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Banks and other financial institutions are hoping for some relief this summer from what has become a costly, risky, and burdensome legal obligation-the filing of Suspicious Activity Reports on money transactions that could fund illegal and terrorist activities. The Bank Secrecy Act requires banks, thrifts, bank holding companies (including nonbank subsidiaries), broker-dealers, credit unions, and other financial institutions to report suspicious activity above certain dollar thresholds that may involve money laundering or other illicit activities. Suspicious Activity Reports, or SARs, have existed since 1996. But with the terrorist attacks of September 11, 2001, and the passage of the USA Patriot Act, regulators and law enforcement have increased their focus on those reports and the entire reporting system, according to a number of counsel for the financial community. That increased scrutiny, combined with recent multimillion-dollar penalties levied upon banks that failed to file SARs, has created a flood of defensive SAR filings that threaten to undermine the goal of the reports, according to federal regulators and bank counsel. “Our bank counsel are saying, if it looks and smells just the least bit, file. File early, and file often,” says John Hall, a spokesman for the American Bankers Association. And the banks are not alone. Also required to file Suspicious Activity Reports with the Financial Crimes Enforcement Network (FinCEN), which administers the Bank Secrecy Act, are casinos, card clubs, and money services businesses, as well as certain segments of the securities and futures industries. All of the anxiety has meant a 453 percent increase in national SAR filings since 1996, says Richard Whiting, executive director and general counsel of the Financial Services Roundtable, which represents 100 of the largest financial services companies providing banking, insurance, and investment products and services. In particular, fines levied against two banks for SARs-related lapses caused concern on the part of the banking industry that “this was now open season,” says Robert Rowe, regulatory counsel to the Independent Community Bankers of America. “I have reassured bankers in presentations that there were serious problems [in those cases] and that this was not a case of zero tolerance or a game of �gotcha’. But banks are very concerned, so there’s a tendency to overreport.” Those who believe the current reporting system is not working say that they have found a sympathetic ear at FinCEN. Financial Services Roundtable filed a petition with FinCEN two weeks ago seeking more guidance on the filing of SARs, as well as requesting “safe harbor” protection from criminal liability for institutions that fail to file an SAR on a money transaction but meet and follow minimum standards for compliance. The roundtable’s petition is the latest in a series of recent actions and comments by representatives of financial institutions concerned about the suspicious activity reporting system. “I think we’ve reached a tipping point here,” says Whiting. “Even regulators agree that what the system was designed to achieve-pinpointing transactions with a high probability of impermissible activity-is not so easily achieved with the number of SARs being filed.” Defensive SAR filings are a “major concern” at FinCEN, confirms agency spokeswoman Ann Marie Kelly. “We don’t want to see defensive filings.” FinCEN director William Fox recently wrote in an agency publication: “While the volume of filings alone may not reveal a problem, it fuels our concern that financial institutions are becoming increasingly convinced that the key to avoiding regulatory and criminal scrutiny under the Bank Secrecy Act is to file more reports, regardless of whether the conduct or transaction identified is suspicious. These �defensive filings’ populate our database with reports that have little value, degrade the valuable reports in the database, and implicate privacy concerns.” The solution to defensive filings, he added, is a clear, consistently applied reporting policy. FinCEN’s Kelly says help is on the way, with material to be issued this summer that’s aimed at providing uniform procedures. “There really is a war on terror behind all of this,” says Rowe, of the Independent Community Bankers of America. “The financing element is an important part of it, but trying to get a handle on it isn’t easy.” A version of this story originally appeared in The National Law Journal, a sibling publication of Corporate Counsel.

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