83 BBR 665 Page 1. BNA's Banking Report News November 1, 2004

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1 83 BBR 665 Page 1 BNA's Banking Report News November 1, 2004 MONEY LAUNDERING: IN AGE OF 'ZERO TOLERANCE' BANKS, AGENCIES LOOK TO STRIKE BALANCE ON PROPER SARS FILING Already among the most difficult aspects of banks' anti-money laundering obligations, the stresses for compliance officials in submitting Suspicious Activity Reports have intensified with recent reports of high-profile civil and criminal actions against banks that failed to file such documents properly. Concerns about bank regulators' "zero tolerance" approaches to SAR filing were front and center in an American Bankers Association/American Bar Association conference Oct in Arlington, Va., as policy makers, examiners, and bankers sought to iron out their differences. Since the events of Sept. 11, 2001, bank regulators have become more adamant about the need to protect the U.S. financial services system against money launderers and terrorism financiers. A money laundering scandal that unfolded earlier this year at Riggs National Bank and an even more recent criminal action against AmSouth Bank of Birmingham, Ala., formed the backdrop for an increasingly strained dialogue on the roles of examiners and the responsibilities of compliance officers. Riggs in May agreed to pay a $25 million penalty based in part on failure to file SARs (82 BBR 865, 5/17/04). AmSouth signed a $40 million forfeiture agreement in October with the United States Attorney's Office for the Southern District of Mississippi in connection with its failure to file SARs in matters involving fraudulent activities by its customers (83 BBR 600, 10/18/04). One of the panelists at the conference, Ian M. Comisky of Blank Rome LLP, Philadelphia, said that shortly after the Riggs problem came to light "examiners got called up on [Capitol] Hill" and faced tough congressional questioning about how they could miss SARs violations by a prominent Washington, D.C.-based bank. "In the post-riggs era examiners feel that for whatever reasons, the examination requirements need to be more rigorous and the sanctions need to be more rigorous than before," Comisky said. Banking experts note that SARs filing is fundamentally different from other components of banks' overall responsibilities under the Bank Secrecy Act and the aggressive new requirements included in the USA PATRIOT Act, which Congress passed shortly after the Sept. 11 attacks to catch terrorist financiers if they use the U.S. banking system. Banks can meet other BSA requirements, such as new account-opening procedures with relatively straightforward compliance functions, said Peter Djinis, a lawyer specializing in anti-money laundering compliance issues and a panelist at the conference. But SAR filing involves quasi-law enforcement techniques, subjective judgments about transactions, and sometimes intimate knowledge about certain customers. The Treasury Department's Financial Crimes Enforcement Network, which tracks SARs, has reported that from time the filing requirement took effect in April 1996 through the end of 2003, 1,278,716 SARs have been filed by depository institutions. FinCEN also noted that the number of SARs filed has grown from 81,197 in 1997, the first full filing year, to 288,343 in 2003.

2 83 BBR 665 Page 2 During the conference, William J. Fox, director of FinCEN, highlighted "defensive filing" of SARs as a concern in recent months. "We all know this phenomenon is occurring--we have both empirical and anecdotal evidence we can cite," Fox said. "We have seen financial institutions file [SARs] in ever increasing numbers--often upon the recommendation of their lawyers or risk management teams" even when circumstances do not justify such filings. Bankers have suggested that at worst SARs simply provide the government with too much information, Fox said, noting that, "It is true that we can handle the storage, and maybe even the filtering of additional information. Computer memory is fairly cheap these days, and we are developing technological tools that should allow us to separate the wheat from the chaff." Dilution of SARs' Value. But Fox also cautioned that defensive SARs filing "leads to a dilution of the value of suspicious reporting as a whole." Recent enforcement actions such as AmSouth, "are raising the stakes of noncompliance in a way that perhaps send the wrong message to the industry as a whole," Fox said, noting that it occurred at the same time FinCEN and the Federal Reserve Board were taking measures against the bank's anti-money laundering programmatic failures. "Without commenting on this particular case, I have very serious concerns about what appears to be a trend to criminalize behavior designed to be governed by civil standards," Fox said. In a subsequent panel discussion on anti-money laundering enforcement issues, Lester M. Joseph, principal deputy chief of the Justice Department's Asset Forfeiture and Money Laundering Section, acknowledged Fox's comments in regard to AmSouth. "I've had to modify my remarks in the past few minutes since Bill [Fox] spoke this morning," Joseph said. Four Criminal SARs Cases. Joseph said AmSouth is the fourth bank that has faced criminal action based on failure to file SARs. The other three included Broadway National Bank, New York (2002); Banco Popular, Puerto Rico (2003); and Delta National Bank and Trust Company, New York (2003). In discussing the action against AmSouth, Joseph said the problem in that instance was a systemic failure to establish an adequate system for filing SARs when the situation warranted it. "Now we can have a discussion as to the appropriate role of criminal prosecution in enforcing bank regulatory schemes and there's always room for better coordination between the Department of Justice and the federal regulators," Joseph said. "But I want to make something clear: prosecutors do not go after banks looking to charge them with these offenses and prosecutors do not routinely target banks to detect violations of this sort."

3 83 BBR 665 Page 3 He noted that the cases of Broadway, Banco Popular, and AmSouth "came to the attention of prosecutors as a result of the investigation of serious criminal activities." Joseph said Broadway and Banco Popular also involved "outrageous amounts of drug money going through these institutions." Defending Justice's actions in regard to the four banks, Joseph said, "I don't think that anyone can argue that these four cases that have been prosecuted have not been serious cases and hopefully no one will believe that the conduct of these four institutions represents... acceptable standards in the industry." Joseph said he agreed with Fox that excessive SARs filing is a serious issue but he contended that the four criminal actions could not be blamed for the defensive posture of banks in their BSA compliance activities. Lessons From Riggs. Daniel P. Stipano, deputy chief counsel at the Office of the Comptroller of the Currency, said regulators, as well as banks, can learn lessons from the Riggs case. "While the bulk of the corrective action that is taken in the BSA area will be taken seamlessly through the supervision process, through informal actions, there comes a time when if problems are so severe and bank management fails to correct problems that are brought to their attention, then we have to use enforcement remedies. And we have a pretty awesome arsenal of remedies at our disposal." Stipano said Congress has mandated that if a bank has an inadequate BSA compliance program in place or fails to correct compliance deficiencies, regulators must use their cease and desist authority to correct the problems. However, the banking agencies have followed internal guidance in determining how to enforce the law and will soon issue revised guidance, he said. As an example, he said, a cease and desist order may be issued if a bank fails to have an adequate BSA compliance program in place or has a "paper" program on the books that it fails to implement. Another situation requiring a regulatory action could occur when "deficiencies are flagged in a bank's program that are coupled with aggravating factors, like evidence of money laundering or widespread structuring or pervasive and systemic recordkeeping and reporting violations. A combination of deficiencies with aggravating factors will result in a cite and a cease and desist order." Future guidance also will focus on repeated citations of the same deficiencies and violations, as well as on banks with a history of violations, even if they are for different weaknesses in their BSA programs, Stipano said. Although the examination procedures will tend to seek out examples of continuing or repeated violations, Stipano said, a single violation also may result in a citation if it is "sufficiently egregious." Stipano also referenced his agency's concerns about dealing with banks' decisions in filing SARs. Since the SARs system was introduced less than a decade ago, he said, it "was never designed to be a 'gotcha game.' "

4 83 BBR 665 Page 4 SARs Designed to Get Information. SARs were intended simply to get information into the hands of law enforcement officials, Stipano said, adding that, "I do worry sometimes that there may be some in the government who don't look at it that way, and I think if that's true, that's a very unfortunate trend." The process of filing SARs involves subjective judgments on the part of bank officials and therefore "we're not that interested in focusing on isolated SAR failures. What we are interested in is situations where the whole system doesn't work or where the bank doesn't have a program in place to comply with the BSA." Stipano said some of the recent scandals involving failures to file SARs could be considered "misnomers" because they really involved much larger money laundering violations. "The convenient plea to cop to is a criminal violation of BSA. Criminal failure to file SARs is part of BSA, so it makes it look like, you know, you're being dinged for not filing SARs, when in fact the problems were really much greater than that." A new trend in the area of BSA compliance that banks must take into account, Stipano said, is that more government agencies are involved today than in the past. "There are a lot of stakeholders here," Stipano said. "That has a number of ramifications. One is that we as regulators have got to be mindful that we are not the only players here. There are other players involved as well and we need to be able to coordinate with them; share information. To be really effective, that's the only way we can operate." Following the panel presentations, John Byrne, director of the ABA's Center for Regulatory Compliance, drew applause from the audience made up largely of compliance officers when he said he agreed with Joseph that the prosecutions were not the primary cause of defensive SARs filings. "I don't think that's why it's happening," Byrne said. "Why it's happening is in part the examiners' overreacting to the enforcement action and criticizing the banks. And that combination has led us to where we are today." Byrne serves as a co-chair of a subcommittee of the Bank Secrecy Act Advisory Group that deals with examinations. Byrne told BNA Oct. 28 that "part of what we are working on are recommendations on trying to improve consistency. One of the elements of that is the interagency exam procedures." That group's suggestions will make up part of the input used by an interagency effort to revise examination procedures. Bridget Neill, manager of the Anti-Money Laundering Policy and Compliance Section of the Federal Reserve Board, serves as co-chair with Byrne on the advisory group's subcommittee. She announced at the conference that the new examination procedures should be issued in the spring of Djinis told BNA Oct. 29, "I think that just issuing new procedures alone will not be sufficient if there is not also a companion effort to provide the kind of state-of-the-art training to examiners--in other words, contemporaneous training--as to what does constitute a significant criminal threat or terrorist threat."

5 83 BBR 665 Page 5 Like Byrne, Djinis underscored the need for "consistency in interpretations of the anti-money laundering rules that are in effect today." Byrne said the two most important things banks need to emphasize in their SARs filing procedures are: "documentation and training. Make sure you do what you say you're doing. Make sure your program reflects what you're doing. Don't have it in a nice three-ring binder that never gets taken off the shelf. That will get you in trouble." 83 BBR 659 By Richard Cowden END OF DOCUMENT