WASHINGTON - The dramatic rise the industry had predicted in bank suspicious activity reports - most of them filed because of fear of regulatory scrutiny - did not materialize last year, according to preliminary data from the Financial Crimes Enforcement Network.
Depository institutions filed 552,354 such reports last year, well short of predictions that they would top 1 million. The growth rate from a year earlier, 5.7%, was also far below that of previous years; filings jumped 37% in 2005 and 32% in 2004.
Some industry observers said the new data suggested that "defensive" filings are leveling off as institutions become more comfortable with what activities should be reported to the government. But others said defensive filings remain a problem.
"It's probably too early to tell if what appears to be a slowing of the rate of growth is a trend or just a lull," said Richard Riese, director of the American Bankers Association's Center for Regulatory Compliance. "I still believe the numbers are a mix of banks identifying things about substantive crime threats and what has been termed defensive filings, items you're not sure about but don't want to be second-guessed."
According to the preliminary figures, which Fincen provided at American Banker's request, depository institutions filed an average of 46,030 SARs a month last year, compared to an average of 43,555 in 2005. A record 52,414 reports were filed in March, beating the previous record of 51,248 set in November 2005.
Fincen cautioned that the numbers could rise as the agency continues to process paper filings. However, it does not expect the totals to increase significantly.
The agency first warned in late 2004 that banks were filing defensively. After a $41 million fine was levied on Riggs National Corp. and AmSouth Bancorp. was charged $50 million of fines, in part for failure to file SARs, bankers reacted by filing more reports than ever. But Fincen officials said many of the filings, for activity that should not be considered suspicious, were gumming up the system with unimportant information.
A Fincen spokesman said it hopes the new data could mean the problem has gone away.
"Although there may be different variables in play, we hope this demonstrates that … there is less confusion and more consensus about what constitutes suspicious activity," the spokesman said.
Robert Werner, who stepped down as Fincen's director at yearend for a job in the private sector, told reporters in October that defensive filings were no longer an issue.
Some observers - while not quite in agreement with Mr. Werner - said the data likely proved regulators were having some success in at least stopping the growth of defensive filings.
"The number still has an element number of defensive filings but it represents that regulators have had some impact," said Gilbert Schwartz, a former Federal Reserve Board attorney, who is now a partner at Schwartz & Ballen LLP.
Robert Serino, a former deputy chief counsel at the Office of the Comptroller of the Currency and now counsel at the Washington law firm Buckley Kolar LLP, said bank examiners are looking increasingly at the quality of SARs, not just the number a bank files.
That shift might discourage some defensive filing, Mr. Serino said.
"There are two countervailing issues," he said. "The one is banks don't want to be second-guessed by examiners, so banks just file. The other is, 'If we file, examiners could scrutinize what we are filing.' "
Bankers are also absorbing regulatory guidance released on the subject in June 2005 by the banking, thrift, and credit union regulators in an anti-laundering examination manual, Mr. Serino said.
"Banks are more sophisticated every day by things like the manual and by things like examiners' criticism," he said.
But Mr. Riese said that even though the manual helped, he is not sure banks have found a new confidence level in when to report SARs. Adding to their confusion, regulators continue to spotlight different areas of concern, including mortgage fraud, a trend that could increase defensive filings, he said.
"There continues to be a unending amount of government alerts to different types of potential suspicious activity. That adds to the notion that there's always more to be sensitive to," Mr. Riese said.
Peter Djinis, a lawyer in Sarasota, Fla., and a former Fincen official, said that even though defensive filings may not be increasing, he suspects the practice has become institutional, and that he would like more focused instructions on the kinds of activities that would be more indicative of criminal activity.
Banks, thrifts, and credit unions alone file hundreds of thousands of reports each year, but the number of prosecutions using SARs is relatively small, Mr. Djinis said. "There is a huge disparity between the criminal enforcement cases brought each year and the number of reports filed by financial institutions."
Reginald Brown, a former White House counsel, who is now a partner at Wilmer Cutler Pickering Hale & Dorr LLP, agreed it is hard for banks to see how their SAR data is useful to law enforcement agencies.
"It is still very unclear how the ever-increasing information going to the government is being used," he said. "More work remains to be done to make the standards for filing clearer, and to provide the industry with adequate assurances that outsized penalties won't be assessed for isolated and nonsystemic failures to file."
But Mr. Brown said regulators are continuing a dialogue with banks about how to address industry concerns.
Regulators have also taken steps to make filing easier. To reduce duplicate reports, last month they released a final revision of the SAR form for joint filings. The revised form would let holding companies report on behalf of multiple financial institutions that handle a single transaction they deem suspicious. Unaffiliated institutions noticing the same suspicious activity also could file a joint report. The change will take effect June 30.