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1st Cir. Limits Ability to Use Bank Secrecy Act to Shield Sensitive Documents

Bank sign in carved stone

The U.S. Court of Appeals for the First Circuit recently denied a bank’s request pursuant to the Bank Secrecy Act to shield certain business records from being produced and used in a putative class action, holding that none of the subject documents constitute a draft SAR, or reflect the decision-making process as to whether a SAR should be filed, the process of preparing a SAR, or an attempt to explain the content of a SAR post-filing.

A copy of the opinion is available at: Link to Opinion.

The lead plaintiffs sued the bank, alleging that a customer used his accounts at the bank and a predecessor bank acquired by the defendant bank to run a Ponzi scheme that the bank failed to detect and stop.

Plaintiffs’ counsel sought to rely on certain of the bank’s business records in order to pursue claims for fraud, deceit and conversion.  This resulted in a dispute over whether the documents were shielded from discovery under the Bank Secrecy Act, 31 U.S.C. § 5318(g), and related regulations.

A magistrate judge eventually reviewed the disputed documents in camera and concluded that most were not protected by the BSA.

The district court rejected the bank’s request to certify the magistrate judge’s ruling for interlocutory appeal. The bank then filed a petition for writ of mandamus, asking the appellate court to declare that the BSA and related regulations shielded an additional 55 pages from production or use in the litigation because they were “evaluative documents” prepared in order for the bank to determine its obligations under the BSA and related regulations to report certain transactions to the Financial Crimes Enforcement Network (FinCEN) as required by 12 C.F.R. § 21.11(k)(1)(i).

The First Circuit began its analysis by noting that “[a] petitioner seeking mandamus must show both that there is a clear entitlement to the relief requested, and that irreparable harm will likely occur if the writ is withheld.”

Focusing on the “clear entitlement” prong, the First Circuit considered the BSA, related regulations, the limited case law and guidance provided by FinCEN and the Office of the Comptroller of the Currency (OCC).

The relevant part of the BSA, 31 U.S.C. § 5318(g), “requires financial institutions ‘to report any suspicious transaction relevant to a possible violation of law or regulation.’” The BSA “also imposes limits as to whom financial institutions, government officials, and others may notify when a ‘suspicious transaction’ has been reported. … No involved person, whether on the financial institution side or the government side, ‘may notify any person involved in the transaction that the transaction has been reported.”

In addition, the pertinent regulation under the Act, 12 C.F.R. § 21.11(k), promulgated by the OCC, labels a suspicious activity report as a “SAR,” and provides that a SAR, “and any information that would reveal the existence of a SAR, are confidential, and shall not be disclosed except as authorized in this paragraph.” This regulation also provides that it “should ‘not be construed as prohibiting …[t]he disclosure … of … [t]he underlying facts, transactions, and documents upon which a SAR is based.’”

The First Circuit noted that district courts that have examined the scope of protection provide by the BSA and related regulations have held that the statute and regulations provide “an unqualified discovery and evidentiary privilege that … cannot be waived,” but have struggled with defining “the universe of documents encompassed by this ‘privilege.’”

According to the First Circuit, district courts have generally drawn a distinction between SARs themselves and communications pertaining thereto, which are privileged, and supporting documentation such as “’documents produced in the ordinary course of business pertaining to the defendants’ banking activities, transactions, and accounts’ that do not suggest the existence of a SAR” which are not privileged.

The Court summarized that the prior rulings “have tended to focus on whether implicated documents were created ‘in the ordinary course of business in monitoring unusual activity,’ as opposed to being documents ‘of an evaluative nature intended to comply with federal reporting requirements.”

The First Circuit then questioned “whether the [BSA] and related regulations prevent disclosure by third parties like the name [sic] plaintiffs” because “the [BSA] itself expressly forbids disclosure only by reporting financial institutions and their officers and agents, and by government entities, officials, and agents on the receiving end of SARs.”

Mandamus Standard Not Met

The Court concluded that the bank could not “satisfy the demanding mandamus standard where there is such uncertainty as to the applicability of the disclosure limitations to parties like the name plaintiffs.”

The First Circuit went on to explain that “there is a second concern causing us to question the very applicability of the disclosure limitations, and that concern stems from circumstances unique to this case.” Specifically, because the SAR to which the disputed documents relate was made public in court filings in prior litigation, the plaintiffs could not logically disclose something that was already in the public domain under the ordinary dictionary definition of “disclose.”

However, the Court reasoned that it did not need to “arrive at a definitive conclusion as to the reach of the [BSA] and regulations at this time” because even if BSA’s disclosure limitations applied, “the [C]ourt would deny mandamus relief because in camera review of the documents at issue here reveals that the documents fall outside the scope of that so-called ‘privilege.’”

The First Circuit reasoned that “the vast majority of the allegedly privileged documents in this case feature only lists and descriptions of transactions” and “courts uniformly have concluded that such documents are not encompassed by the [BSA] or the regulations but, instead, constitute ‘[t]he underlying facts, transactions, and documents upon which a SAR is based,’ which are expressly declared exempt from the confidentiality obligation at 12 C.F.R. § 21.11(k)(1)(ii)(A)(2).”

Turning to “the narrow sliver of the fifty-five pages featuring non-transactional information,” the Court reasoned that “the key query is whether any of those documents suggest, directly or indirectly, that a SAR was or was not filed.”

The Court concluded that, after careful de novo in camera review, none of the documents suggested that a SAR was or was not filed because, for example, “none of the documents at issue constitute a draft SAR, and none of the documents reflect the decision-making process as to whether a SAR should be filed, the process of preparing a SAR, or an attempt to explain the content of a SAR post-filing.”

Accordingly, the petition for writ of mandamus was denied because the bank could not show a clear entitlement to the relief sought.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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