By Seth Kean
In recent years, plaintiffs have increasingly sought discovery from banks relating to their anti-money laundering and Bank Secrecy Act programs, particularly in cases involving alleged customer misconduct. This development, which parallels increased focus by regulators on AML and BSA compliance, means that banks must take even greater care to avoid inadvertent disclosures of material protected by suspicious activity report confidentiality. This task is complicated by the fact that the line between privileged SAR material and non-privileged material, particularly material that is not a SAR and does not reference a SAR but is also not an account statement or other transactional document, is not always clear.
A federal appellate court underscored this point in 2015 when it referred to the scope of the SAR privilege as an “evolving area of the law.” In the absence of further regulatory guidance, the scope of the SAR privilege may continue to evolve in court decisions, but two points merit mention from recent decisions: first, there appears to be a consensus that material reflecting an evaluation or analysis of whether to file a SAR is privileged; and second, courts are divided as to whether material generated as part of an investigation is categorically privileged.
Evaluative Versus Investigatory Material
Congress passed the Bank Secrecy Act to require banks to assist the government in monitoring for financial crimes. In 1992, the BSA was amended to require financial institutions to report known or suspected violations of federal law using a SAR, which is confidential. Federal law prohibits a bank from disclosing a SAR or the fact that a SAR has been filed or has not been filed, but does not prevent the disclosure of transactional documents. The prohibition against revealing whether a SAR has been filed protects a variety of other material, including communications relating to a SAR filing.
The central issue in SAR-related discovery disputes is often how to evaluate documents that fall in a gray or middle area; that is, they are not SARs and do not contain express references to a SAR filing, and they are also not transactional documents. The Financial Crimes Enforcement Network has commented that the SAR privilege should extend “in appropriate circumstances to material prepared by the financial institution as part of its process to detect and report suspicious activity.” But as some courts have observed, this guidance is open ended and does not specify exactly when material should be protected. Against this backdrop, some court decisions have drawn a distinction between evaluative material, which reflects an evaluation or analysis of whether certain activity requires a SAR filing, and investigatory material, which relates to or is generated as part of an investigation into potentially suspicious activity.
There appears to be a consensus that the SAR privilege protects reports, memoranda, and other documents that reflect or relate to evaluation of a potential SAR filing. For example, one court ruled that a “cover sheet” that attached various transactional documents was protected because of comments on the sheet. It also ruled that communications between banks were “covered by the SAR privilege as the comments on those documents, the regulatory authority cited in the communications and the evaluative content, as a whole, reflect material that could be considered as a report of an evaluative nature intended to comply with federal reporting requirements.” Thus, in considering whether AML-related material may be protected from disclosure in civil litigation, practitioners should consider whether the documents contain or reflect some type of analysis or evaluation, even if such analysis or evaluation is not memorialized in a formal memoranda or report.
On the other hand, courts have made conflicting rulings on whether documents relating to a bank’s investigation of potentially suspicious activity are categorically protected by the SAR privilege. Some courts have ruled that material generated as part of an AML-related investigation is protected by the SAR privilege. In Norton v. U.S. Bank, investors in what turned out to be a Ponzi scheme, filed suit against the bank where the schemers deposited investor funds, and sought documents “generated by the bank in internal investigations” relating to the accounts. The court ruled that the “[SAR] privilege is not limited to documents that contain an explicit reference to a Suspicious Activity Report,” and that it includes “material prepared by [a] national bank as part of its process to detect and report suspicious activity.” Thus, the plaintiffs were not entitled to “information about internal investigations or monitoring of the [alleged schemer’s] accounts in particular, or internal methods of tracking unusual patterns in banking activity in general.”
The court in Wultz v. Bank of China reached a different conclusion. Here, the bank argued that various investigatory documents sought by plaintiffs, who were family members of bombing victims, were protected by the SAR privilege because “they result from the implementation of [the defendant’s] policies and procedures for the filing of SARs.” The court rejected this argument (and the reasoning of Norton) and concluded that documents generated by the bank’s investigatory process were not categorically protected from disclosure. The court acknowledged, however, that the SAR privilege would likely protect evaluative documents and invited the bank to identify documents that would be protected under this approach.
In complying with SAR confidentiality, banks and their counsel must ensure that they do not inadvertently disclose a SAR or the fact that a SAR has been filed. In the absence of more definitive regulatory guidance, banks must also navigate the uncertainty for materials in the gray area between protected SAR material and non-privileged transactional material. Recent cases reflect that this uncertainty is greatest regarding documents relating to or generated as part of an internal bank investigation, but that do not explicitly reflect an analysis or evaluation of a potential SAR filing. Some court decisions have ruled that material related to such an investigation is protected from discovery in civil litigation, but other courts have taken a narrower view.
Seth Kean is a New York-based partner in the financial industry group of the law firm ReedSmith LLP. For more information, visit www.reedsmith.com.