Suspicious Activity Reports: Why They Matter
The Bank Security Act (BSA) states that financial institutions have an obligation to aid law enforcement in identifying suspicious financial transactions through what is known as a Suspicious Activity Report (SAR). As banking agencies note, SARs are key in unveiling money laundering, terrorism, terrorist financing, and other crimes involving finance. The BSA ensures that SARs and any information pertaining to the existence of a SAR are confidential and are not to be disclosed by banks unless extenuating circumstances exist.
Banks utilize numerous methods to identify potentially suspicious activity, such as activity identified by employees during day-to-day operations or transaction and surveillance monitoring system output. However, civil litigants have recently begun requesting SARs, and some courts have thus required banks to produce material related to internal investigations of suspicious activity.
Most recently, in the case of Wultz v. Bank of China the court refused to protect the confidentiality of SAR materials because “investigatory documents do not by themselves reveal the existence of a SAR.” Further, the court expressed a desire to only protect “evaluative” documents pertaining to client information.
The lines with SAR, such as what is considered substantial evidence and what information is allowed to be disclosed, continue to blur. In March 2012, the Financial Crimes Enforcement Network (FinCEN) stressed the importance of legal counsel respecting the confidentiality of SARs, due to concerns that an increasing number of private parties who are unauthorized to view SARs are seeking the reports from financial institutions. Unauthorized legal counsel is not allowed to request or view SARs, even for litigation purposes.
The disclosure of SAR material can have negative consequences. FinCEN cited these as important policy justifications for maintaining the confidentiality of SARs as well as information pertaining to the discovery of a SAR. In a recent report, Katrina Carroll of Wilmer Hale LLP outlined the following policy justifications:
- disclosure could compromise ongoing investigations
- disclosure could discourage banks from filing SARs or from cooperating with law enforcement
- banks will over-prioritize their client relationship, failing to file SARs
- a SAR might provide insight into the bank’s process for uncovering criminal conduct
- personal and confidential information could be jeopardized in disclosure
- disclosure might make financial institution employees targets of exposed financial criminals
Given all of this, it is imperative to know who is authorized to handle or request SARs. Financial institutions are allowed to share all relevant SAR information with agents of the bank, law, or consulting firms for the bank, parent financial institutions, and domestic affiliates. Foreign affiliates are not permitted to handle SARs. The Department of Justice and federal law enforcement agencies may request SARs, but one should always be cautious when state law enforcement does so.
Financial institutions, directors, officers, employees, or agents who receive requests to disclose SAR materials to an unauthorized entity must refuse the request and notify FinCEN of the request and subsequent refusal. Banks must also notify their primary federal regulator. Legal counsel is considered an agent and will be subject to the same protocol. Unlawful disclosure of a SAR often has dire consequences, including federal criminal charges. If someone knows of an unauthorized disclosure of a SAR, he or she should also contact FinCEN.
When handling SARs, legal counsel should be sure to establish protocols and include SAR handling instructions in dealing with third parties or contractors. Always avoid creating physical copies of SARs and keep electronic copies restricted, password protected, and segregated.
For more resources on SARs, visit FinCEN’s website, www.fincen.gov, which includes the Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative, The SAR Activity Review – Trends, Tips and Issues, and an abundance of further literature.