FinCEN Director Bewails "Defensive Filing" Wants Banks/Examiners to Separate "Unusual" from "Suspicious"

In his speech at the American Bankers Association/American Bar Association conference in October, William Fox, Director of the Financial Crime Enforcement Network told banking compliance officers and banking attorneys present that one of the challenges facing the financial industry and FinCEN is to address the phenomenon of "defensive filing" of suspicious activity reports (SAR).

Mr. Fox said, "The "defensive filing" results where a financial institution files a SAR on an activity or transaction that really is not suspicious. Regulations require the filing of SARs when an institution "knows, suspects, or has reason to suspect" that a transaction or an attempted transaction 1) involves funds derived from illegal activity; 2) is designed to evade the requirements of the Bank Secrecy Act; or, 3) has no business or apparent lawful purpose.

"We all know the phenomenon of "defensive filing" is occurring. There is both empirical and anecdotal evidence. We have seen financial institutions file reports in increasing numbers - often upon the recommendation of their lawyers or risk management teams - when the facts as presented do not meet this standard. I suspect that this over compliance is occurring for a reason. It is occurring because financial institutions are - somewhat justifiably in my view - unwilling to accept the regulatory or reputational risk associated with an action by the government that would make it appear that the institution is soft on anti-money laundering or, even worse, terrorist financing." He added, "We hear too many stories of bank examiners evaluating institutions based upon the number of SAR filings made at similar sized institutions to ignore the problem or pretend it is not there.

"The problem with this sort of filing is that it leads to a dilution of the value of suspicious reporting as a whole," Mr. Fox went on to say. "This type of reporting becomes less valuable to law enforcement when the reports document activity or transactions that are not indeed suspicious. It also means we have reports on transactions or activity that have no business in a government computer. The privacy implications of defensive filings are clear."

In summation, Mr. Fox cautioned the financial industry not to overreact to FinCEN's enforcement actions, and to continue with commitment to institution programs, policies, procedures and systems to protect the U.S. financial system from the abuses of criminals and terrorists.

He added that the bank regulators, through the FFIEC, are currently reviewing Bank Secrecy Act examination procedures and training, aiming at better information sharing, sharper policy guidance, and consistent exam procedures and exam training.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 9, 11/04