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First Circuit Examines Compliance Requirements Under Bank Secrecy Act

Federal law - specifically a section of the Bank Secrecy Act (31 U.S.C. § 5318(g)) (the "Act") and related regulations - requires financial institutions both "to report any suspicious transaction relevant to a possible violation of law or regulation" and forbids those institutions, government officials, and others from "notify[ing] any person involved in the transaction that the transaction has been reported."  31 U.S.C. § 5318(g).  

Except as authorized by law, banks and their employees may not disclose a suspicious activity report ("SAR") "or any information that would reveal the existence of a SAR" and further, upon service of a subpoena or other discovery device requesting disclosure of  "a SAR, or any information that would reveal the existence of a SAR, shall decline to produce the SAR or such information, citing this section and [the Act]."  12 C.F.R. § 21.11(k).  "[T]he strong public policy that underlies the SAR system as a whole - namely, the creation of an environment that encourages financial institutions to report suspicious activity without fear of reprisal" justifies such restrictions.  See In re JPMorgan Chase Bank, N.A., No. 14-8015, 2015 WL 4979594 at *4 (1st Cir. Aug. 21, 2015) (quoting Confidentiality of Suspicious Activity Reports, 75 Fed.Reg. 75593, 75595 (Dec. 3, 2010). 

Citing the SAR system, a major financial institution recently asked the Boston-based United States Court of Appeals for the First Circuit to intervene, overturn a trial court order, and prevent putative class action plaintiffs from basing their allegations on 55 pages of documents that the Bank argued were "prepared for purposes of determining [the Bank's] obligations under the Act and related regulations to report certain transactions" in litigation against the Bank stemming from a Ponzi scheme allegedly orchestrated by a Bank customer.  See In re JPMorgan, 2015 WL 4979594 at *1.  Unlike usual circumstances in which a bank resists production citing the SAR system, here the plaintiffs had previously obtained the relevant documents and "the SAR to which the relevant documents relate was placed into the public record via court filings in prior litigation and... electronic versions of the SAR reside[d] on the internet."  Id. at *6.

The First Circuit refused to grant the Bank the relief it sought.  As a preliminary matter, the Court noted that the plaintiffs, as third parties to the bank-government reporting nexus, arguably did not fall under the legal restrictions attached to the subject documents.  Id. at *5.  "[I]t would appear," the Court reasoned, "that neither the Act nor the regulations restrict third parties - that is, parties on neither the financial-institution side nor the government side of a SAR exchange - from disclosing the existence or non-existence of a particular SAR."  Id.  The First Circuit further reasoned that even without a third-party exception, prior disclosure of the relevant SAR in the public record and online diminished the chances that the plaintiffs could be capable of violating the law through disclosure.  Id. at *6.  Finally the Court held that the Bank's request was overbroad.  See id. at **6-7.  "Under the existing law and guidance... the key query is whether any of those documents suggest, directly or indirectly, that a SAR was or was not filed... none of them do."  Id. at *6.  Granting the Bank's request therefore would shield documents explicitly subject to disclosure under the law.  Id. at *7. 

Fitch Law Partners LLP regularly counsels banks with respect to Bank Secrecy Act compliance.  For more information about the firm's banking law practice, please visit our banking law page.

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