WASHINGTON - The Financial Crimes Enforcement Network is renewing its plea to bankers to stop the defensive filing of suspicious-activity reports, and this time it is armed with fresh statistics that strengthen its case.
Banks submitted an average of 36,000 reports a month in the six-month period that ended March 31 - much higher than previous levels, according to preliminary data Fincen gave American Banker on Thursday.
Last month banks filed a record 43,469 reports - 40% more than a year earlier and 16% more than the month before. In the first eight days of April banks filed 8,223 SARs - more than in any one month for the first two years after the reports were mandated in 1996.
William Fox, Fincen's director, was expected to say in an agency analysis of filing trends that to avoid prosecution or penalty, banks have begun filing reports on customer activities that are not even unusual.
"We estimate that if current filing trends continue, the total number of suspicious-activity reports filed this year will far surpass those filed in previous years," Mr. Fox wrote in the SAR Activity Report, scheduled to be released today.
"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. … If this trend continues, consumers of the data - law enforcement, regulatory agencies, and intelligence agencies - will suffer," he wrote.
Filings have been picking up for several years but jumped noticeably after October, when AmSouth Bank was hit for failure to file SARs and fined $40 million by the U.S. Attorney's Office for the Southern District of Mississippi. Critics said the Justice Department was unfairly prosecuting a regulatory violation, and that banks would seek to avoid such fines by flooding regulators with reports on minor matters.
Before October banks had filed more than 35,000 SARs only once. But their filings did not dip below that point from November through March, and they set records in all but one of those months.
The numbers put to rest arguments by some that the evidence of defensive filing was anecdotal, and that banks did not respond as a group to cases like AmSouth's.
"This is dramatic evidence that we and Bill Fox have been pointing to for the past six months - and that is the rapid filing of SARs due to fear, confusion, and lack of guidance," said John Byrne, the president of the American Bankers Association's Center for Regulatory Compliance. "There is a clear correlation between the rapid rise in SARs and the announcements of several consent orders."
Fincen's report included a breakout of data that indicate banks are detecting more activity that could be terrorist financing. It said 2,175 reports related to possible terrorist activity were filed from April 1, 2003, to June 30, 2004. Of those, 1,014 were by banks and other depository institutions.
SAR filings on possible terrorist activity spiked in the fourth quarter of 2001, then fell steadily over the next year. But since the first quarter of 2003 such filings have risen each quarter.
Fincen was more complimentary about practices in this category. It said that two depository institutions were responsible for 38% of bank filings on possible terrorist financings between April 1, 2003, and June 30, 2004. Fincen said both institutions - which it would not name - filed "comprehensive, proactive reports that clearly articulated the factual basis for suspecting illegal activity."
The activity report said 20% of bank filings on possible terrorist activity were in response to law enforcement inquiries, matches of customer names with the Office of Foreign Assets Control's sanctions list, and news articles. Fincen said the rest were considered "proactive," meaning they were made as a result of the banks' own investigations.
That contrasted sharply with the filings immediately after the Sept. 11 attacks, which Fincen said were mostly a result of law enforcement inquiries.
The agency said 28% of all filings on possible terrorist activity were the result of foreign wire transfers. It has formed a working group to investigate requiring data on certain international transfers to be made available to law enforcement officials automatically.
Fincen's report also offers guidance for banks that receive national security letters - written demands from the FBI in counterterrorism investigations. Fincen said receiving such a letter does not necessarily mean a bank should file a SAR, but that it should be taken into account.
If a bank does file a report, Fincen said, it should not mention the national security letter but only the underlying facts and analysis about the suspicious transaction.
