The Safe-Harbor Protection for Employment References: A Long-Awaited Tool To Deter Money Laundering, Terrorism & Fraud

by Robert B. Serino (Senior Advisor for Financial Services, Watkins Consulting)

On October 26, 2001, President George W. Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required To Intercept and Obstruct Terrorism Act (USA PATRIOT Act of 2001). In so doing, the President developed new tools and imposed additional requirements on the federal government and the financial services industry to address the dual threats of terrorism and money laundering. While some of the act's changes will impose additional burdens on financial institutions, others will protect them and their employees from liability when they take steps to keep dishonest individuals out of the financial services industry.

The USA PATRIOT Act expands the safe harbor that currently protects banks and their employees from being held liable when they file suspicious activities reports with the federal government. It also, for the first time, protects an expanded list of financial institutions and their employees when they make disclosures in certain employee references. Note 1

PREDICATE FOR THE LEGISLATION

Congress had previously given federal regulators appropriate remedies to remove and bar dishonest individuals from the banking industry. Regulators have the statutory power to commence a formal administrative action to remove and ban bank employees and officials when it can be established that they have violated their positions of trust. Likewise, existing statutes permit regulators to summarily suspend bank personnel if they are indicted for crimes of dishonesty, breaches of trust, or money laundering. Also, a person convicted of such a crime is, by operation of law, barred from serving in a depository institution, unless he or she has prior approval of the Federal Deposit Insurance Corporation.

Through its 1989 passage of the Financial Institutions Reform, Recovery and Enforcement Act, Congress attempted to strengthen the removal statute by mandating that if an individual was removed from one depository institution, he or she would be barred from any other depository institution.

If an individual is barred from banking for any of these reasons, it is illegal for a bank to employ that individual. If a bank or individual knowingly violates this prohibition, they are subject to criminal prosecution or a civil money penalty up to $1 million for each day the violation continues.

While the existing statutory remedies are helpful, they are only effective if a formal action or prosecution has been taken against the individual. These provisions do not address situations in which there was no prosecution or regulatory sanctions of the individual.

To avoid committing such a violation and to protect themselves from employee abuse, financial institutions must have a due diligence program to evaluate the background of individuals before they are employed. One of the major sources of information an institution should check before employing someone is prior employment records.

For years the industry and its regulators have been concerned about the problem that is created when a person is terminated from an institution for being involved in wrongdoing but is not prosecuted. Subsequently, that person could become employed at another institution without the second institution learning about the problems at the first. Until now, banks have been reluctant to share such adverse information about former employees for fear that they might be sued for providing the facts of the wrongdoing that caused the termination.

In previous years Congress and the regulators have addressed this concern. In testimony given on June 11, 1998, before the Committee on Banking and Financial Services of the U.S. House of Representatives, the Comptroller of the Currency's Office supported the goals of the legislative proposals before the committee, specifically:

the expansion of the statutory .safe harbor. for banks and individuals that report potential crimes and suspicious transactions, and the creation of a new .safe harbor. for banks and individuals who share information in an employment reference about a prospective employee's possible involvement in a violation of law or a suspicious transaction. Banks and their employees must feel free to report suspicious transactions, and to share information in the employment context about individuals involved in misconduct, without fear of liability.... Note 2

Although the committee approved a provision dealing with the issue, the legislation never became law.

The issue was again brought up in the legislative debates on the Money Laundering Act of 2000 (the predecessor of the USA PATRIOT Act). In testimony before the Subcommittee on Crime of the Committee of the Judiciary, the American Bankers Association's senior counsel and compliance manager, John Byrne, pointed out the limitations banks have faced in disclosing the facts regarding former employees who have been terminated for committing fraud. Note 3 Clearly, one of the major obstacles has been the fear and cost of responding to litigation. To address this concern, Byrne noted, about a dozen states already had provided for liability protection to employers who responded to requests for references, including when they advised that an individual had been suspected of criminal wrongdoing.

LEGISLATIVE CHANGE

To address the industry's concerns about potential litigation, Congress passed a provision in the USA PATRIOT Act that, for the first time, gives financial institutions and their employees a .qualified. safe harbor protection from liability when they provide information to another institution about a former employee's employment record. This provision deals with information regarding former employees, not customers. Note 4 To come within the act's protection, banks must strictly comply with its provisions. The requirements mandate that the disclosure be in writing and be in response to a request from another institution. The protection only exists for disclosures between financial institutions, including uninsured branches and agencies of foreign banks.

Although the statute does not mandate disclosures between institutions, it does protect an institution and its employees if a disclosure is made. The protection also covers written termination notices or employment references that are provided pursuant to rules of a self-regulatory organization registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission. We refer to this as a .qualified. safe harbor because the USA PATRIOT Act.s provision amending the FDIC Act provides that any disclosure made with .malicious intent. will not be shielded from liability. While this provision is only in the section of the act dealing with disclosures between .depository institutions,. out of an abundance of caution, all financial institutions should be concerned that this factor will be read into their safe harbor. EFFECT ON FINANCIAL INSTITUTIONS

Because the statute provides that maliciousness would defeat the safe harbor, it can be easily assumed that when a person sues an institution or individual for .defamation. or other tort stemming from an employment reference, there will be an allegation of malice. Note 5 Such a claim would probably allege that the bank or its employees made the employment reference out of personal animosity and without a true factual basis. Generally, because the question of malice will hinge on the facts of each case, a bank probably will not be able to merely obtain a summary judgment or a dismissal of a suit. Note 6 To defeat such allegations, a financial institution or person sued will be required to defend the action by establishing that its actions and responses were made without malice. This will become a debate on the facts and could involve substantial discovery.

In order to ensure that the Act's safe harbor protects financial institutions and their employees, it is strongly advised that the language of the statute be followed literally and that institutions set up detailed processes to handle employment record requests. If the issue of malice is raised, the institution can point to its strict compliance not only with the statute but also with its established policies and procedures.

Among the actions an institution should take to support the argument that an employment reference was made in accordance with the act and without malice are the following:

• The handling of the requests for information should be centralized and if possible reviewed by counsel. This will help rebut the contention that the person making the reference had a personal dislike or intent to injure him. It would also provide for a separate set of eyes to review the particular matter and make an independent determination consistent with prior matters. Such a process should lead to more objective and less personalized references.
• The response must be in writing and in response to a request from another financial institution. Although the act does not state that the request be in writing, to ensure that there is no question that a request was made - and to avoid the contention that the .referring bank. made the reference with malice because it was not .requested. - a written request should be obtained. Having this on file would lend credibility to the argument that there was no malicious intent involved.
• The disclosure is made only in a situation in which a SAR or report has already been filed. The regulations of the agencies require that financial institutions file a SAR when they suspect violations of law or suspicious activities involving amounts of money greater than $5,000, unless the individual is an insider in the institution - in which instance there is no dollar limit. Because institutions should have a review process to determine whether a SAR should be filed, this should be another independent indication to help refute the allegation of personal animosity toward the individual.
• The response cannot disclose that a SAR has been filed but can contain the allegations made in the SAR. A SAR is considered a confidential document and the fact that one has been filed cannot be disclosed.
• The response should recite accurate facts without the use of pejorative words or speculation. This is one of the most important considerations in making a reference. It is where personal animosity could be detected, especially if the reference was spiced with incriminating, highly charged facts that ultimately prove to be inaccurate. An undisputed recitation of the facts as to what transpired is the safest course. There probably should be no suggestion of what the requesting bank should do about hiring the individual (i.e., there is no benefit in telling the requesting bank that it should not hire the individual - the facts should speak for themselves).
• Records should be maintained to show that the review of the request was handled in accordance with bank processes and with appropriate review. Copies of any memoranda summarizing a decision to file the SAR and the reference, together with the incoming request, should be maintained to establish that the matter was handled in accordance with normal bank procedures and without personal animosity toward one individual. Financial institutions should try to obtain a written admission from the offending employee. This should be part of the supporting documentation and filed with the bank records.

CONCLUSION

While the USA PATRIOT Act's creation of the safe harbor for employment references is important and institutions should be encouraged to provide accurate and truthful reports, it is also important that financial institutions establish an internal process to ensure that the protections are maintained. Without such a process, it may be difficult for an institution to defeat a claim that information was provided with malice toward the former employee and avail itself of the act's safe harbor protection.

Notes:

1. See Sections 351 and 355 [351 amends the present 31 USC 5318(g)(3), and 355 amends the FDIC Act by adding section (w) to 12 USC 1828].
2. See testimony of Robert B. Serino, Deputy Chief Counsel, Comptroller of the Currency, before the Committee on Banking and Financial Services of the U.S. House of Representatives, June 11, 1998, concerning markup of H.R. 4005 (Money Laundering Deterrence Act of 1998) and H.R. 1756 (Money Laundering and Financial Crimes Strategy Act of 1997).
3. Hearing before the Subcommittee on Crime of the Committee on the Judiciary, U.S. House of Representatives, on February 10, 2000. The testimony covered several issues presented in The Money Laundering Act of 2000 and also focused the subcommittee on the employment reference provision.
4. The sharing of customer information would be covered by the provisions of the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act, and this safe harbor would not protect them.
5. In several cases brought over the past few years, individuals have sued banks alleging that the banks, in making referrals to law enforcement, have violated the individuals. rights. In defending themselves, banks have contended that they were immune from liability for this disclosure under the .unqualified. safe harbor provisions of the Annunzio-Wylie Anti-Money Laundering Act. See 31 USC 5318 (g)(3)[SAR safe harbor]. In some early cases, courts found that there was a factual issue to determine if the banks had acted in bad faith and therefore in some cases did not grant the banks. motions for summary judgment or motions to dismiss. See Lopez v. First Union National Bank, 129 F.3rd 1186 (11th Cir.1997). Nevertheless, in the key case dealing with the breadth of the .suspicious activity report. safe harbor, the court in Lee v. Bankers Trust, 166 F.3d 540 (2d Cir., 1999), concluded that the plain language of the statute (and the congressional intent) did not require the referral to be made in good faith. The court concluded, therefore, that there was no question of fact. See also Stoutt v. Banco Popular De Puerto Rico, 158 F.Supp 2d 167 (D.P.R July 24 2001). The absence of the language in the SAR safe harbor is in stark contrast to the specific language of Section 355 of the USA PATRIOT Act, where Congress specifically allows for malice to defeat the protection of the safe harbor.
6. Courts are reluctant to issue summary judgment where there are potential issues of motive and intent. See Stoutt v. Banco Popular De Puerto Rico, 158 F.Supp 2d 167 (D.P.R. July 24, 2001). However, .even in cases where elusive concepts such as motive or intent are at issue, summary judgment may be appropriate if the nonmoving party rests merely upon conclusory allegations, improbable inferences, and unsupported speculation.. Ibid., citing Ayala- Gerena v. Brystol Myers-Squibb Co., 95 F.3d 86,95 (1st Cir. 1996).

Excerpted from SAR Activity Review Issue 4, page 53