisms that FinCEN wields its § 311 power so as to evade judicial review). 6 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 18 of 57 contentions, then due process as long venerated under the U.S. Constitution will shift beyond reach of foreign entities, just because they are foreign, or else be dampened for all. If the Government does not prevail in its contentions, that is good and sufficient basis to vacate the final rule. FBME respectfully submits that it is entitled to due process (§ II.A, below), and that the final rule is the product of unlawful procedures insomuch as FinCEN altogether withheld yet critically relied on secret evidence (§ II.B, below), failed to provide a neutral decisionmaker and oral hearing (§ II.C, below), and failed to conduct the requisite consultations (§ II.D, below). FBME’s entitlement to due process is especially straightforward and strong considering that FBME is being cut off from more than $290,000 otherwise available to it in North Carolina. Accordingly, the Government must show that the procedures FinCEN followed here—involving no neutral decisionmaker; no live hearing; no investigation into palpable taint; no timely disclosure of unclassified evidence relied on by the decisionmaker—somehow afford all the process that is due before an international bank is branded a scofflaw and excommunicated from the U.S. financial system. To so hold would contravene decades of due-process precedents. In order to vacate, the Court need conclude only that some or all of the remarkable circumstances present here combine to render FinCEN’s procedural deprivations impermissible. Among these remarkable circumstances, piled atop those familiar to § 311 proceedings, are: • FinCEN’s receipt, review (undisclosed for a period of months), and ostensible reliance upon materials submitted by former members of FBME’s legal team in flagrant violation of attorney-client privilege; • FinCEN’s central and express reliance upon untested submissions from a foreign regulator, CBC, whose credibility, motivations, pecuniary interest, and conduct adverse to FBME should, at the very least, engender concern (according to the submissions of neutral third parties as well as an extensive body of evidence); • FinCEN’s still more pointed reliance upon CBC’s September 2015 audit, which PWC disavowed having written after being commissioned to perform the audit; 7 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 19 of 57 • FinCEN’s critical reliance upon classified evidence as to which FBME remains, even now, entirely in the dark; • FinCEN’s failure to disclose new unclassified allegations that supposedly support the Second Final Rule in its preceding notices; and • FinCEN’s refusal to engage responsively with FBME when FBME repeatedly inquired into specific points, including the adequacy of FBME’s (voluminous) AML documentation and identification of specific customers and transactions occasioning concern, before FinCEN then faulted FBME for the supposed inadequacy of its responses when purporting to justify the Second Final Rule. Whether FinCEN owes something more to satisfy due process and the APA should be considered in light of all these circumstances. Once it is, we respectfully submit that this Court should answer with a ready, resounding “yes.” A. FBME Is Entitled to Due Process The Government disputes FBME’s entitlement to due process, arguing that FBME lacks sufficient presence or property in the United States. Gov’t MSJ at 45–49. The Government further argues that FBME is entitled to no more process than entities designated as terrorists under other statutory schemes. 1. Gov’t MSJ at 49–51. These arguments do not find purchase. FBME satisfies any applicable property requirements The Government first contends that FBME lacks “minimum contacts with the United States” (Gov’t MSJ at 45) sufficient to satisfy the rule articulated in People’s Mojahedin I that a “foreign entity without property or presence in this country has no constitutional rights, under the due process clause or otherwise.” 182 F.3d 17, 22 (D.C. Cir. 1997). There are four fatal flaws with this argument. First, the Chenery doctrine—the “foundational principle of administrative law that a court may uphold agency action only on the grounds that the agency invoked when it took the action,” Michigan v. EPA, 135 S. Ct. 2699, 2710 (2015) (citing SEC v. Chenery Corp., 318 U.S. 80, 87 (1943))—precludes the Government from pressing this argument because FinCEN did not invoke it at the administrative level. 8 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 20 of 57 FBME MSJ at 16. Second, § 311 itself—as understood in light of (i) the presumption that Congress intends agency procedures to afford due process, (ii) the doctrine of constitutional avoidance, and (iii) § 311’s legislative history—builds in due process irrespective of FBME’s contacts with the United States. Id. at 16–17. Third, the D.C. Circuit recognized in GSS Group Ltd. v. National Port Authority, 680 F.3d 805, 816–17 (D.C. Cir. 2012), that the rule in People’s Mojahedin I is out of step with governing law following the Supreme Court’s holdings in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), and Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011), that foreign corporations lacking “minimum contacts” with the United States do have due-process rights. FBME MSJ at 17–18. Fourth, in any event, FBME does have sufficient property in the United States to satisfy People’s Mojahedin I. Id. at 18–19. The Government’s brief offers no answer to the first three of these points. focuses solely on FBME’s property. Gov’t MSJ at 46–47. Instead, it Even assuming arguendo that FBME’s due-process rights depend on it owning property in the United States, FBME has conclusively proven that it does own U.S. property: FBME holds liens on roughly 50 lots in North Carolina and has $291,435.97 held for it in escrow in an Interest on Lawyers Trust Account (“IOLTA account”) in North Carolina. Decl. ¶¶ 24–37 & Apps. A–K. Mojahedin I. FBME MSJ at 8–9; AR3998 ¶¶ 37–38; Peters These property holdings readily satisfy the rule in People’s See National Council of Resistance of Iran v. U.S. Department of State, 251 F.3d 192, 201 (D.C. Cir. 2001) (presence in an office building and interest in “small bank account” triggers due process); United States v. Sum of $70,990,605, 128 F. Supp. 3d 350, 363 (D.D.C. 2015) (money in a U.S. bank account entitles party to due process). The Government has no counter-evidence, and none exists. Pointing solely to FBME’s Complaint, it argues that FBME’s “tenuous assertions” of property in North Carolina are 9 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 21 of 57 insufficient to trigger due process. Gov’t MSJ at 47 (citing ECF 1 ¶¶ 23–24). That is no answer to the hard evidence reflected in the administrative record, see AR3998 ¶¶ 37–38, and it certainly is no answer to the sworn declarations and documents accompanying FBME’s motion for summary judgment, see Peters Decl. ¶¶ 24–37 & Apps. A–K.6 The Government improperly cites (Gov’t MSJ at 47) the unpublished order in Abelaez v. Newcomb, 1 Fed. App’x 1 (D.C. Cir. 2001). By the Government’s reading, that case stands for the proposition that foreign nationals with “two U.S. bank accounts” lack sufficient contact with the United States to assert constitutional challenges. Citation to this 2001 unpublished order violates D.C. Circuit Rule 32.1(b)(1)(A), which prohibits “cit[ing] as precedent” any “[u]npublished order[] . . . entered before January 1, 2002.” Moreover, nothing in this short, three-paragraph order states that the foreign nationals at issue had “two U.S. bank accounts.” Even assuming they did, this nonprecedential order—which involved a challenge not under the Due Process Clause but instead under “Article I, Section 9, clause 3 of the Constitution” (1 Fed. App’x at 1)—does not displace the D.C. Circuit’s precedential, binding decision in National Council of Resistance that a small U.S. bank account does suffice to trigger due process. Nor does it displace the Supreme Court’s precedential, binding decisions in Daimler and Goodyear that foreign entities lacking U.S. connections nonetheless hold due-process rights.7 6 Had FinCEN doubted FBME’s entitlement to due process during the remand, FBME could have extinguished those doubts then. But FinCEN did not—which is precisely why the Chenery doctrine forecloses FinCEN from raising such doubts now. 7 The Government also relies (Gov’t MSJ at 47–48) on dicta from two district-court decisions: (1) United States v. All Assets Held in Account Number XXXXXXXX, which stated that the D.C. Circuit has not ruled whether due process protects foreign nationals in civilforfeiture actions, 83 F. Supp. 3d 360, 370 (D.D.C. 2015), and (2) Aero Continente, S.A. v. Newcomb C.A., which noted that “it is not entirely clear” that due process protected a foreign airline in that case because “the parties have not briefed the issue,” though the airline’s “connections with the United States may be substantial enough to afford it constitutional 10 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 22 of 57 The Government further maintains that there is an insufficient nexus between FBME’s property and FinCEN’s designation. is required, it clearly exists here: Gov’t MSJ at 48. Assuming arguendo that such a nexus The publication of FinCEN’s § 311 notices cut off FBME from being able to access its U.S. dollars in North Carolina or from being able to collect on its North Carolina liens. Peters Decl. ¶¶ 34–35 & App. A; see also FBME MSJ at 8–9. It did so because these notices caused FBME to be unable to execute any “money transfers to and from FBME accounts in USD.” AR3999 ¶ 43. Were the practical effect of FinCEN’s final rule not clear enough, here is the legal effect: “all covered financial institutions . . . [must] ensure that they maintain no accounts directly for, or on behalf of, FBME.” 81 Fed. Reg. at 18491 (emphasis added). FinCEN further expressly calls for “a covered financial institution to apply special due diligence to its correspondent accounts that is reasonably designed to guard against processing transactions involving FBME,” and, in particular, for “covered financial institutions [to] notify those foreign correspondent account holders that covered financial institutions know or have reason to know provide services to FBME that such correspondents may not provide FBME with access to the correspondent account maintained at the covered financial institution.” Id. (emphases added). In sum, FinCEN is instructing all financial institutions that FBME’s U.S. dollars can neither be “maintain[ed] . . . directly for, or on behalf of, FBME,” nor transferred through any correspondent account that might “provide services to FBME” or otherwise “provide FBME with access” to its funds. That of course would leave FBME completely cut off from its dollars. protections,” No. 04-1168, ECF No. 8, at 7–8 n.7 (D.D.C. July 16, 2004). This dicta has no bearing on our case. The D.C. Circuit has held that due process does apply to foreign entities with bank accounts in the United States that—like FBME—are adversely designated by a federal agency. National Council of Resistance, 251 F.3d at 200–03. 11 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 23 of 57 As things presently stand, FinCEN cannot seriously deny that its Second Final Rule will permanently prevent FBME from accessing its funds in the North Carolina IOLTA account or proceeds of its North Carolina liens. Even if FinCEN did not intend to deny FBME access to this U.S. property, that does not matter to the Fifth Amendment, which protects against practical deprivations of property, irrespective of the Government’s intent. Yuba Natural Resources, Inc. v. United States, 821 F. 2d 638, 640 (Fed. Cir. 1987). Finally, the Government half-heartedly suggests that FBME lacks a “property interest” protected by due process. Gov’t MSJ at 49. The suggestion is not serious. The Supreme Court has held that a client has a Fifth Amendment “property interest” in funds in an IOLTA account when state law deems those funds to be client property—as North Carolina does. Phillips v. Washington Legal Foundation, 524 U.S. 156, 164–72 (1998) (relying, in part, on a Texas Rule of Professional Conduct); North Carolina Rule of Professional Conduct 1.15 (IOLTA funds are “client property”). FBME’s real-estate liens are its “property” too. Mennonite Board of Missions v. Adams, 462 U.S. 791, 798 (1983); Mai v. Carolina Holdings, Inc., 696 S.E.2d 769, 773 (N.C. Ct. App. 2010). Nor is there any doubt that the Second Final Rule will also permanently cut off FBME from all of its U.S.-dollar correspondent accounts (see 81 Fed. Reg. at 18491), thereby permanently depriving FBME of its ability to access its existing U.S.dollar placements, which amount to approximately $800 million. (“Wyllie Decl.”) ¶¶ 11, 13–18. See AR3999 ¶ 46; ECF 3-5 These existing placements are FBME’s “business assets” and therefore “unquestionably are property” that due process protects. College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 666, 675 (1999).8 8 The Government argues that the ability to access the U.S. financial system is merely a “future business opportunity,” which, under Chrebet v. County of Nassau, 24 F. Supp. 3d 236, 12 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 24 of 57 2. FBME is due more process than entities designated as terrorists Recognizing that the process afforded to FBME does not fit comfortably within due process as long practiced and understood, the Government reaches for extreme comparisons. Specifically, the Government likens FinCEN’s imposition of the fifth special measure of § 311 to (1) the Treasury Department’s designations of Specially Designated Global Terrorists under the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq., and (2) the Department of State’s designations of Foreign Terrorist Organizations under the Antiterrorism and Effective Death Penalty Act, 8 U.S.C. § 1189(a)(1). According to the Government, because FBME received more process than Specially Designated Global Terrorists and Foreign Terrorist Organizations, FBME should consider itself lucky and satisfied. Such reasoning is misconceived. Gov’t MSJ at 49–51. The statutory schemes underlying these terrorist designations differ starkly and categorically from § 311. The recognized exigencies and corresponding curtailments associated with them should remain the exception rather than the rule, carefully confined and not opportunistically expanded. Congress has authorized the terrorist designations specifically to combat immediate, direct threats of terrorism and terrorist financing. An entity can be designated a Specially Designated Global Terrorist only when there is an “unusual and extraordinary threat” to the United States. 50 U.S.C. § 1701(b); Executive Order 13224, 66 Fed. Reg. 49079 (Sept. 23, 2001); see generally Holy Land Foundation for Relief and Development v. Ashcroft, 333 F.3d 156 (D.C. Cir. 2003). Likewise, an entity can be designated a Foreign Terrorist Organization only when it engages in (or has the capability and 245 (E.D.N.Y. 2014), affirmed, 606 F. App’x 15 (2d Cir. 2015), is “not a protectable property interest.” Gov’t MSJ at 49. But FBME’s U.S.-dollar placements are not a “future business opportunity”; they are concrete, existing assets that have obvious, quantifiable, non-speculative value. AR3999 ¶ 46. In any event, Chrebet—which is not binding in this Court—itself recognizes that other courts do treat business opportunities as property interests. 24 F. Supp. 3d at 245 (citing San Jacinto Savings & Loan v. Kacal, 928 F.2d 697, 704 (5th Cir. 1991)). 13 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 25 of 57 intent to engage in) terrorism or terrorist activities threatening the United States or its citizens. 8 U.S.C. § 1189(a)(1); see generally Holder v. Humanitarian Law Project, 561 U.S. 1 (2010). The grave and imminent threat posed by terrorism sharply reduces what process is due before an organization may be designated as Foreign Terrorist Organizations or Specially Designated Global Terrorists. See, e.g., National Council of Resistance, 251 F.3d at 208; Holy Land Foundation for Relief and Development v. Ashcroft, 219 F. Supp. 57, 77 (D.D.C. 2002). These kinds of terrorism designations remain “unique, procedurally and substantively.” National Council of Resistance, 251 F.3d at 196 (quoting People’s Mojahedin I, 182 F.3d at 19). And the Government has never suggested that FBME might qualify for any such designation. To be sure, the money-laundering concerns that § 311 addresses are important, but they carry nowhere near the same urgency and exigency. Instead, they are standard concerns of traditional law enforcement, albeit with international dimensions. chiseled across the record of this case. July 2014. AR0074–84. The lack of urgency is FinCEN first published the § 311 notices for FBME in Rather than invoke its statutory authority to skip notice-and- comment procedures when “good cause” necessitates a swift ruling, 5 U.S.C. § 553(b)(3)(B), FinCEN waited over a year before publishing its First Final Rule that might (had it not been preliminarily enjoined by this Court) have effectuated the designation. (July 29, 2015). 80 Fed. Reg. 45057 Following the preliminary injunction, FinCEN forfeited its right to take an immediate appeal under 28 U.S.C. § 1292(a)(1) and instead sought a voluntary remand so it could do everything over. After the remand on November 11, 2015, FinCEN then waited four more months to issue the Second Final Rule, see 81 Fed. Reg. 18480 (Mar. 31, 2016), essentially taking the maximum time available under the schedule set by this Court, see ECF 49 at 8 (setting a deadline of four months after November 30, 2015, to issue a revised final decision). 14 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 26 of 57 The months and years that have lapsed leave this case leagues removed from the exigent circumstances uniquely associated with terrorist designations. 9 For this reason, the requirements of due process in this § 311 proceeding properly and profoundly exceed those in cases involving urgent terrorist designations under other statutory schemes. See United States v. James Daniel Good Real Property, 510 U.S. 43, 56–61 (1993) (due process requires more when no “pressing need,” “executive urgency,” or “exigent circumstance” is at stake). B. FinCEN Unlawfully Relied on Secret Evidence 1. FinCEN withheld unclassified and unprotected evidence Both the APA and due process require that FinCEN disclose the unclassified record before rendering its final decision. FBME MSJ at 20–21 (collecting cases). In its preliminary-injunction opinion, this Court correctly found that FBME “was entitled at a minimum . . . to view and comment on all the non-classified, non-protected material on which FinCEN relied.” FBME, 125 F. Supp. 3d at 121. FinCEN obtained a voluntary remand only because this Court was “satisfied that on remand FinCEN will fulfill its obligations under the Administrative Procedure Act to disclose unclassified information not protected by the Bank Secrecy Act on which it intends to rely.” ECF 49 at 8. As FBME demonstrated in its opening brief, however, FinCEN has again failed to disclose unclassified information key to its final decision. FBME MSJ at 21–34. The Government’s opening brief effectively confirms this latest failure, as it repeatedly tries to justify the Second Final Rule by citing new allegations that 9 The timeline in this case is typical of § 311 designations. Throughout its history, FinCEN has commenced 23 proceedings under § 311. Of the 23, 13 were rescinded without being finalized, 4 were finalized more than a year after being noticed, 3 were finalized more than four months after being noticed, and 3 have been pending for three years without being finalized or rescinded. See FinCEN, Section 311 – Special Measures, https://goo.gl/mpJ1Vz. In sum, no § 311 proceeding has ever reflected need for immediate action. 15 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 27 of 57 predate the remand yet were omitted from the remand notice and never otherwise disclosed until FinCEN suddenly announced them in the Second Final Rule. See Gov’t MSJ at 17–18. Simply focusing on the 2015 remand notice turns up smoking-gun proof that FinCEN has once again withheld unclassified information that it relied upon. Unlike the 2014 Notice of Finding, which listed specific allegations that FBME then enlisted EY to investigate, see AR0075–76, the 2015 notice neither specified any new allegations nor indicated that FinCEN had any in mind. See 80 Fed. Reg. 74064 (Nov. 27, 2015). In the Second Final Rule, however, FinCEN suddenly announced that it had in mind specific, intervening allegations, hitherto undisclosed, that were central to its decision because they allegedly occurred after FBME was alerted to FinCEN’s AML concerns. See 81 Fed. Reg. at 18489 (“FinCEN is also particularly concerned that FBME continued to take measures to evade regulatory oversight even after FinCEN highlighted its concerns in the NOF.”). In its opening brief, the Government beats the same drum, contending that “FBME failed to allay FinCEN’s concerns regarding the bank’s AML controls.” Gov’t MSJ at 17. For support, the Government cites a number of the new allegations, including that (a) FBME allegedly “failed to provide any meaningful information or documentation that would allow FinCEN to verify such implementation [of improvements to FBME’s AML compliance program]”; (b) “[a]s of early 2015, many months after the Notice of Finding, an alleged Hezbollah associate and his Tanzanian company continued to bank with FBME”; and (c) “[t]here was evidence in late 2014 that FBME employees took certain measures to obscure information . . . .” Gov’t MSJ at 17–18. The Second Final Rule contains additional new allegations that (d) FBME misidentified the customer with possible ties to a Syrian entity, 81 Fed. Reg. at 18486; (e) failed to show improvement in Tanzania, id. at 18488; and (f) did not review enough high- 16 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 28 of 57 risk files, id. at 18483. All of those allegations were omitted from FinCEN’s prior notices, and most are not even hinted at by the portions of the administrative record FinCEN released before the Second Final Rule. FBME MSJ at 26–34. Contrary to FinCEN’s claim that it “cured” any deficiency and “provided, on remand, all of the unclassified, non-protected information it considered in its decision,” Gov’t MSJ at 43, 45, FinCEN opted to withhold these new allegations that it could and should have disclosed for comment before arriving at the Second Final Rule. information long before issuing the 2015 Notice. There is no denying that FinCEN had such For example, FinCEN had ample opportunity during or after the first round of notice and comment to disclose that FBME’s written submissions did not (in FinCEN’s view) include “any meaningful information or documentation” about FBME’s AML compliance program, or about improvements to FBME’s headquarters in Tanzania, particularly after FBME repeatedly asked FinCEN whether it required any further information about FBME’s compliance improvements. See Peters Decl. ¶¶ 2–20; 22–23. Likewise, FinCEN had every opportunity to disclose to FBME that it had identified the wrong Syrian-sanctioned entity, particularly in response to FBME’s pointed inquiries in early 2015, yet FinCEN opted to withhold that tidbit too until suddenly springing it as part of the basis for the Second Final Rule. See page 4, above. With regard to the allegation that, as of early 2015, an alleged Hezbollah associate and his Tanzanian company had an account at FBME, it was obliquely referenced—though, due to heavy redactions, was incomprehensible—in FinCEN’s Memorandum Supporting the First Final Rule, AR4490, but it was never explained or flagged as a material issue until the Second Final Rule, where it was repeated ad nauseum. As for the damning (if mystifying) allegation that “in late 2014, FBME employees took various measures to obscure information” (81 Fed. Reg. at 18482, 18486, 18489), the only alleged support remains 17 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 29 of 57 redacted. See Gov’t MSJ at 18 (citing AR0009–11 (redacted)). All of this information is (at least in relevant part) unclassified, as we have learned from the Second Final Rule, yet all of it was withheld even as FinCEN considered and relied upon it. The Government tries to defend its procedural defect in two ways. First, it attempts to re-litigate this Court’s holding that FinCEN must “make the unclassified materials available for comment.” Gov’t MSJ at 43. The Government warns that forcing FinCEN to “provide all information to the public in advance of a final decision” could “paralyze” the agency by subjecting “311 actions to a never-ending cycle of notice and comment rulemaking.” Id. at 44. Yet this Court’s prior holding—and it is a holding, see ECF 49 at 6—remains binding. FinCEN cannot re-litigate this holding absent a showing (which it cannot make) that “justice requires” reconsideration. United States ex rel. Landis v. Tailwind Sports Corp., --- F. Supp. 3d ----, 2016 WL 141615, at *10 (D.D.C. Jan. 12, 2016). The holding was also correct, as shown by the many cases ruling that agencies must disclose unclassified materials when adversely designating a foreign entity. E.g., Ralls Corp. v. Committee on Foreign Investment in the United States, 758 F.3d 296, 317–21 (D.C. Cir. 2014); People’s Mojahedin Organization of Iran v. U.S. Department of State, 613 F.3d 220, 227–30 (D.C. Cir. 2010) (“People’s Mojahedin II”); National Council of Resistance, 251 F.3d at 208–09; KindHearts for Charitable Humanitarian Development, Inc. v. Geithner, 647 F. Supp. 2d 857, 899–906 (N.D. Ohio 2009) (“KindHearts I”). As for the Government’s bogeyman about agency paralysis, it rings hollow. The prospect of § 311 cases becoming loaded with too much procedure, protection, and review is thoroughly farfetched. Especially because § 311 proceedings are infrequent (there have been only 23 in the 15 years since § 311’s enactment), there should be little concern here that the agency cannot abide by requisite procedures. Cf. Los Angeles v. David, 538 U.S. 715, 718 18 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 30 of 57 (2003) (emphasizing the burden of a procedural requirement affecting 1,000 or more hearings per year). And if FinCEN is truly concerned about the disclosures attending a rulemaking becoming too onerous, then it can opt simply to add a hearing—as FBME requested consistent with due process, see § II.C, below—at which a fulsome administrative record can be rounded out in one fell swoop. Or, if the Government is concerned that it might theoretically be faulted for withholding information that it did not in fact have in hand, then it can so complain in a case where that occurs. This is not such a case. FinCEN has (for a second time) systematically withheld unclassified information essential to enable fair, responsive comment. Even while it was on clear, pointed notice from this Court of its obligation to disclose all unclassified information, FinCEN still was considering yet withholding a string of unclassified particulars critical to FinCEN’s deliberations. The Court’s prior holding in its preliminary-injunction opinion, and the precedents on which it rests, flatly forbid what FinCEN has done. Second, the Government repeatedly cites to the 2014 Notices as though those are the only E.g., Gov’t MSJ at 45, 50, 51 (referring to the operative notices and remand never happened. Notice of Finding’s factual detail as providing sufficient notice to FBME). disingenuous, that account is counter-factual. Worse than being The avowed premise of FinCEN’s voluntary remand is that it would revisit and re-notice any proposed rule. When FinCEN then issued its remand notice, it came under the same obligation to “provide relevant unclassified materials to plaintiffs and the public.” ECF 49 at 8. But FinCEN omitted in the 2015 Notice any mention of the new “unclassified information” that it later invoked, publicly and prominently, in the Second Final Rule. Compare 80 Fed. Reg. 74064, with 81 Fed. Reg. 18480. What is more, FinCEN did not so much as disclose that it was focusing upon intervening allegations as critical to its deliberations; instead, FinCEN simply solicited comment as to whether “[a]ny material 19 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 31 of 57 developments” had occurred subsequent to the initial notices, 80 Fed. Reg. at 74066, and then, after no commenter suggested any adverse intervening development, came forward in the Second Final Rule with the agency’s own surprising list. Because omission of key unclassified information from the 2015 Notice is indefensible, the Government does not defend it. 2. FinCEN withheld unclassified SARs There is one particular category of unclassified information—SARs—that the Government contends it has statutory authority under the Bank Secrecy Act to withhold. MSJ at 41–43 (citing 31 U.S.C. § 5318(g); 31 C.F.R. § 1020.320(e)(1)). Perhaps so. Gov’t But what the Bank Secrecy Act does not authorize is submitting the SARs to this Court ex parte while also withholding them. D.C. Circuit precedent forbids the Government—absent on-point statutory authorization—from submitting to a court ex parte unclassified evidence on which it seeks to rely. Abourezk v. Reagan, 785 F.2d 1043, 1061 (D.C. Cir. 1986), affirmed by an equally divided Court, 484 U.S. 1 (1987); see also Code of Conduct for United States Judges, Canon 3(A)(4) (forbidding federal judges from considering ex parte communications on substantive matters, except as “authorized by law”); FBME MSJ at 23. Neither the Bank Secrecy Act, nor § 311, nor any other statute authorizes FinCEN to submit SARs ex parte for this Court to consider. Even if statutory authorization existed, due process would still foreclose use of secret third-party complaints—such as SARs—to sanction FBME. States Marine Lines, Inc. v. Federal Maritime Commission, 376 F.2d 230, 239–40 (D.C. Cir. 1967); Forcade v. Knight, 416 F. Supp. 1025, 1038–39 (D.D.C. 1976); see also FBME MSJ at 24–25. The Government maintains that the secrecy of SARs is necessary to increase the “willingness of all financial institutions to file SARs” by preventing “retaliation” against filers. Gov’t MSJ at 42–43. The Federal Maritime Commission argued the same in States Marine Lines—that the third-party complaints in that case needed to stay secret because “a shipping company will be loath to 20 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 32 of 57 complain about a competing line’s illegal concessions to a shipper for fear of incurring the shipper’s wrath”—yet the D.C. Circuit found such policy considerations trumped by the “fundamental” principle that “an accused should not be subjected to punishment on the basis of secret evidence.” 376 F.2d at 238–39. Just so here. FinCEN’s desire to increase incentives to file SARs must in this case yield to FBME’s due-process rights. Thus, under both Abourezk and States Marine Lines, FinCEN is obliged either to disclose the SARs or else not to rely on them. 3. FinCEN appears to have withheld other information as privileged Although it is unlawful for the Government to rely on and withhold any unclassified evidence, at a minimum the Government must log whatever privileges and statutory protections it invokes as basis for withholding unclassified material otherwise belonging in the administrative record. Ralls Corp. v. Committee on Foreign Investment in the United States, 2014 U.S. Dist. Lexis 177868, at *5 (D.D.C. Nov. 6, 2014); see also FBME MSJ at 25–26. Only then can FBME have fair notice and a meaningful opportunity to contest the withholdings. The Government, however, has yet to provide a privilege log or even a clear statement of the specific privileges and protections it is invoking. We know the Government is withholding SARs under the Bank Secrecy Act, but we have yet to understand whether and to what extent the Government is also withholding other documents on other grounds, such as law-enforcement privilege. See Gov’t MSJ at 40 n.16 (suggesting that FinCEN’s decision is “based in significant part on . . . law enforcement sensitive . . . information”); id. at 17 n.7 (admitting that the Government previously invoked the law-enforcement privilege to withhold documents that it later conceded it lacked “internal authorization to submit”); id. at 43 n.17 (citing lawenforcement-privilege cases as support for withholding evidence). Absent a privilege log, FBME is being denied the opportunity even to challenge any such unclassified withholdings. 21 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 33 of 57 4. FinCEN failed to mitigate its use of classified evidence The Government further claims that it may rely on classified information “without disclosing it to the complainant.” otherwise. Gov’t MSJ at 40–41. Section 311 and case law say Congress made clear that when classified information is submitted ex parte in a § 311 proceeding, the court is to “fashion procedures, necessary to assure a moving party due process of law, that resemble those already required in similar situations in which the government . . . seeks to base a claim or defense on classified information.” H.R. Conf. Rep. 108-381, at 55 (2003). These procedures are threefold: (1) declassify materials; (2) present an adequate unclassified summary; and (3) for material that cannot be declassified or summarized, provide access to security-cleared counsel. FBME MSJ at 35 & n.7 (collecting authorities). National security is paramount, but due process is weighty too. The latter entitles an entity facing sanction to test via adversarial proceedings the purported basis for sanction; the risk of erroneous deprivation is just too high when punishment rests critically on untested evidence. See People’s Mojahedin II, 613 F.3d at 230–31; American-Arab Anti-Discrimination v. Reno, 70 F.3d 1045, 1069 (9th Cir. 1995) (“the very foundation of the adversary process assumes that the use of undisclosed information will violate due process because of the risk of error”); Rafeedie v. INS, 795 F. Supp. 13, 18–21 (D.D.C. 1992); KindHearts for Charitable Humanitarian Development, Inc. v. Geithner, 710 F. Supp. 2d 637, 659–60 (N.D. Ohio 2010) (“KindHearts II”). Exposing classified evidence to adversarial testing is essential, precisely because it often proves flimsy and rebuttable once known. E.g., Kiareldeen v. Ashcroft, 273 F.3d 542, 548–49 (3d Cir. 2001); David Cole, Enemy Aliens, 54 STAN. L. REV. 953, 1001–02 (2002) (noting cases). The Government also briefly contends—based on this Court’s preliminary-injunction opinion—that it adequately summarized the classified information. incorrect. Gov’t MSJ at 41. That is An adequate summary provides “the ‘who,’ ‘what,’ ‘when,’ and ‘where’ of the 22 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 34 of 57 allegations.” Kiareldeen, 273 F.3d at 548. Anything less is ineffectual because it does not afford a meaningful opportunity to identify and rebut the allegations. Supp. 3d at 660 n.17. FinCEN here withheld key particulars. KindHearts II, 710 F. AR0075–77. Nevertheless, this Court previously ruled that FinCEN’s Notices “adequately summarized the conclusions FinCEN drew from the classified evidence and that providing further unclassified summaries would be difficult, if not impossible, without revealing the underlying classified information.” FBME, 125 F. Supp. 3d at 119 n.2 (emphasis added). Yet a summary of conclusions is inadequate; it is impossible to rebut a conclusion (e.g., that you facilitate money laundering) unless you know the allegations and evidence informing the conclusion (e.g., the specific transactions alleged to involve money laundering). FinCEN here should have summarized the who, what, when, and where of the allegations and evidence—not just the conclusions it drew. Moreover, if further summary is impossible without divulging classified material, that does not mean the existing summary is adequate; instead, it means that access to the remaining information should be provided to security-cleared counsel. KindHearts II, 710 F. Supp. 3d at 660; see also Bismullah v. Gates, 501 F.3d 178, 187 (D.C. Cir. 2007) (approving use of securitycleared counsel); United States v. Abu Khatallah, No. 14-cr-141, ECF 134 at 2 (D.D.C. Nov. 18, 2015) (describing how “unredacted classified materials” were “produced to cleared defense counsel”). C. FinCEN’s failure to provide any such accommodation violates due process. FinCEN Failed To Provide a Neutral Decisionmaker and Oral Hearing The Government argues that, under Withrow v. Larkin, 421 U.S. 35, 47 (1975), FinCEN need not provide a neutral adjudicator because, in general, an agency may combine investigative and adjudicative functions. Gov’t MSJ at 52. As FBME pointed out (FBME MSJ at 36), however, that is only the general rule. The Supreme Court in Withrow took care to carve out an exception, noting that “a substantial due process question would be raised” if “the initial view of 23 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 35 of 57 the facts based on the evidence derived from nonadversarial processes [that] as a practical or legal matter foreclosed fair and effective consideration at a subsequent adversary hearing leading to ultimate decision.” 421 U.S. at 58; accord Concrete Pipe & Productions of California, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 618 (1993). situation here: That is precisely the because FinCEN has placed critical reliance on withheld evidence (both classified and unclassified, see § II.B, above), “the initial view of the facts” was based on “evidence derived from nonadversarial processes,” which as a “practical [and] legal matter” is “foreclos[ing] fair and effective consideration at a subsequent adversary hearing leading to ultimate decision.” Indeed, there is not now nor has there ever been any adversarial hearing as to the secret evidence on which the Second Final Rule expressly and critically depends. This “substantial” due-process problem cannot be solved without “a neutral adjudicator to conduct a de novo review of all factual and legal issues.” Concrete Pipe, 508 U.S. at 618. The Government nonetheless claims that Withrow’s language is “dicta.” 52. Not so. Gov’t MSJ at The language just quoted from Withrow limits the scope of the case’s holding— the presumption that it is permissible to combine investigative and adjudicative functions does not hold in cases involving facts derived from nonadversarial processes—and limits on a case’s holding are part of that holding. United States v. Vongxay, 594 F.3d 1111, 1115 (9th Cir. 2010). In any event, “carefully considered language of the Supreme Court, even if technically dictum, generally must be treated as authoritative,” and that “is especially so” where “the Supreme Court has reiterated the same teaching,” Overby v. National Ass’n of Letter Carriers, 595 F.3d 1290, 1295 (D.C. Cir. 2010) (citation omitted)—as the Supreme Court did when it reiterated in Concrete Pipe this aspect of Withrow. Withrow and Concrete Pipe thus make clear that a neutral adjudicator is required in this particular case. 24 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 36 of 57 Moreover, although the Government does not address it, due process also demands that FinCEN hold a live evidentiary hearing, specifically because its rule is, inter alia: (1) adjudicatory in nature; (2) heavily dependent on credibility determinations; (3) unattended by clear guidance regarding what FinCEN would consider “relevant”; (4) tainted by FinCEN’s receipt of attorney-client privileged materials that has yet to be investigated, much less remedied; and (5) based on a record largely unavailable to FBME. FBME MSJ at 19–20, 37–39; see also James Daniel Good, 510 U.S. at 55 (“The purpose of an adversary hearing is to ensure the requisite neutrality that must inform all governmental decision-making.”). Simply put, FBME is due more process than it has received. FBME’s interest in not being cut off from the U.S. financial system and the risk of erroneous deprivation from FinCEN’s procedures loom large enough to necessitate additional safeguards: timely disclosure of all unclassified information; appropriate access to classified information; a neutral factfinder; and a live hearing. See Mathews v. Eldridge, 424 U.S. 319, 332–49 (1976); Ralls, 758 F.3d at 317–21; People’s Mojahedin II, 613 F.3d at 227–30; National Council of Resistance, 251 F.3d at 208–09; Gray Panthers v. Schweiker, 652 F.2d 146, 159–73 (D.C. Cir. 1980); American-Arab Anti-Discrimination, 70 F.3d at 1069; KindHearts I, 647 F. Supp. 2d at 904–06. Moreover, given FinCEN’s lack of urgency and the small number of § 311 proceedings (see § II.A.2, above), the administrative burden of providing such procedures will be minimal. Accordingly, the Constitution requires more process than FinCEN provided prior to promulgating the Second Final Rule. D. FinCEN Failed To Conduct the Required Consultations FBME explained in its opening brief that FinCEN did not complete the consultations required by § 311. FBME MSJ at 39–40. There still is no evidence that, on remand, FinCEN consulted with the Attorney General, Secretary of State, Chairman of the Board of Governors of 25 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 37 of 57 the Federal Reserve, and various functional regulators, as § 311 requires before the fifth special measure may be imposed. 31 U.S.C. § 5318A(a)(4)(A), (b)(5), (c)(1). The Government’s brief—which completely fails to acknowledge that consultation is even required—exemplifies FinCEN’s disregard of this statutory requirement. See pages 2–3, above. The consultation requirements are in fact essential to ensure that important considerations are weighed before the fifth special measure is imposed. As Congress explained, “[a]mong other things, this consultation is designed to ensure that the Secretary [of the Treasury] possesses information on the effect that any particular special measure may have on the domestic and international banking system.” H.R. Rep. 107-250, at 68 (2001). Likewise, “[t]o ensure that the Secretary is apprised of the pertinent diplomatic and law enforcement implications of determinations made pursuant to this section, subsection (c)(1) requires the Secretary to consult with the Secretary of State and the Attorney General.” Id. at 70. To the extent that FinCEN skipped or discounted specified consultations, it unlawfully failed to acknowledge and account for considered inputs from the Attorney General, Secretary of State, Federal Reserve Chairman, and the other federal officials whom the statute names, in precisely the sort of circumstances where such consultations may matter most. FBME MSJ at 40 (collecting cases striking down agency actions for ignoring consultation requirements). III. FINCEN’S SECOND FINAL RULE IS ARBITRARY AND CAPRICIOUS Beyond these procedural defects, the substance of the Second Final Rule is arbitrary and capricious. The Government maintains that the Rule is reasonable (Gov’t MSJ at 23–37), but that is belied by the fact that FinCEN unreasonably ignored contrary evidence (§ III.A, below), failed to apply statutory factors appropriately (§ III.B, below), imposed an excessive penalty without adequately considering lesser alternatives (§ III.C, below), and was tainted by its receipt, review, concealment, and ostensible use of the Privileged Materials (§ III.D, below). 26 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 38 of 57 A. FinCEN Unreasonably Ignored Contrary Evidence 1. FinCEN failed to respond to criticisms of its SARs analysis FinCEN’s defense of its reliance on aggregated SARs data is emblematic of its larger substantive defense before this Court, which boils down to: “trust us, we know what we’re doing.” To quote the Government, “it was well within FinCEN’s expertise and discretion to decide how to interpret the SARs, given that it is the agency charged with regulating SARS filing requirements and routinely analyzes them.” Gov’t MSJ at 29 n.14. Of course, the agency’s general subject-matter expertise and entitlement to deference are the threshold premise that begins arbitrary-and-capricious review, not the cogent, on-point, substantive reasoning that ends it. FinCEN has clung to the SARs data as basis for sanctioning FBME without addressing critical aspects of FBME’s critique. See FBME MSJ at 41–43. Such unexplained, unyielding obstinacy is a hallmark of agency arbitrariness and caprice. FinCEN’s opacity by no means squares with the APA and the “hard look” associated with judicial review. American Radio Relay League, Inc. v. FCC, 524 F.3d 227, 241 (D.C. Cir. 2008) (“summarily dismiss[ing]” data of a “critical nature . . . cannot substitute for a reasoned explanation, for it provides neither assurance that the [agency] considered the relevant factors nor a discernable path to which the court may defer”). Indeed, combined with FinCEN’s withholding of individual SARs (§ II.B.2, above), FinCEN’s refusal to address FBME’s concerns about the aggregated SARs analysis threatens to complete a total end run around the APA, both procedurally and substantively—with FinCEN simultaneously avoiding (i) disclosure of the individual SARs and (ii) meaningful, reasoned explication of the aggregated SARs analysis it relies upon. Vacatur is the only result consonant with the APA. 27 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 39 of 57 2. FinCEN refused to address CBC’s shortcomings The Government continues to place pivotal reliance on CBC’s recriminations against FBME. Gov’t MSJ at 26–29. For all its reliance on CBC, however, the Government still does not address specific comments, including by third parties, that discredit CBC, particularly vis-àvis its instant campaign against FBME. On this point, too, FinCEN demands abject deference, asserting that it may reflexively credit CBC—apparently without regard for specific evidence of pecuniary interest, corruption, and bias—because FinCEN has “the particular expertise to judge the credibility and reliability of other foreign regulators.” Id. at 29. But due “deference” cannot displace judicial review of the specific reasoning (or lack thereof) FinCEN relied on to overcome obvious, powerful, corroborating indicia of CBC’s unreliability and, indeed, bad faith. See Butte County v. Hogen, 613 F.3d 190, 194–95 (D.C. Cir. 2010) (it is arbitrary and capricious for an agency to refuse to consider a submission that “called into doubt the judgment” of a body on which the agency relied). Moreover, to the extent FinCEN is here relying upon pure, classic credibility determinations, that makes all the more problematic its denial of any hearing at which FBME might confront its Cypriot accusers, before a neutral decision-maker positioned to fairly and dispassionately assess who is telling the truth. i. See § II.C, above. FinCEN relied on CBC’s discredited 2015 findings Topping the accusations FinCEN parrots from CBC are those set forth in CBC’s September 2015 letter to FBME, which purports to report findings from an audit of FBME that CBC had commissioned PriceWaterhouseCoopers (“PWC”) to conduct a year earlier. Fed. Reg. at 18482–83; Gov’t MSJ at 26–29. See 81 Just like the Second Final Rule, the Government’s opening brief prominently cites CBC’s September 2015 findings. The Government submits that FinCEN “assesses that [FBME’s compliance upgrades] are inadequate” based on CBC’s identification of “‘serious and systemic’ AML deficiencies at FBME” in its 28 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 40 of 57 September 2015 findings. Gov’t MSJ at 26. The Government further points to FBME’s supposed efforts to “evade AML regulations” and ignore “CBC’s AML directives,” citing FinCEN’s gloss in the Second Final Rule on the same CBC findings. Id. Indeed, the Government goes so far as to invoke FBME’s “hostile relationship with their regulator” as evidence, in and of itself, that FBME is of primary money laundering concern. Id. at 25. It is worth emphasizing just how troubling the circumstances surrounding CBC’s September 2015 letter are, even though the Government is silent about them. To reiterate what FBME has repeatedly submitted and FinCEN has not denied, CBC’s September 2015 letter bears telltale signs of an outcome-oriented regulatory campaign—the upshot of a coordinated effort to achieve a foreordained result and insulate the result against judicial scrutiny. FBME MSJ at 43–47. AR3319–20; Although CBC claimed its 2015 findings came from PWC’s on-site inspection of FBME in the summer of 2014, e.g., AR3932, PWC has disavowed any role in drafting or reviewing the findings, AR3990–92. CBC’s findings predictably do not square with PWC’s contemporaneous report that “there were no findings of any significance against the Bank,” AR3986, a report that senior CBC officials echoed to FBME in meetings shortly before and after FinCEN’s issuance of the Notice of Finding. AR3964–65. It is also worth emphasizing how CBC’s supposed findings came to light. Once PWC completed its review, FBME requested a copy of the audit findings, which in years past were always promptly provided. Id. In the wake of FinCEN’s § 311 notices, however, CBC inexplicably refused to supply a copy of PWC’s 2014 findings, despite recurring requests from FBME. Id. That refusal persisted for over a year, until FBME in connection with this litigation pressed FinCEN in September 2015 for a copy of any resulting audit findings. Id. When the Government responded on September 17 that, “with respect to the [PWC audits] you 29 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 41 of 57 asked us about, to the best of our knowledge FinCEN does not have them in its possession and therefore does not plan to rely on them [in connection with voluntary remand],” FBME immediately requested confirmation that “FinCEN never previously received, reviewed or relied upon the PWC audits, inclusive of any information, reports or summaries specifically associated with those.” AR3922. Id. At that point, the Government refused to supply further information. The very next day, September 18, CBC dropped on FBME the findings supposedly coming out of PWC’s 2014 audit. AR3319–20; FBME MSJ at 49. After withholding its “findings” for more than a year, CBC then afforded FBME a mere seven days to formulate a response. AR3958. This eye-popping timeline jumps from the record. None of it has been denied or addressed by the Government. Equally eye-popping are the irregularities, flaws, inconsistencies, and distortions that suffuse CBC’s purported findings. ignored by FinCEN. FBME has pointed out these problems, but they have been AR3959–88; see also AR3319–20. As the administrative record reflects: • CBC’s findings directly and inexplicably contradicted PWC’s and CBC’s contemporaneous assessments that there were no significant issues turned up by the audit. AR3964–65. • CBC focused on finding alleged deficiencies between 2008 and 2012, even though (1) the on-site examination explicitly related to 2013–2014; (2) any alleged historical failings had been the subject of earlier examinations by CBC, which knew about, yet found no issue with, any of the circumstances suddenly alleged to be problematic; and (3) any failings that may have existed from 2008– 2012 had long since been rectified. AR3965. • CBC made no effort to benchmark its findings against other banks operating in Cyprus or to consider the overall dynamics of the Cypriot banking sector. AR3961, 3988. This is especially significant because MONEYVAL—on which the Government relies to salvage CBC’s credibility (Gov’t MSJ at 18, 2910)— 10 The Government claims (Gov’t MSJ at 29) that CBC has received “positive reviews”—plural—from “intergovernmental organizations,” yet identifies only one such review from one such organization: a 2011 MONEYVAL report, which actually criticized the “supervisory authorities” in Cyprus, see FBME MSJ at 46–47. 30 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 42 of 57 conducted an industry-wide assessment in Cyprus in 2013 and identified risks throughout the industry. MONEYVAL, Special Assessment of the Effectiveness of Customer Due Diligence Measures in the Banking Sector in Cyprus ¶¶ 2–4 (Apr. 24, 2013), https://goo.gl/38jT4X. • CBC’s claim that it was identifying deficiencies in September 2015 was irreconcilable with the year CBC waited before informing FBME, as it delayed any corrective action by FBME. AR3962. • CBC’s position was also irreconcilable with the fact that neither CBC nor its appointed special administrator, while supervising FBME’s Cyprus branch for more than a year, ever blocked a single account, transaction, or internal transfer on compliance grounds. AR3987. • Despite professing alarm about FBME, CBC never shared its findings with FBME’s statutory manager appointed by its home regulator in Tanzania, which could have facilitated the remediation CBC demanded. AR3962. • CBC never consulted with FBME’s management or shareholders or afforded them real opportunity to respond to CBC’s findings, instead addressing the special administrator who was hand-selected to liquidate FBME’s Cyprus branch and who had no incentive or mandate to help the Bank, and affording grossly inadequate time for proper response. AR3962, 3988–89. • Although CBC failed to specify a single instance where FBME was used to facilitate money laundering, CBC and its special administrator were responsible for perpetrating their own flagrant, calculated AML breach during the period covered by the audit. Because certain banks in the United Kingdom construed FinCEN’s § 311 notices as prohibiting them from transferring money to FBME, CBC’s special administrator instructed the banks to transfer money to a nonexistent account in the name of “Language Link Ltd” at the CBC, for subsequent re-routing to the special administrator to pay off an obligation of FBME. In so doing, the special administrator knowingly disguised his transaction (in defiance of contrary advice) so as to conceal FBME as the true beneficiary of an international payment, thereby deceiving the payer that received the instruction and the UK banks that transacted. AR3962, 3989. The payer responded by filing a SAR and demanding return of the funds, to no avail. “When the Bank complained of this deliberate breach of the Law to the Special Administrator and the CBC, the matter was completely ignored by both.” AR3987. All of those concerns coincide with the still larger concerns surrounding CBC’s longstanding pattern of persecuting FBME for illegitimate reasons. AR3304–18. Without addressing those big-picture indictments of CBC, FinCEN merely cherry-picked a few specific allegations from CBC’s September 2015 letter for use against FBME. 31 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 43 of 57 Even isolating the three supposed failures FinCEN cherry-picked from CBC and repeated in the Second Final Rule, FBME’s answers dispelled any reasoned concern about systemic AML deficiencies. First, FinCEN points to CBC’s finding that FBME “failed to maintain sufficiently comprehensive and up-to-date files on its customers.” 81 Fed. Reg. at 18483. Here, even as FinCEN apparently credits FBME’s refutation of this accusation, id. (noting that “FBME disputed the CBC’s findings”), FinCEN also notes that “in some cases FBME conceded that the CBC’s findings were correct.” Id. But FBME’s candid concession concerns one account for which customer addresses had fallen out of date absent any transaction since 2009; under FBME’s dormancy procedures, the customer would have been required to submit up-to-date See AR3970. information before ever transacting again. What the Second Final Rule is faulting, therefore, is one dormant (effectively frozen) account with an out-of-date address— which no rational regulator would take as basis for taking such severe action against a bank. Second, as FBME previously explained (FBME MSJ at 32), FinCEN’s concern that FBME had reviewed only three percent of its high-risk customer base as of June 2014, see 81 Fed. Reg. at 18483, grossly distorts the facts. The statistic simply reflects where the audit fell on the annual calendar—in June 2014, when audit commenced—as PWC auditors presumably recognized and knew better than to take as occasioning AML concern. AR3973. In any event, the Bank’s historical practice in this regard was already being revised to meet best practices as recommended by EY, such that customer reviews would occur throughout the year. AR3091. Third, FinCEN points to CBC’s finding of one instance in which FBME supposedly accepted incorrect identifying information. 81 Fed. Reg. at 18483 Although that one instance was attributable to the interplay between data-privacy concerns and AML protocol, FinCEN nonetheless “agrees with the CBC’s assessment” that FBME’s conduct “prevented FBME from 32 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 44 of 57 adequately identifying and mitigating money laundering risks.” Id. By effectively crucifying FBME based on CBC’s account of a single file, FinCEN has ventured beyond anything the record or reason might support. As FBME demonstrated to CBC, even for that one account, FBME had identified the ultimate beneficial owner and reviewed the file, including by analyzing all transactions from 2008 to 2013, and had a dedicated client relationship officer managing the account for AML compliance. AR3969. It speaks volumes about FinCEN’s arbitrariness and caprice that FinCEN has—notwithstanding all of the above—elevated CBC’s singular negative spin over (1) PWC’s disavowal of reviewing or writing the report supposedly resulting from the audit that CBC had enlisted PWC to conduct, (2) recurring, bottom-line findings of compliance by KPMG and EY following their own audits, and (3) a clear and consistent pattern by FBME of improving its AML policies and practices to meet evolving best practices. ii. FinCEN ignored extensive evidence of CBC’s misconduct In dismissing FBME’s unanswered criticisms of CBC as the “self-serving” grumblings of an “entity the regulator had found deficient,” Gov’t MSJ at 29, FinCEN continues to overlook neutral third-party corroboration of the unfairness and bias CBC has exhibited against FBME. 1. PWC: Nowhere does the Government grapple with the revelation that the audit on which FinCEN so heavily relies have been disavowed by PWC, even after PWC was commissioned and paid by CBC to conduct that very audit of FBME. 2. Former Governor of CBC: AR3990–92. Nor does FinCEN acknowledge the extraordinary comment it received from Panicos Demetriades, the Governor of CBC from 2012 to 2014 and a former member of the Governing Council of the European Central Bank. Governor Demetriades described the “toxic politics” in Cyprus, “the diminished independence of the central bank,” the positive compliance record of FBME, and the hostility that has nonetheless been exhibited in Cyprus against FBME. AR3198–3200. 33 He further observed that these Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 45 of 57 factors likely caused FinCEN to “receive[] misleading or inaccurate information about FBME from Cypriot sources,” which sought to offer up “a small bank like FBME [as] a convenient scapegoat.” AR3200. A reader of the Second Final Rule would not know, however, that Governor Demetriades submitted any comment. 3. Bank of Tanzania: Nor does FinCEN grapple with the denunciation of CBC’s lawless, avaricious conduct by the statutory manager appointed by the Bank of Tanzania. After CBC’s special administrator admitted wanting “to access [FBME’s] funds so [he] can keep them as cover for potential legal damages that the Central Bank of Cyprus or the Republic may have to pay,” the statutory manager took that as “a clear sign that [the FBME] funds that you so badly want to access are not to pay back the depositors to whom the money belongs but for other uses.” AR3821–22. The statutory manager accused CBC of taking “illegal” action and creating a “mess by acting unilaterally and prematurely” against the Bank. Id. FinCEN has said nothing about this, much less explained why it credits Cypriot regulators over their Tanzanian brethren. 4. Former FBME Investigators: Finally, as FinCEN has well known for nearly a year (but FBME and its undersigned counsel learned only recently), CBC was commissioning and paying former investigators of FBME to divulge information and communications, including core attorney-client communications and work product, that the investigators had become privy to while working with FBME to prepare its defense. ECF 52-3 at 3–6. because the former investigators themselves submitted as much to FinCEN. FinCEN knows this ECF 52-6. Upon learning of this, FBME noted to FinCEN that revelations from the private investigators afforded still more evidence of CBC’s “illicit, nefarious tactics to destroy FBME” and proof that “CBC will stoop as low as necessary to further its calculated campaign against FBME,” thereby 34 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 46 of 57 shredding any notion that CBC retains credibility or integrity. ECF 52-3 at 6. Even so, FinCEN has paid no regard for the CBC’s role in this episode. Thus, even if FinCEN could discount to zero the hundreds of pages of commentary and exhibits from FBME and its counsel that discredit CBC, see AR3302–22, 3432–69, 3472–590, 3737–65, 3820–24, 3828–992, 4169–81, FinCEN would still need to explain why it is unmoved by all of the other “relevant information” from outside sources, including past and present “government authorit[ies],” pointing to CBC’s misconduct. 81 Fed. Reg. at 18485. Whatever “particular expertise” FinCEN may claim “to judge the credibility and reliability of other foreign regulators of money laundering,” Gov’t MSJ at 29, FinCEN still needs to explain why and how it judged them as it has here. Yet FinCEN in the Second Final Rule has said nothing—nothing— specifically addressing any of the critical, contrary inputs noted above from outside parties, particularly “foreign regulators” (and those partnering with them) that shine their own spotlights on CBC’s mistreatment of FBME. more arbitrary and capricious. That gaping omission renders the Second Final Rule all the District Hospital Partners, L.P. v. Burwell, 786 F.3d 46, 56–57 (D.C. Cir. 2015); Butte County, 613 F.3d at 194–95; American Radio Relay, 524 F.3d at 241. 3. FinCEN unreasonably found FBME lacks effective AML controls Contrary to the Government’s submission, FinCEN’s conclusion that FBME “[f]ail[ed] to implement effective anti-money-laundering controls” is not “reasonable and well substantiated.” (Gov’t MSJ at 24–25). The record reflects the robust, bank-wide compliance program (including continuous improvements) that FBME has implemented in its Cyprus and Tanzania branches, as cued to ever-changing legal requirements in Europe and Africa. AR0107, 0113, 0135–736, 0817, 0916, 3322, 3326, 3328; Saab Decl. ¶ 14. Against that record, FinCEN cannot intelligently rest its Second Final Rule on purported substantive concerns about such things as whether FBME in fact implemented its AML 35 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 47 of 57 improvements or extended them to Tanzania. 0068. 81 Fed. Reg. at 18490; AR0020, 0028, 0054–56, FinCEN raised those questions for the first time in the Second Final Rule. It did so after receiving and reviewing hundreds of pages of documents from FBME and its outside auditors chronicling a battery of AML improvements; it did so after raising no such question in the course of a prior rulemaking, ensuing litigation, and remand notice-and-comment; it did so after refusing to answer FBME’s repeated entreaties for any feedback or outstanding questions, after refusing FBME’s suggestion of a meeting, and after denying FBME’s request for a live hearing at which FBME might offer sworn testimony and responsive proof. If, after all that, FinCEN somehow awoke to genuine questions on these points, the only rational conclusion it could draw was that its process was deficient in precisely the way FBME has long stressed— because it has been unreceptive to meaningful, responsive engagement. Although FinCEN might reasonably have seen fit to grant a hearing, or agree to a meeting, or re-notice its rule, or simply pose a question to FBME in that posture, it was arbitrary and capricious for FinCEN to cite its newfound questions as basis for imposing the harshest available sanction, as FinCEN has. i. FinCEN refused to credit FBME for EY’s and KPMG’s positive compliance determinations and FBME’s improvements in response The Government continues to argue that “far from giving FBME a clean bill of health,” the 2013 KPMG audit and 2014 EY audit “confirmed that FBME has significant, recurring weaknesses,” such as (1) “weaknesses in the bank’s customer due diligence procedures”; and (2) its “failure to adequately screen the AML measures of the Approved Third Parties (ATPs) who were authorized to introduce new customers.” Gov’t MSJ at 26, 28. That, to be sure, would be basis for saying that FBME had certain weaknesses that stood to be improved, just as FBME had been improving them, per auditors’ recommendations. But the operative question is whether FinCEN is “of primary money laundering concern.” It is arbitrary and capricious for 36 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 48 of 57 FinCEN to answer that question in the affirmative without so much as crediting the facts that the 2013 KPMG audit and 2014 EY audits found FBME consistently cooperative and fundamentally compliant with applicable laws, AR0754–55, 3064–66, 3621–718, and that FBME was making demonstrated strides to bolster its bank-wide compliance policies, practices, and procedures in response to its auditors’ expert recommendations, AR3330–35, 3719–36, 3766–80; see also AR3719–36, 3766–80; Saab Decl. ¶¶ 16–17 & Apps. E & F. Those undisputed facts make for a forest of good-faith compliance by FBME, and FinCEN does not adequately answer them by pointing to a few trees’ worth of weaknesses that FBME was already addressing. Because the on-point audits are, on the whole, so clearly favorable to FBME, FinCEN now runs away from them. The Government notes that FinCEN is “not required to adopt the KPMG or EY audits’ conclusions, or to reject the CBC’s, or to interpret any of these reports . . . as FBME would,” and that it does not have to “take FBME’s word for it.” Gov’t MSJ at 29, 30. Here, FinCEN’s confidence in its own ability to make such sensitive determinations on its own— particularly about overseas regulators and foreign relations—seems inflated to the extent FinCEN is forgetting its consultation obligations. See § II.D, above. the APA is that this Court does not take FinCEN’s word for it: for crediting one data point over contrary ones. In any event, the rub of FinCEN must explain its reasons See District Hospital, 786 F.3d at 57. Such reasoned explanation is sorely lacking here. FinCEN has effectively disregarded a series of audits from KPMG and EY—auditors whose scruple and professionalism have not been questioned here—that confirm, if nothing else, FBME’s consistent good faith, cooperation, and strides. Instead, FinCEN prefers to take the word of CBC, whose scruple and motivations are very much in question, to say the least. In doing so, FinCEN has not even acknowledged the fact that CBC jettisoned the professional outside auditors from PWC who would otherwise have 37 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 49 of 57 been opining (and, equally important, constraining any slanted opining) with the benefit of their own on-site, contemporaneous inspection of FBME in summer 2014. If nothing else, this Court should demand a cogent explanation from FinCEN as to why FinCEN assigned such weight and such credit to CBC despite these singularly suspicious circumstances. ii. FinCEN failed to refute FBME’s demonstration that CBC’s fines were baseless, inapplicable, and unfair The Government also argues that FBME has “sought to evade AML regulations and has ignored the CBC’s AML directives,” in addition to “ignor[ing] instructions from its regulator,” citing specifically to two fines CBC levied against FBME. Gov’t MSJ at 26. FBME demonstrated the baselessness, inapplicability, and unfairness of these fines in its comment (AR3308, 3310–14, 3319–20, 3352–56), and FinCEN offered no contradiction even as it continued to rely on these fines in the Second Final Rule (81 Fed. Reg. at 18482, 18484, 18486). The Government also emphasizes CBC’s December 2015 fine of €1.2 million (Gov’t MSJ at 18), which was based on the extremely suspicious (to say the least) “PWC” audit discussed above. AR3751–55. Without further belaboring the problems infecting the audit findings, we simply note that FinCEN could not properly rely upon CBC’s fine without grappling with CBC’s process and findings behind it. iii. See District Hospital, 786 F.3d at 57. FinCEN relied on discredited allegations The Government continues to argue that FBME has “long been recognized by its high risk customers for its ease of use and potential for evading AML regulations,” citing to its allegation that FBME “advertised the bank to potential customers as being willing to facilitate the evasion of AML regulations.” Gov’t MSJ at 26. FBME thoroughly refuted this claim, demonstrating that FBME “has never advertised its willingness to” facilitate the evasion of AML regulations, AR0130, and that FBME pursued lawsuits against third parties for inaccurate or 38 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 50 of 57 potentially defamatory information published on the Internet, AR0131–32. conclude otherwise is contrary to the evidence and unreasoned. For FinCEN to See FBME MSJ at 47. In addition, FinCEN emphasizes FBME’s transactions with “shell companies.” Gov’t MSJ at 24, 32. Allegations regarding shell companies are part and parcel of FinCEN’s concerted effort to paint FBME as a bad bank despite the absence of supporting evidence. As FBME explained at length to FinCEN in its public comment, the fact that FBME facilitated transactions on behalf of shell companies does not differentiate FBME from countless, and, indeed, all international banks the world over. AR3344–45. Indeed, as FinCEN itself has acknowledged elsewhere, “[m]ost shell companies are formed by individuals and businesses for legitimate reasons.” FinCEN, Potential Money Laundering Risks Related to Shell Companies (Nov. 9, 2006), https://goo.gl/jAJgEA. FinCEN has articulated no good reason, and there is no good reason, to pillory FBME for having the same sort of customer base that is commonplace around the world, especially in Cyprus (where companies can and do avail themselves of a favorable tax and fiscal environment, including the double-taxation treaties Cyprus has in place with almost 60 countries). AR3344–45. FBME has likewise refuted the Government’s allegations that FBME facilitated a substantial volume of illicit activity by international terrorist financiers, organized crime figures, and money launderers. Gov’t MSJ at 2, 10–11. EY found that, with respect to all of the identifiable allegations in the Notice of Finding, FBME acted appropriately including by (1) conducting due diligence; (2) screening customers against key sanctions lists; (3) cooperating with correspondent bank requests; and (4) investigating and reporting suspicious activity and freezing or closing accounts. AR3336–40, 4251–315. In addition, EY identified no connections between FBME customers or accounts and Lebanese Hezbollah, other known 39 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 51 of 57 terrorist organizations, or individuals or entities involved in international narcotics trafficking or money laundering. AR3337–38. But FinCEN mads no effort to explain or justify its findings relative to the body of contrary, on-point evidence presented by EY. B. 81 Fed. Reg. at 18484. FinCEN Failed To Apply § 311’s Statutory Factors Appropriately FinCEN also failed to consider, as required by statute, (1) “the extent to which [FBME is] used for legitimate business purposes in the jurisdiction [i.e. in Cyprus and in Tanzania],” 31 U.S.C. § 5318A(c)(2)(B)(ii), and (2) “the extent to which” imposing the fifth special measure “would have a significant adverse systemic impact on . . . legitimate business activities involving [FBME],” § 5318A(a)(4)(B)(iii). FBME MSJ at 50–51. These factors go directly to the collateral costs of imposing the fifth special measure and, from there, to whether any benefits of the chosen sanction outweigh those costs. When Congress mandates that an agency consider a rule’s costs, as it has here, it is arbitrary and capricious for the agency not to consider them. Michigan v. EPA, 135 S. Ct. 2699; MetLife, Inc. v. Financial Stability Oversight Council, --- F. Supp. 3d ----, 2016 WL 1391569, at *14–17 (D.D.C. Mar. 30, 2016). The Government’s brief confirms FinCEN’s failure on this score. The Government argues that FinCEN weighed FBME’s “legitimate business purposes” because it “considered” that (1) “few of the bank’s customers were Cypriot or Tanzanian citizens,” (2) “[FBME] was primarily an offshore bank with a significant number of shell entity customers and politically exposed persons,” and (3) “potentially as many as 27% of its customers were high-risk customers.” Gov’t MSJ at 32 (citing AR0059–61). Yet none of these considerations concern the “extent” of FBME’s legitimate business; they either are irrelevant factoids (the citizenship of FBME’s customers) or are attempts to paint FBME as having a high amount of illegitimate business (the percentage of its high-risk customers), which is the subject of a different statutory 40 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 52 of 57 factor (§ 5318A(c)(2)(B)(i)).11 FinCEN has thus completely failed to carry out the weighing exercise and strike the balance prescribed by Congress. Just as an agency cannot shirk its statutory obligation to consider a rule’s costs by trumpeting only its benefits, see Michigan v. EPA, 135 S. Ct. at 2707–08, FinCEN cannot shirk its obligation under § 5318A(c)(2)(B)(ii) and § 5318A(a)(4)(B)(iii) to measure an entity’s legitimate business (i.e., the business that will be collateral damage if FinCEN imposes the fifth special measure) against the entity’s illegitimate business (i.e., the business that FinCEN is aiming to stamp out with the fifth special measure). C. FinCEN Imposed an Excessive Penalty Without Adequately Considering Alternatives FinCEN further erred by re-imposing the fifth special measure without adequately justifying its rejection of alternatives. Its stated rationale for dismissing possible alternatives (including information collection, reporting requirements, fines, or an independent monitor at the Bank) comes down to FinCEN’s conclusion that FBME is incorrigible and untrustworthy. See 81 Fed. Reg. at 18490 (rejecting all alternatives “[b]ecause such alternatives ultimately depend on FBME to provide accurate, reliable, and credible information”). Similarly, FinCEN’s claim that it is “treat[ing] like cases alike,” Westar Energy, Inc. v. FERC, 473 F.3d 1239, 1241 (D.C. Cir. 2007), particularly relative to Multibanka,12 depends on its assessment that FBME “would not effectively implement new AML policies and procedures.” 81 Fed. Reg. at 18490. 11 These considerations by no means indicate that FBME’s business is illegitimate. Whether or not FBME’s customers “were Cypriot or Tanzanian citizens” has nothing to do with whether its business is legitimate; foreigners can engage in legitimate business activity in any given jurisdiction just as locals can—something regulators of U.S. financial institutions should well appreciate. The emphasis on “shell entity customers” is equally irrelevant, as explained above. See § III.A.3.iii, above. And, as FinCEN itself has conceded, “high-risk” customers do not equate with “illegitimate” ones. AR0059. 12 FinCEN’s stated allegations against Multibanka tracked its allegations against FBME: According to FinCEN’s notices, (1) Multibanka was “used by . . . shell companies to facilitate financial crime”; (2) FinCEN had “reason to believe that certain criminals use accounts 41 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 53 of 57 While recognizing why such an astonishing conclusion would justify rejection of alternative measures, FBME respectfully urges this Court to examine whether FinCEN has offered requisite reasoned explication en route to its conclusion. Of course, we have been denied any way of accessing, much less engaging, FinCEN’s black box of secret evidence, and we have been denied a neutral arbiter who could make credibility determinations at an adversary hearing with live witnesses. See FBME MSJ at 20–39; §§ II.B–II.C, above. What we can submit is that FinCEN, in now branding FBME a recalcitrant, bad-faith bank, has gone far beyond anything the available record and stated reasoning might support. Unless this Court looks for and finds requisite substantive justification elsewhere, it should vacate. The substance of FinCEN’s stated concerns is that “FBME previously disregarded the instructions of its AML regulator; engaged in opaque and suspicious money transfers; maintains deficient AML controls; and its employees took various measures to obscure information.” 81 Fed. Reg. at 18490. FinCEN’s allegations about problematic transfers and deficient AML controls have been addressed extensively above and, what is more, inhere in § 311 cases. Those are hardly the indicia of egregious bad faith that would justify the most extreme sanction, at Multibanka to facilitate financial fraud”; and (3) “a significant portion of its business involves wiring money out of the country on behalf of its accountholders.” 70 Fed. Reg. 21362, 21364 (Apr. 26, 2005). FinCEN then rescinded its proposed imposition of the fifth special measure after “[Multibanka], through its counsel, initiated meetings with us in May and October 2005, with the intent to demonstrate the remedial measures taken,” and FinCEN “permitted the bank to submit additional documentation to demonstrate its continued efforts and the bank had provided copies of its revised policies, procedures, and internal controls.” 71 Fed. Reg. 39606, 39608 (July 13, 2006). What differentiates the Multibanka case is that FinCEN “believe[d] that the bank’s cumulative efforts demonstrate its continuing commitment to fighting money laundering and other financial crimes.” 71 Fed. Reg. at 39608. This makes it all the more incumbent upon FinCEN to explain why, according to record evidence, FBME’s “cumulative efforts” supposedly do not “demonstrate its continuing commitment” to compliance. In order to distinguish Multibanka, FinCEN also stated that “FBME has not demonstrated any AML improvements . . . in Tanzania.” 81 Fed. Reg. at 18490; AR0068. For the reasons already noted, however, that allegation was belated, unfair, and devoid of substance. 42 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 54 of 57 quite different from the measured remediation and cooperative rehabilitation that FinCEN espouses under § 311. See, e.g., AR3359–60 ¶ 4 (noting then-Director Jennifer Shasky Calvery’s statement that one of the purposes of FinCEN’s actions is rehabilitation). We will therefore focus on what appears to be the essential crux of FinCEN’s claimed justification: alleged willful defiance by FBME and cover up by FBME’s employees. Neither of these was alleged by FinCEN prior to the Second Final Rule or even hinted at by any of the materials FinCEN disclosed. And the claim that FBME “previously disregarded the instructions of its AML regulator” depends entirely on the same 2014 audit that was thoroughly discredited insomuch as it was, e.g., disavowed by the outside auditors who were commissioned for the audit, at odds with candid, contemporaneous reports on the audit, and finally turned up (following energetic efforts by FBME and its counsel over the course of 12 months) under circumstances that smack of collusion, fabrication, and impropriety by CBC. 43–47. FBME MSJ at Suffice to say that the report (or, rather, a cherry-picked fragment of it) from CBC cannot itself justify FinCEN’s most extreme conclusion and draconian sanction. Pointing the opposite way are the uniform insights of a series of first-class auditors— KPMG, EY, and also PWC—that expressed no such alarm after reviewing FBME’s policies, practices, and transactions. AR0754–55, 3064–66, 3319. Similarly, the Bank of Tanzania has expressed no such concern about FBME even while denouncing CBC. AR4439–44. Likewise, throughout this proceeding FinCEN itself has seen FBME going above and beyond to supply reams of documentation and information (including with the benefit of outside auditors who received full cooperation) that may bear upon its AML compliance—even to the point of identifying potentially questionable transactions that FinCEN had not, Gov’t MSJ at 28 n.13 (“[I]n some case the EY review . . . identified additional illicit activity that FinCEN had not 43 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 55 of 57 previously identified.”). FinCEN has also seen how eagerly FBME engaged with FinCEN to solicit questions and feedback in a concerted effort to resolve whatever concerns FinCEN harbored. See, e.g., AR0143, 0826–27, 4402; Peters Decl. ¶¶ 2, 9–12 , 23. Those data points are powerful, extensive, and of a piece: FBME is committed to compliance, making demonstrated strides, and seeking constructive engagement, all in good faith. Assuming arguendo these data points are not necessarily dispositive, FinCEN must at least fairly acknowledge and account for them before adopting CBC’s anomalous account as its own and using that to condemn FBME. Yet FinCEN has taken no meaningful account of the larger body of evidence while taking the word of CBC, the most suspect source of all, as gospel in order to condemn FBME. In this sense, FinCEN has been arbitrary and capricious in deeming prohibition under the fifth special measure to be the appropriate sanction. D. FinCEN’s Review of Privileged Materials Tainted the Rulemaking The Government reiterates in its brief that FinCEN did “not consider[] or rel[y] upon” the materials it obtained from the rogue investigators who were retained by FBME’s legal counsel before being enlisted and paid off by CBC. is cold comfort. Gov’t MSJ at 16 n.5 (emphasis in original). That As FBME has demonstrated (FBME MSJ at 27), the investigators’ comment and related affidavits afford the only discernible source for the allegation in the Second Final Rule that “FBME employees took various measures to obscure information” in late 2014. Fed. Reg. at 18482, 18486, 18489; see also Gov’t MSJ at 18, 26. 81 If FinCEN obtained this privileged information indirectly from the rogue investigators—for instance, by way of CBC— and not specifically from the comment and affidavits directly submitted to FinCEN, then FinCEN’s express assurance that it would not be relying on them out of deference to FBME’s stated privilege concerns, see ECF 51–52, has proved, to put it mildly, unsatisfying. FinCEN no less violated the APA, due process, and the D.C. Rules of Professional Conduct to the extent it 44 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 56 of 57 relied upon information and materials that it knew were obtained in violation of FBME’s attorney-client privilege, regardless of how they may have travelled to FinCEN following the surreptitious, illicit breach. See FBME MSJ at 54–55 (collecting authorities). Finally, even if FinCEN’s newfound allegation that FBME employees obscured information in 2014 is traceable to a truly independent source, FinCEN’s receipt and review of the investigators’ comment and affidavits nevertheless tainted the rulemaking. FinCEN never should have been sitting on and reviewing the materials, much less doing so for months, and certainly not without alerting FBME and its undersigned counsel. An agency’s failure to heed ethical considerations and remedy ethical violations “amount[s] to fail[ure] to consider an important aspect of the problem” and renders agency action arbitrary and capricious. Lorillard, Inc. v. U.S. FDA, 56 F. Supp. 3d 37, 51 (D.D.C. 2014) (citation and quotation marks omitted), vacated on other grounds, 810 F.3d 827 (D.C. Cir. 2016). Without an evidentiary hearing— which FinCEN is required to undertake but has not undertaken, see FBME MSJ at 55 (collecting authorities)—we cannot know whether and how the privileged materials influenced FinCEN’s decisionmaking. The problem looms especially large because nothing prevented FinCEN’s relevant contributors and decisionmakers from being swayed by the privileged materials to the extent they perceived them as corroborating or accentuating the same allegations leveled elsewhere, thereby convincing them to recommend, shape, or adopt the Second Final Rule as they did. Given that FinCEN has now adopted the former investigators’ allegations as its own without entertaining any inquiry or making any effort to purge their taint, FinCEN’s disavowal of reliance is illusory. If no other defect invalidates the Second Final Rule, this should. CONCLUSION For the foregoing reasons, FBME Bank Ltd. and FBME Ltd. respectfully request that the Court deny the Government’s motion for summary judgment and grant Plaintiffs’ cross-motion. 45 Case 1:15-cv-01270-CRC Document 70 Filed 05/23/16 Page 57 of 57 Dated: May 23, 2016 Respectfully submitted, QUINN EMANUEL URQUHART & SULLIVAN LLP /s/ Derek L. Shaffer Derek L. Shaffer (D.C. Bar No. 478775) William A. Burck (D.C. Bar No. 979677) Lauren H. Dickie (IL Bar No. 6286037) Jonathan G. Cooper (D.C. Bar No. 999764) 777 Sixth Street NW, 11th Floor Washington, DC 20001 (202) 538-8000 HOGAN LOVELLS US LLP /s/ Peter S. Spivack Peter S. Spivack (D.C. Bar No. 453731) J. Evans Rice III (D.C. Bar No. 481768) 555 Thirteenth Street NW Washington, DC 20004 (202) 637-5600 Attorneys for Plaintiffs FBME Bank Ltd. and FBME Ltd. 46