SARs Do Not Need to Be Filed At the First Sign of Potential Problems
Honoring “Keep Open” Letters from Law Enforcement Should Not Lead to Criticism
On January 19, 2021, the Financial Crimes Enforcement Network (FinCEN), along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration jointly published Answers to Frequently Asked Questions Regarding Suspicious Activity Reporting and Other Anti-Money Laundering Considerations. The agencies provided answers to certain frequently asked questions (FAQs) in an effort to (1) clarify for financial institutions the regulatory requirements related to Suspicious Activity Reports (SARs) that they must comply with; and (2) help financial institutions focus their resources on Bank Secrecy Act (BSA) reporting activities that provide the most value to law enforcement.
The banking agencies developed these FAQs in response to recommendations made by the Bank Secrecy Act Advisory Group, which are detailed in FinCEN’s Advance Notice of Proposed Rulemaking on Anti-Money Laundering Program Effectiveness published in September 2020. Notably, the FAQs do not change existing legal obligations or create new regulatory requirements. Instead, they address several questions that have emerged among anti-money laundering compliance personnel. Generally, they are helpful and make clear that a decision to file a SAR in a particular case is driven by specific circumstances and good judgment, rather than a rigid “check the box” mentality.
Key guidance includes the following:
- Financial institutions may – but are not required to – maintain a customer relationship after receiving a request from law enforcement to keep that customer’s account open as part of an investigation into suspicious or illegal activity. The FAQs emphasize that financial institutions “should not be criticized solely for [their] decision to maintain an account relationship at the request of law enforcement or for [their] decision to close the account.” When they decide to keep such accounts open, financial institutions still must comply with all applicable BSA regulations.
- Financial institutions are not necessarily required to file SARs or take any specific action after receiving a law enforcement inquiry, such as a grand jury subpoena. They should instead determine whether a SAR is warranted based on an evaluation of all available information and the applicable regulatory requirements. However, receipt of a grand jury subpoena should “cause a financial institution to review relevant account activity and transactions.”
- Financial institutions are not required to terminate customer relationships after filing one or more SARs on a particular customer. They should instead apply a risk-based approach to decide whether to maintain or terminate such relationships. This approach should consider all relevant information about the customer and its activity, including the customer’s risk profile and geographic location, the volume and type of transactions conducted by the customer, the type of account, and the types of SARs filed on the customer. Financial institutions should also provide and maintain escalation protocols to facilitate review by senior management and legal staff.
- Financial institutions are not required to independently investigate every negative news alert if the alerts are based on the same underlying event.
- Financial institutions do not need to repeat information in a SAR narrative that is provided in other SAR data fields. They are instead encouraged to include in the narrative information about the suspicious activity that is not clear from the SAR data fields alone, such as an explanation about why certain characterizations of suspicious activity were selected in the SAR data fields.
- Financial institutions should not file additional SARs on the same suspicious activity simply because the narrative exceeds the SAR narrative character limit. They should instead include any relevant additional information as an attachment to the SAR.
Honor “Keep Open” Letters from Law Enforcement?
We focus here in particular on the first FAQ noted above, regarding “keep open” letters from law enforcement, which can be particularly difficult for financial institutions to assess. Law enforcement officials who are investigating an individual or entity which maintains an account at a financial institution sometimes send “keep open” letters to the financial institution, requesting – but not requiring – the institution to keep the account open. Law enforcement does this because they know that if the financial institution becomes aware that a customer is using an account to potentially commit a crime, the institution often will close the account – which may impair an ongoing investigation by law enforcement (often, law enforcement wants an account to remain open specifically because it is running an undercover investigation, and wants to collect as much incriminating evidence as possible against the target – sometimes without thought as to the harm that the target may continue to inflict on his victims). Although financial institutions often want to honor the wishes of law enforcement, such letters can create a predicament for an institution because it puts the institution on notice that a customer might be using the account to commit a crime. Such knowledge, coupled with continued use of the account, can create issues for the institution with regard to its regulator, or, more likely, any third-party targets of the customer’s illegal conduct (for example, investors being defrauded by the customer’s scheme).
The FAQ is definitely helpful, although it does not necessarily solve the full predicament. The language stating that financial institutions “should not be criticized solely for [their] decision to maintain an account relationship at the request of law enforcement or for [their] decision to close the account” is directed to regulators. FinCEN is not thinking about private parties. Although the FAQ may give solace to financial institutions when they are being examined later by their regulator for BSA/AML compliance, potential private plaintiffs who feel that they were defrauded by a customer whose account was held open at the request of law enforcement may have their own agenda, rightly or not. Nonetheless, the FAQ underscores that “hold open” letters from law enforcement can put financial institutions in a difficult position, and that decisions to honor such requests – often made for very good reasons – should not redound to the harm of the institution.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.