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A law that requires banks to report suspicious activities to authorities has turned into a legal headache for the banking industry, which has been hit with lawsuits and hefty fines in recent years over its reporting practices. Most recently, BankAtlantic BanCorp Inc. in Florida was hit with a $10 million fine last month for failing to report suspicious activity properly-one of several banks to pay multimillion-dollar fines in the last year. And on the litigation front, a South Dakota woman is suing First American Bank & Trust, claiming that the bank intentionally gave authorities false information about her to get her in trouble. Kloster v. First American Bank & Trust, No. 05-3202 (Minnehaha Co., S.D., Cir. Ct.). The lawsuit-one of about two dozen such cases filed in the last decade-faces a unique challenge: convincing a court that banks should not automatically be immune from lawsuits over what they report to authorities. “It’s outlandish what banks can do . . . .[Congress has] deputized bankers to report what bankers think is suspicious activity whether it is or not-and there’s an attempt to grant banks total immunity no matter what they say,” said Mark Meierhenry, a partner at Danforth & Meierhenry in Sioux Falls, S.D., who is representing the plaintiff in the South Dakota lawsuit. ‘Defensive filing’ But the banking industry is on edge about reporting suspicious activity, noted John Hall, spokesman for the American Banking Association. He said that in recent years, banks have engaged in “defensive filing” of suspicious activity, hoping to avoid the multimillion-dollar fines that were levied against several other banks for failing to report. “When those fines came down, it certainly was a wake-up call to many bank compliance officers to seek out more guidance on when to file a suspicious activity report,” Hall said. “Because the knee-jerk reaction is to file early and to file often.” But the public should be aware of what is going on, argued Meierhenry, who claims that banks can secretly report false information about customers, without fear of consequences. That’s at the heart of his lawsuit, which revolves around a 1996 federal rule that requires banks to file Suspicious Activity Reports (SARs) about employees and customers with the Financial Crimes Enforcement Network (FinCEN). According to FinCEN, banks are required by law to keep secret any SAR filing. Banks are also granted immunity from civil suits in exchange for information that they turn over-a protection that has been upheld by a handful of courts, but rejected by others. For example, in 1999, in Lee v. Bankers Trust Co., 166 F.3d 540, the 2d U.S. Court of Appeals gave bankers an unqualified privilege in reporting suspicious activity, holding that disclosures on customers and bank employees can be made without a good-faith belief, and banks are still protected. But in 1997, in Lopez v. First Union National Bank, 129 F.3d 1186, the 11th Circuit held that in order to qualify for immunity, banks must have a good-faith belief or suspicion that a law has been violated before filing an SAR. And in 2002, in Bank of Eureka Springs v. Evans, 109 S.W.3d 672 (Ark. 2003), the Arkansas Supreme Court held that if a suspicious report is made in bad faith, then protection is not granted. The ‘automatic’ issue Meierhenry argues that immunity should not be automatic, particularly when reports are made in bad faith, which he alleges happened in the South Dakota suit. In that case, according to court records, the plaintiff, Audrey Kloster, alleges that First American Bank & Trust filed an SAR on her out of anger. Kloster had left her job at the bank to work for a competitor. Kloster initially faced criminal charges, but they were dismissed. She is now suing the bank for defamation. Tom Welk of Boyce Greenfield Pashby & Welk in Sioux Falls, S.D., who is defending First American Bank & Trust, denied allegations in the complaint, but would not comment further on the case. According to FinCEN, more than 1.9 million SARs have been filed over the last decade by banks. The numbers have skyrocketed over the years, from 62,388 in 1996 to 381,671 in 2004. Florida Attorney Clemente Vazquez-Bello, who has been counseling banks for 20 years and specializes in bank secrecy act/anti-money laundering compliance, strongly supports granting banks broad immunity when it comes to filing SARs. The information must also remain confidential, he stressed. “The secrecy of the SAR and the safe harbor against lawsuits is absolutely essential for the suspicious-activity function to be effective and for it to really work,” said Vazquez-Bello.

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