FinCEN Promotes Use of Section 314(b) Safe Harbor to Fight Money Laundering and Terrorist Financing

The Financial Crimes Enforcement Network (“FinCEN”) issued a fact sheet on Section 314(b) of the Patriot Act (the “Fact Sheet”).¹ In the Fact Sheet, FinCEN “strongly encourages information sharing” among financial institutions through Section 314(b) and the safe harbor it provides,² and outlines key aspects of FinCEN’s Section 314(b) information sharing program.³

This Alert provides background on the Section 314(b) safe harbor and discusses ongoing regulatory initiatives potentially strengthening both it and the related safe harbor for suspicious activity report (“SAR”) filings. This Alert also summarizes the FinCEN Fact Sheet.

Background

Section 314(b) of the Patriot Act encourages financial institutions and associations of financial institutions located in the U.S. to share information to facilitate the identification and reporting of activities raising suspicions of possible money laundering or terrorist activity.⁴ Section 314(b) also provides a safe harbor from civil liability if certain, specified requirements are met.⁵ A separate statutory safe harbor provides complete immunity from civil liability for the reporting of known or suspected criminal offenses or suspicious activity to appropriate authorities by the use of a SAR or by reporting through other means.⁶

Recently, the regulators have been focused on improving the rules and regulations governing anti-money laundering compliance, including, among other things,⁷ the statutory safe harbors promoting information-sharing. Under Secretary of the Treasury David Cohen is currently leading an interagency task force charged with making recommendations for the improvement of the Bank Secrecy Act of 1970 and its requirements.⁸ Additionally, in March 2013, the Comptroller of the Currency, Thomas Curry, testified before the U.S. Senate on anti-money laundering issues.⁹ In relevant part, Curry testified that his office would support “efforts to enhance information sharing, including the provision of information from the government to financial institutions,” and “legislation to expand the information sharing safe harbors...and to eliminate or modify the notice requirements to FinCEN.”¹⁰ He also said that the “OCC would...strongly support legislation that clarifies that the safe harbor from liability for filing SARs is absolute and there is no good faith requirement.¹¹

Like these initiatives, the Fact Sheet signals a regulatory focus on increasing financial institutions’ use of safe harbor protections to help fight money laundering and terrorist financing.

Primer on Section 314(b)

The Fact Sheet includes a laundry list of “the Benefits of 314(b) Voluntary Information Sharing.”¹² Among other things, FinCEN points out that information sharing among firms can help decipher “layered” transactions (i.e., intentionally complex transactions designed to camouflage illegal sources of funds) among numerous financial institutions, entities, and jurisdictions, as well as facilitate the filing of more comprehensive and complete SARs.¹³

True to its name, the Fact Sheet also summarizes Section 314(b) and its existing implementing regulations and interpretive guidance:

• Eligible Information Sharing Participants: The following financial institutions are eligible to share information under Section 314(b): banks, casinos and card clubs, money services businesses, brokers or dealers in securities, mutual funds, insurance companies, futures commission merchants and introducing brokers in commodities, dealers in precious metals, precious stones, or jewels, operators of credit card systems, loan or finance companies, and associations consisting of any of the foregoing financial institutions.¹⁴
• Information That May Be Shared: Sharing participants may share information pertaining to “individuals, entities, organizations, and countries” for purposes of identifying, and, where appropriate, reporting activities that may involve possible terrorist activity or money laundering.¹⁵ If a Section 314(b) sharing participant suspects that transactions may involve the proceeds of the various unlawful activities specified in anti-money laundering statutes, information related to such transactions can be shared, and the participant will still remain within the protection of the Section 314(b) safe harbor.¹⁶
• Intersection of Section 314(b) Information Sharing With SAR Requirements: FinCEN encourages financial institutions to note if a SAR has benefited from Section 314(b) information sharing in the SAR narrative.¹⁷ While information may be shared related to possible money laundering or terrorist financing that resulted in, or may result in, the filing of a SAR, Section 314(b) does not authorize a participating financial institution to share a SAR itself or to disclose the existence of a SAR.¹⁸
• Prerequisites to Safe Harbor Protection: To obtain the benefit of the safe harbor, financial institutions must satisfy certain requirements as specified in FinCEN regulations. First, they must submit a Section 314(b) notification to FinCEN.¹⁹ Second, prior to sharing information, they must take reasonable steps, such as checking the FinCEN participant list (which FinCEN updates on a daily basis), to verify that the other financial institution also has submitted a notification to FinCEN.²⁰ Third, they must establish and maintain procedures to safeguard the security and confidentiality of shared information, and must only use shared information for purposes of: (i) identifying, and where appropriate, reporting on activities that may involve money laundering or terrorist financing; (ii) determining whether to establish or maintain an account, or to engage in a transaction; or (iii) assisting in compliance with anti-money laundering requirements.²¹

Conclusion

The Fact Sheet is a helpful point of reference for existing information sharing participants as well as for financial institutions considering participating. At the same time, and despite the many benefits of participating in FinCEN’s information sharing program, financial institutions still struggle with balancing the availability of the safe harbor with concerns over their clients’ information privacy and their own civil liability. Luckily, ongoing regulatory initiatives signal that enhanced safe harbor protections may be forthcoming, which would be the best encouragement the regulators could give financial institutions to engage in the activities the safe harbors are designed to promote.

¹ Financial Crimes Enforcement Network, “Information Sharing Between Financial Institutions: Section 314(b) Fact Sheet,” available at http://www.fincen.gov/statutes_regs/patriot/pdf/314bfactsheet.pdf.

² Id. at 1.

³ Id. at 2-4.

⁴ Pub. L. No. 107-56, § 314(b); 31 C.F.R. § 103.1010.540.

⁵ Id.

⁶ 31 U.S.C. § 5318(g)(3); 31. C.F.R. § 1023.320(f).

⁷ In February 2012, FinCEN issued an advance notice of public rulemaking seeking comment on a proposed rule to extend customer due diligence obligations to include a new requirement to identify the beneficial owner(s) of all customers, and to verify the beneficial owners’ identities pursuant to a risk-based approach. Financial Crimes Enforcement Network, “Customer Due Diligence Requirements for Financial Institutions,” 77 FR 13046-01 (March 5, 2012), available at http://www.regulations.gov/#!docketDetail;D=FINCEN-2012-0001;dct=FR%252BPR%252BN%252BO%252BSR. In response, FinCEN received dozens of comment letters, many of which were critical of the proposal. Id. FinCEN also held a hearing in July 2012, followed by various roundtables in major cities across the country, to obtain further public guidance on the proposed rule. Summary of Public Hearing, U.S. Department of the Treasury (July 31, 2012), available at http://www.sifma.org/uploadedfiles/events/2013/anti-money_laundering_and_financial_crimes_conference/summary-washington%20dc-7-31-12.pdf; Press Release, U.S. Department of the Treasury, Remarks of Under Secretary for Terrorism and Financial Intelligence David Cohen at the American Bankers Association/American Bar Association Money Laundering Enforcement Conference (“Cohen Speech”), p. 5 (Nov. 12, 2012), available at http://www.treasury.gov/press-center/press-releases/Pages/tg1762.aspx As of this writing, FinCEN has yet to issue its proposed rule.

⁸ Cohen Speech, supra note 7.

⁹ Comptroller of the Currency Thomas J. Curry, Testimony Before The Committee on Banking, Housing, & Urban Affairs of the U.S. Senate, p. 7 (Mar. 7, 2013) (“Curry Testimony”), available at http://www.occ.gov/news-issuances/congressional-testimony/2013/pub-test-2013-41-oral.pdf

¹⁰ Curry Testimony, supra note 9 at 13.

¹¹ Id. at 14.

¹² Fact Sheet, supra note 1 at 1-2.

¹³ Id.

¹⁴ Id. at 2. See also, FIN-2012-R006, available at http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2012-R006.pdf (clarifying the meaning of “association of financial institutions”).

¹⁵ Fact Sheet, supra note 1 at 2-3; Pub. L. No. 107-56, § 314(b); 31 C.F.R. § 103.1010.540.

¹⁶ Fact Sheet, supra note 1 at 3, citing Guidance on the Scope of Permissible Information Sharing Covered by Section 314(b) Safe Harbor of the USA PATRIOT Act, FIN-2009-G002 (Jun. 16, 2009). available at http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-g002.pdf. Similarly, the safe harbor for SAR reporting protects the reporting of suspected unlawful activities or activities lacking an apparent lawful purpose; actual knowledge of unlawful activity is not necessary for the safe harbor to apply. See 31 U.S.C.§ 5318(g); 31 C.F.R. § 1023.320 (governing SAR reporting by broker-dealers); 12 C.F.R. § 21.11 (governing SAR reporting by national banks); 12 C.F.R. § 163.180 (governing SAR reporting by federal savings associations); 12 C.F.R. § 208.62 (governing SAR reporting by state member banks); 12 C.F.R. § 353 (governing SAR reporting by state nonmember banks and savings banks); 12 C.F.R. § 390.355 (governing SAR reporting by state savings associations); 12 C.F.R.§ 748.1(c) (governing SAR reporting by credit unions); E.g., FINRA Letter of Acceptance, Waiver and Consent to Penson Financial Services, Inc.., No. 2008011615801 (Dec. 14, 2009) at 3.

¹⁷ Fact Sheet, supra note 1 at 3.

¹⁸ Id.

¹⁹ Id. at 4. The Fact Sheet also provides contact information at FinCEN for providing changes, updates or deletions to existing Section 314(b) notifications. Id.

²⁰ Id.

²¹ Id.