This advisory is provided to inform financial institutions of the recent court decision concerning the “safe harbor” provision of the Bank Secrecy Act as applied toreports of suspicious transactions.
Protection of financial institutions from liability to customers is an essentialpart of the United States’ program for reporting suspicious activities.Congress created that protection in 1992 when it added a safe harbor fromcivil liability for reporting institutions [31 U.S.C. 5318(g)(3)] to the BankSecrecy Act (BSA). Now, in Merrill Lynch v. Green (S.D. Fla No. 952207), arecent decision applying the protection, a federal court provides strongsupport for the statute, in a situation where a securities firm voluntarilyreported a suspicious transaction.
In late 1992, Merrill, Lynch, Pierce, Fenner, & Smith (Merrill Lynch)reported to federal agents the existence of suspect funds held in one of itscustomer’s accounts. The funds were seized and approximately half thefunds were later forfeited by the customer, an alleged narcotics and goldsmuggler, under the customer’s settlement with the government.
In 1995, the customer (after beginning and voluntarily dismissing afederal civil action) sought arbitration, before the National Association ofSecurities Dealers (NASD), of a claim that Merrill Lynch was liable forcompensatory and punitive damages because it reported its suspicions withouthis knowledge and cooperated with the government. Merrill Lynchsought to enjoin the arbitration because of the BSA's statutory civil liabilitysafe harbor. The court issued a preliminary injunction staying the arbitrationon March 29, 1996, and made that order permanent on June 14, 1996.
The court’s orders confirm the broad scope of the protection against civilsuits afforded by the safe harbor provision in 31 U.S.C. 5318(g)(3).
In its order granting the preliminary injunction, the court stated that thebrokerage firm “is entitled to immunity for its initial disclosure regarding the(defendant’s) account under the safe harbor provision of the Bank SecrecyAct, found at 31 U.S.C. 5318.” The Court stated further:
"The statute prohibits financial institutions who voluntarily report asuspicious transaction to the government from notifying the personsinvolved in the transaction. Merrill Lynch complied with this provisionby abstaining from notifying Green . . . of its own suspicions regardingthe account and of the ongoing investigation by variousAmerican and British agencies."
Finally, the Court concluded, “[w]ithout presently determining its fullbreadth and scope, [that] the statute [confers] broad protection upon financialinstitutions.” In its later judgment making the injunction permanent, the courtreiterated the broad scope effect of the safe harbor:
"Pursuant to the statute [Merrill Lynch] was authorized to abstainfrom notifying defendant of its suspicions regarding the accounts andof the ongoing investigation by law enforcement authorities. The safeharbor provision confers broad protection upon financial institutions,such that the protective mantle of 31 U.S.C. 5318 immunizes theplaintiff from claims raised by the defendant."
As the Financial Crimes Enforcement Network (FinCEN) prepares rulesto expand the obligation to report suspicious activity to securities brokers anddealers and other non-bank financial institutions, it intends to write thestatutory safe harbor into those rules as well. All of this translates into thefact that the court supports the premise that the statute provides broad protectionfor financial institutions whether they file by regulation, or voluntarily,on a form, in person or even over the telephone and that there is no obligationto notifying the customer(s) involved.
The Congress and the Treasury have carefully crafted anti-money laundering laws and regulations to focus on the reporting of suspicious transactions by financial institutions. That focus recognizes that it is representativesof financial institutions, rather than law enforcement, who see the money launderers first; illicit proceeds are almost always moved through some form of financial institution. The focus also recognizes that the commercial precautions and expertise financial institutions use to protect themselves fromfraud, theft, and misuse, equips those institutions to recognize what is or is not suspicious.
Two techniques for recycling funds along the border have been identifiedby law enforcement officials.
For a suspicious transaction reporting regime to be effective, however,financial institutions and their customers must be able to rely upon the confidentialityof the reports, and financial institutions must be protected fromcivil liability to persons about whom reports are made. FinCEN and the fivefederal financial supervisory agencies (Federal Deposit Insurance Corporation,Federal Reserve Board, National Credit Union Administration, Office ofthe Comptroller of the Currency, and the Office of Thrift Supervision) that now require reporting of suspicious activity reports by depository institutions, confirmed the importance of these protections in final rules issued earlier this year.
It is noteworthy that the emerging international consensus on fightingmoney laundering couples the requirement of suspicious transaction reportingwith firm assurances of confidentiality and protection of reporting institutionsagainst liability to their customers. This is reflected, for example, in the 40Recommendations of the Financial Action Task Force of the G-7 nations (theUnited States, The United Kingdom, Germany, France, Italy, Japan andCanada); the European Community’s Directive on prevention of the use of thefinancial system for the purpose of money laundering; and the Model RegulationsConcerning Laundering Offenses connected to Illicit Drug Traffickingand Related Offenses of the Organization of American States.
We recognize the extreme importance of the safe harbor provision andsupport financial institutions' interests in protecting themselves from liabilityto customers as it relates to the reporting of suspicious activities. We are inthe process of reviewing additional decisions related to the safe harbor provisionand will keep you informed of relevant legal developments.
Stanley E. Morris