WASHINGTON - Defensive filing of suspicious-activity reports is becoming a growing problem in the fight against money laundering by creating a mass of paperwork and distracting law enforcement, regulators warned.
But just what can be done to resolve the problem is unclear.
William Fox, director of the Financial Crimes Enforcement Network, said Tuesday that the government must "get a better handle" on ways to deter banks that seek to avoid criticism from regulators by filing unneeded reports.
"The defensive filing of SARs frankly, in our view, is as big a failure as not filing in many respects," Mr. Fox said on a conference call hosted by the American Bankers Association. "The problem with doing that is that we get flooded with information. … It actually does distract our analytical capabilities and the capabilities of law enforcement and intelligence agencies as they try to trace down the really bad apples."
Mr. Fox and officials from the Federal Reserve Board and the Office of the Comptroller of the Currency told the call participants, estimated at more than 1,700, that bank examiners should be focused on an institution's policies for filing the reports - and not on second-guessing every individual decision.
"If what we are doing in examining is leading to the defensive filing of these reports, then we are failing and we have to figure out a better way to do it," Mr. Fox said.
Bridget M. Neill, the Fed's manager of anti-laundering policy and compliance, said that sometimes banks see legitimate exam questions on a bank's filing policies as second-guessing.
"I'd like to stress that the purpose of this step in the exam process should be a review to ensure that a process is in place, that appropriate events were flagged, and that the bank can evidence a process for investigating a flagged event and ultimate disposition," Ms. Neill said. "Unless there is evidence of systemic, obvious oversight, the decision to file a SAR in our view remains a subjective obligation of the banks."
But many bankers are worried that field examiners are still looking over their shoulders after every decision.
"There is a Washington view and there is a regional view," said John Byrne, the director of the ABA's Center for Regulatory Compliance, in a phone interview Wednesday. "The Washington view is very reasonable, very rational. But when you get out to the field, that's when you have examiners - even if it is informal - criticize a bank because the SAR filing volume has gone down. With all of these things, the better course for many institutions has been to say, 'We are going to err on the side of filing.' "
Even regulators acknowledged that the costs of not filing a report have become more serious.
"The stakes are higher," said Daniel P. Stipano, deputy chief counsel for the OCC, on the conference call. In light of the 9/11 terrorist attacks and highly publicized reporting deficiencies at Riggs National Corp., "the consequences of not getting it right are much greater and much more severe than they were previously. … We've seen an increasing trend to the criminalization of SAR failures - where banks have been convicted or pled to criminal charges based on failures to file SARs."
But Mr. Stipano also emphasized that "we are not interested in turning the exam process into subjective second-guessing."
So what is a bank supposed to do?
Ms. Neill said that one way banks can help prevent second-guessing from examiners is to ensure they have an adequate explanation of any decision to file or not file a report after detecting and investigating unusual activity.
The Fed has found banks that "may be clearing exceptions without providing an explanation," Ms. Neill said. "We are looking for a process that provides an explanation of decision. We're not second-guessing the decision, just looking for it."
Mr. Stipano said banks should also make sure there is a commitment to the prevention of money laundering and that it starts at the very top.
"We've seen in the past some institutions have attempted to do Bank Secrecy Act compliance on the cheap, viewing it as a cost but nothing more," he said. "If ever there was a time you could get away with that, I think that time is past."
