The Civil Safe Harbor

by John J. Byrne

Use it (Correctly) or Lose it!
Bankers are realizing that more pressure is on them to report possible violations of law, especially in the area of electronic-based transactions.

Even in light of the new suspicious activity reporting procedures, we have felt fairly comfortably secure in the knowledge that we were protected by safe harbor, which was granted in the Annunzio-Wylie Anti-Money Laundering Act.

As the trend in transactions becomes more electronic-based, we will receive more pressure to report possible violations of law. We must ensure that policies are carefully crafted and followed so that the federal protections from civil liability for reporting these potential violations will withstand legal attack Recent court challenges show we need to work to avoid losing this hard fought safe harbor, especially in light of the new suspicious activity reporting procedures.

We were comfortable
Congress gave additional credence to the broad coverage of the civil liability protection. Rep. Stephen Neal (D-NC), in a January 5, 1993 floor statement, said, "Banks have long been encouraged to report suspicious transactions to the appropriate authorities. To ensure that banks have no excuses, the legislation contains a provision, Section 1517(b), that provides a safe harbor when banks report suspicious activities."

The various federal regulatory agencies felt so strongly about the absolute nature of the civil safe harbor that the assurance was included on the SARs. In one clear example, the Federal Reserve Board stated that it was "of the opinion that the safe harbor statute is broadly defined to include the reporting of known or suspected criminal offenses or suspected activities, by filing a SAR or by reporting by other means?"

Since the enactment of the '92 safe harbor, plaintiffs have challenged the broad nature of the protection but have failed to limit the statute.

Until now.
Good News?

We were OK in 1996 in the case of Merrill Lynch v. Green, when safe harbor applied to the non-bank that "voluntarily" reported a suspicious transaction.

And also in August, 1997 in Puerta v. USA, when the 9th Circuit Court of Appeals grappled with the issue of whether a bank employee can tell an inquiring federal agent anything about a customer's account when asked directly without subjecting the bank to liability. In this case, the plaintiff engaged in check kiting and was reported to the local sheriff's office. A deputy sheriff reported to the State Department the fact that the customer was found with multiple driver's licenses and other identification documents. The agent visited the bank and confirmed the identity of the customer. When the bank was sued by the customer, the court found his right to financial privacy had not been violated.

Bad News
But now we are faced with a Texas case (Digby v. Texas Bank (March,1997)), where a borrower brought a malicious prosecution claim against the bank that reported him for bank fraud after a default on a loan. He claimed an arrangement with the loan officer that was omitted from the SAR.

In Lopez v. First Union the bank disclosed information concerning customer accounts to the government upon "verbal instructions" from federal law enforcement officials. The Court held that verbal instructions of government agents were insufficient legal authority upon which the bank could rely to take advantage of the safe harbor.

Finally, there is Coronado v. BankAtlantic Bancorp, Inc. in November, 1997, where the bank notified federal agents concerning "unusual amounts" and "unusual movements" of money at the bank. The agents were then given access to the "detailed contents" of the funds transfers of close to eleven hundred accounts, which they promptly seized "upon allegations of money laundering."

SAR REPORTING AND THE SAFE HARBOR
As we have already discussed, pressure will increase on the financial industry to have specific policies on the reporting of suspicious activity. With the advent of a new streamlined Suspicious Activity Report (SAR) process and the focus on "Know Your Customer" procedures, one challenge for compliance and security officers as well as in-house counsel will be how to address the myriad of "privacy-related" questions that are sure to surface.

One of the more potentially vexing [and as of yet unchallenged] issues is how to treat the requirement that records not be attached to the filed SAR. According to the regulations, supporting documentation must be identified and maintained by the bank for five years from the SAR filing date and must be made available to the appropriate law enforcement agencies or bank supervisory agencies upon request.

Centralize Your SAR Files
All institutions should maintain a centralized SAR filing system even though it is not required. The reason is that only through a formal system can the bank withstand challenges that records were actually part of the SAR at the time of filing. There will be attempts to prove violations of the Right To Financial Privacy Act (RFPA) and other appropriate statutes, if the records submitted to the government either are simply tangential to the SAR activity or received after the filing. If received after the filing and relevant to the possible violation of law first reported, you should consider filing a supplemental or new SAR so that the record disclosures remain protected.

Close The Account?
Finally, the closing of accounts is still a hotly debated issue. The scenario goes something like this: a bank files an SAR on a customer and the government fails to respond promptly. Do you keep the account open? File SARs on every additional transaction? Unfortunately we are once again left to our own devices. FinCEN states that "unless instructed by an authorized official in writing, this is a decision which must be made by the financial institution." It would be helpful if the agencies were more forthcoming on this, but until then I would recommend that whatever procedures you follow, put them in writing and do not make exceptions. Consistency should help in retaining the civil immunity.

CONCLUSION
Expect more litigation - not less. While the noises being made by the Courts on creating a "good faith" limitation are to be taken seriously, solid procedures should prevent erosion of this necessary protection. Use the safe harbor carefully and we will have it for a very long time.

John Byrne is the Senior Federal Legislative Counsel for the ABA.

Copyright © 1998 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 8, No. 5, 5/98