Federal Banking Agencies Seek Greater Flexibility In Granting Exemptions From SAR Requirements – Finance and Banking


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Last week, the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC) invited
comment on proposed rules that would permit the banking agencies
greater leeway in issuing exemptions to supervised financial
institutions from suspicious activity report (SAR) filing,
confidentiality, and recordkeeping requirements.1 The
proposed rules have two primary objectives: (1) to further
encourage and permit financial institutions to develop innovative
technological solutions to satisfy their Bank Secrecy Act (BSA)
obligations with greater efficiency and effectiveness; and (2) to
cure a disparity in which the Financial Crimes Enforcement Network
(FinCEN) might exempt a financial institution that is testing
innovative anti-money laundering (AML) solutions from complying
with certain of FinCEN’s SAR regulations, where the federal
banking agencies currently lack the authority to grant the
financial institution a similar exemption under their corresponding
SAR regulations, thus impeding the first objective. Below we
summarize how the proposed rules would permit the federal banking
agencies to provide more meaningful safe harbors for financial
institutions to develop innovative SAR reporting technology. We
also discuss the practical considerations financial institutions
should keep in mind, notwithstanding this regulatory
development.

FinCEN, as the administrator of the BSA, has implemented a
number of regulations for financial institutions pertaining to,
among other things, the reporting of suspected illegal transactions
and maintaining the confidentiality of such reporting. The federal
banking agencies have implemented their own SAR regulations that
are largely identical to those implemented by FinCEN. The federal
banking agency regulations, however, include additional
requirements, such as the reporting of insider abuse regardless of
dollar amount.2 One other key difference-which the
proposed rules seek to address-is that FinCEN has the general
authority to grant exemptions from the requirements of the BSA and
its own SAR regulations.3 The OCC and FDIC, on the other
hand, have the authority to grant exemptions only in limited,
specific circumstances pertaining to physical crimes (robberies and
burglaries), and lost, missing, counterfeit, or stolen
securities.4

The OCC’s and FDIC’s proposed rules would explicitly
empower each agency with the general authority to grant exemptions
from the requirements of their respective SAR regulations. Upon
receiving a written request from a supervised financial
institution, the agency would determine whether the request is
consistent with safe and sound banking principles. To the extent a
requirement falls under both FinCEN’s and the banking
agency’s SAR regulation-e.g., filing a SAR within 30 calendar
days of the initial detection of facts that may constitute a basis
for filing a SAR-the FDIC would seek FinCEN’s determination
whether the exemption is consistent with the purposes of the BSA
(as well as seek FinCEN’s concurrence in granting the
exemption), whereas the OCC would be permitted to make its own
determination as to consistency with the purposes of the BSA. In
any event, if an exemption request also requires an exemption from
FinCEN’s SAR regulation, the requesting institution would need
to obtain exemptions from both the appropriate banking agency
and from FinCEN. For a requested exemption from the
requirements of a banking agency-only SAR regulation-e.g.,
reporting of insider abuse regardless of amount-the proposed rules
would allow the appropriate banking agency to grant the exemption
independently. Under the proposed rules, the exemptions may be
conditional or unconditional, apply to limited persons or classes
of persons, and apply to limited transactions or classes of
transactions. The agencies would have the authority to extend or
revoke previously granted exemptions.

Although the proposed rules may appear to be fairly mundane,
process-oriented regulatory amendments, they are another strong
indicator that the federal banking agencies are serious about
fostering the development of innovative tools to gather information
about potential money laundering and illegal activity and getting
that information into the hands of law enforcement in a more
efficient manner. In December 2018, the federal banking agencies
and FinCEN issued a Joint Statement on Innovative Efforts to Combat
Money Laundering and Terrorist Financing (the 2018 Joint
Statement).5 As we wrote in our December 10, 2018,
client Advisory, the 2018 Joint Statement intended to encourage
financial institutions to experiment with innovative BSA compliance
solutions.6 Among other things, the banking agencies
stated that they would not necessarily criticize a financial
institution if new solutions identified gaps in the
institution’s existing BSA compliance program.

Since the 2018 Joint Statement, the banking agencies have
recognized the promise that financial institution-developed
innovations may have in improving the efficiency of BSA/AML
compliance programs and strengthening the overall law enforcement
objectives of the BSA. For example, the FDIC notes in its notice of
proposed rulemaking the positive developments in transaction
monitoring using artificial intelligence and machine learning, as
well as in the practices of shared investigation utilities and
data. The banking agencies recognize that as these technological
advancements are being piloted and fine-tuned, financial
institutions may need to expand their investigations, perhaps
requiring an extension of the 30-day SAR filing deadline, or, in
some cases, requiring the sharing of information otherwise
prohibited by SAR confidentiality regulations. With the rules
proposed last week, the banking agencies are demonstrating their
willingness to make the regulatory amendments necessary to foster
these continued advancements.

Although the proposed rules are a welcome development for
financial institutions seeking to increase the efficiency and
lessen the burden of effective BSA/AML compliance programs, those
in the industry should not let their guard down. First, the banking
agencies have repeatedly reiterated that while they support
innovative AML solutions, financial institutions must continue to
meet their BSA and regulatory obligations. This means that
financial institutions should test new AML technology in parallel
with existing controls. Even after financial institutions have
assured themselves of the propriety of any new AML solution, they
should obtain the feedback of their supervisors before launching a
replacement compliance process or program. Second, financial
institutions should not assume leniency from their supervisors for
failing to abide by SAR regulations as they test new compliance
technology. Although the banking agencies have expressed a
willingness to grant exemptive relief in certain situations, the
proposed rules underscore that financial institutions will have to
seek and receive permission first. Until a written exemption is in
hand-in most cases from the appropriate banking agency and
FinCEN-there should be no expectation of anything short of full
compliance with the requirements of all applicable SAR
regulations.

Comments to the proposed rules will be accepted up to 30 days
after publication in the Federal Register.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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