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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 Sept. 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 focus, 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,” said John Hall, a spokesman for the American Bankers Association. Since 1996, national SAR filings have increased 453 percent, said Richard M. 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. SYSTEM NOT WORKING? Whiting and others believe the current reporting system is not working, and, they say, they have found a sympathetic ear at the Financial Crimes Enforcement Network (FinCEN), which administers the Bank Secrecy Act. The 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 that meet and follow minimum standards for compliance. “I think we’ve reached the tipping point here,” said Whiting. “There’s that old saying about not seeing the forest for the trees. You can’t see the forest here not only because of the trees but the hundreds of thousands of leaves on the ground. I think there’s agreement even with regulators that what the system was designed to achieve — to pinpoint transactions with a high probability of impermissible activity — is not so easily achieved with the number of SARs being filed.” 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. And the banks are not alone. Also required to file SARs with FinCEN are casinos and card clubs, money services businesses and certain segments of the securities and futures industries. As of June 30, 2004, more than 1.8 million SARs had been filed with FinCEN. Defensive SAR filings are a “major concern” at FinCEN, said agency spokeswoman Ann Marie Kelly. “We don’t want to see defensive filings.” Last month, FinCEN director William Fox, in an agency publication, wrote: “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, was a clear policy on reporting combined with consistent application of the policy. But, he conceded, “such consistency continues to be elusive.” The reasons for defensive SAR filings are fourfold, according to some bank counsel. Financial institutions fear criminal prosecution for failing to file. In May 2004, Riggs National Bank in Washington was fined $25 million by federal regulators and another $16 million in criminal penalties by the Department of Justice for failing to report a series of suspicious money transactions. AmSouth Bank of Birmingham, Ala., also was fined $10 million by regulators and $40 million by the Justice Department. “There was a big concern on the part of the banking industry that this was now open season,” said Robert Rowe, regulatory counsel to the Independent Community Bankers of America. “I have reassured bankers in presentations that there were serious problems with Riggs and AmSouth and 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,” he added. NO CLEAR STANDARDS Defensive filings have skyrocketed also because there are no clear standards for when an SAR should be filed, according to Rowe and others. “We feel the regulators didn’t give us enough guidance,” said Hall of the American Bankers. “Our industry is used to functional regulation, with much more specific guidance.” There is also a belief that some examiners have a “zero tolerance” policy toward the banks, holding the institutions accountable for every transaction. And finally, because multiple agencies have overlapping jurisdiction, there are duplicate requests for information and filings. FinCEN’s Kelly said an interagency guidance will be issued this summer covering examination procedures. “It will cover the filing of SARs,” she said, adding, “And it’s aimed more at providing uniform and consistent examination procedures. That’s been a concern among a number of financial institutions.” Rowe, Whiting, Hall and others said that their groups are working closely with FinCEN, the Treasury Department and law enforcement to try to resolve the SAR problem. “They want to keep the dialogue going,” said Rowe. “There is really a war on terror behind all of this. The financing element is an important part of it, but trying to get a handle on it isn’t all that easy.”

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