SARs & Shelters

One of the most interesting and revealing panels at the ABA/ABA conference was a discussion on Suspicious Activity Reporting, including when and how to file SARs. The panel included lawyers, examiners and bankers. The views on safe harbors and privilege from discovery were interesting - and not uniform.

To stimulate discussion and give focus to everyone's comments, the panel was based on a hypothetical fact situation. Gordon Greenberg, co-chair of the conference and coming from the lawyer's side of the ring, prepared a hypothetical that was designed to trigger debate - and it did.

The Hypothetical: Step One
A nervous bank employee expresses concern because a charity customer may be collecting funds to support terrorism. She bases this concern on the fact that the chairman of the charity said that he could understand why an oppressed people would turn to terrorism to have their voice heard.

In discussing whether these facts justified filing a SAR, there was no uniform agreement. In a world where nothing is certain, compliance isn't certain either. However, no one suggested that the situation should be ignored. When an employee, especially an employee who has contact with the customer, raises concerns, the institution should take those concerns seriously. The majority on the panel agreed that the situation should be studied and any action should be based on the findings.

The Hypothetical: Step Two
The bank has referred the situation to in-house counsel for investigation. The in-house counsel hires outside counsel to assist in the investigation. While the investigation is underway, the examiners arrive and ask an inevitable question: has the bank identified any customers engaging in suspicious transactions connected to terrorism?

Those in the discussion who favored attorney-client privilege suggested that the response could be "no" for two reasons. First, the work was subject to privilege. Second, the investigation was underway which meant that there was no conclusion to be reported. Lawyers like this kind of argument. Examiners don't. Those who want to please their examiner will tell the examiner about the situation under investigation, even if it is being handled by outside counsel.

One examiner in the audience pointed out that his question would be phrased differently. He would ask whether there are possible suspicious situations on which the bank has not filed. In short, the examiner would ask for information about any suspicions regardless of the phase of the investigation-to-filing pipeline they are in.

How good is privilege?
Lawyers are fond of asserting attorney-client privilege, or labeling material as attorney work product and therefore privileged. Most attorneys will provide institutions with advice that work should be performed under the supervision of an attorney so that the work can be privileged from discovery as attorney work product. It is a favorite approach of attorneys and it often works.

But tread carefully. Examiners take a different view of attorney-client privilege. The Right to Financial Privacy Act contains limitations to when and how the federal government and its representatives may access personal financial information of your customers. There are blanket exceptions to these protections for examiners. Basically, examiners can see anything they want, no matter how loudly the lawyers cry privilege.

The examiners are charged with determining whether the institution is doing business in a safe and sound manner, and in compliance with all relevant laws. The price of a federal charter or federal deposit insurance is the ability of examiners to see anything - including attorney-client work product. In fact, the examiners in the audience urged banks to use them as a resource. Not only is this part of the kinder, gentler regulator approach, it makes a lot of sense. Both regulators and financial institutions can learn and observe trends together.

The result of this discussion should be a warning to all compliance managers: don't rely on what your lawyers tell you about privilege. Examiners have special rights that may override the claims of privilege.

When to File
One of the panel's discussions involved the standard for filing. Some situations are clear. Any one can see that the person is "up to no good" and the SAR should be filed. Other situations are less clear, and this is where the going gets difficult.One debate is whether you have to believe that something illegal is happening before filing a SAR. At Compliance Action, we have advised you to err on the side of caution. The panelists agreed. In fact, Rick Small said that his rule is if the situation is on the fence, file.

One reason to file is to build a better database. The SAR becomes part of a data base that is used by law enforcement. This database is only as useful as the data in it. Not filing or using cautious filing criteria may result in a database with limited value.

The other reason to file is that there is a possibility of liability for not filing when the institution could have or should have identified a suspicious situation. In the post-9/11 culture of law enforcement, choosing not to file a SAR may have consequences if it prevents someone from knowing something that could have prevented a crime or facilitated an investigation.Greenberg recommends that, if, after a thorough review of a possibly suspicious situation, you decide not to file, you should document this decision. This may be your only way of getting the situation looked at without the clear vision of hindsight.

The Narrative
We have been told many times to draft complete narratives and avoid saying "see attached" when preparing SARs. When preparing your narrative, think about the reader and user. These are not bankers and other financial specialists, but law enforcement people. Using internal terms of art such as CD or MMDA may fail to communicate the necessary message.

The part of the SAR that law enforcement relies on most heavily is the narrative. This makes it the most important part of your report. Describe the incident precisely and fully. Use terms that are clearly understood by people outside of the financial institution. Most important, describe why you are suspicious. Simply describing the activity may not communicate to a non-banker what it is about the transaction that is suspicious. When you write the narrative, explain the conclusion as well as the facts so that the user understands the reason for suspicion.

You can expect law enforcement researchers to know terms like "check kiting" and "fraud." But it may be unreasonable to expect law enforcement to understand from a description of transactions why, to a banker, it is out of the ordinary.

Suppose a customer is managing accounts in a way that causes concern, such as arranging time deposits to mature at the same time. Taken together with other information, such as the identity of the depositor, this may raise concerns about terrorist financing. How should you communicate this in the SAR to alert the data user? Certainly, a simple description of opening or renewing time deposits will not set off alarms. Use the key terms in your narrative such as terrorism financing and account structuring that will pop up in a database search. Also, check all boxes that may describe the crime you suspect. Don't be shy.

ACTION STEPS

Be sure that everyone throughout the institution knows what steps to take when they become suspicious of a customer or of some banking activity.
Be sure that your BSA program includes guidance on what steps to take when the first questions about a customer are raised.
In training, emphasize how the institution is protected by filing and also point out the risks of not filing.
Review the SARs that have been filed by your institution. Look for any trends, positive or negative, in the last three years. Then consider how these SARs reveal any weaknesses in your BSA program.