subjecttoinquiryimage.jpgThe U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently penalized First National Community Bank (FNCB) $1.5 million for failing to file suspicious activity reports (SARs) despite the existence of significant red flags. As described in FinCEN’s Feb. 27, 2015, press release, the accounts in question were controlled by Michael Conahan, a member of FNCB’s board of directors who was also a Pennsylvania judge. Conahan and others were convicted in a judicial corruption scheme known as the “jailing kids for cash” scandal, involving their profiting from sending thousands of juveniles to detention facilities in which they had financial interests.

Despite significant red flags, FNCB never filed a single SAR on these accounts until after Conahan had pled guilty. One red flag deserves special mention, as it is something financial institutions routinely receive: a grand jury subpoena.

In assessing the penalty, FinCEN explained that FNCB responded to a law enforcement subpoena regarding Conahan and others in 2007, but it conducted no further analysis of Conahan’s account activity and failed to risk rate the accounts. Make no mistake; receiving a grand jury subpoena does not, by itself, require a bank to file a SAR. However, FinCEN guidance instructs that receipt of a grand jury subpoena should always trigger a risk assessment of the customer and close scrutiny of the customer’s account activity. If this examination reveals suspicious activity, then the bank should determine whether the regulations require it to file a SAR (and whether the customer’s risk profile should be elevated). If no suspicious activity is uncovered, then the bank should decline to file a SAR, always documenting the analysis and the reasons for this decision.

The case of FNCB presented an additional wrinkle. Federal law strictly prohibits disclosing the existence of a SAR to the party implicated in the SAR. Further, federal law requires banks to report to the board of directors when a SAR has been filed. However, the FNCB accounts were controlled by a member of the bank’s own board of directors. While such a scenario may prove difficult, FinCEN has provided specific guidance:

In the rare instance when suspicious activity is related to an individual in the organization, such as the president or one of the members of the board of directors, the established policy that would require notification of a SAR filing to such an individual should not be followed. Deviations to established policies and procedures so as to avoid notification of a SAR filing to a subject of the SAR should be documented and appropriate uninvolved senior organizational personnel should be so advised.1

Whether intentionally or through neglect, FNCB failed to file a SAR despite significant red flags. One of these red flags, a grand jury subpoena, should be an automatic trigger to scrutinize the customer and account at issue. Therefore, banks should have in place a process to alert the BSA compliance team whenever a grand jury subpoena is received so they can conduct the required due diligence. When it comes to red flags for suspicious activity, planning and communication on the front end can prevent significant loss and reputational harm.

If you have questions about BSA/AML compliance and the many nuances of SAR reporting and nondisclosure, McGuireWoods can assist you. Our attorneys offer experience and skills in advising financial institutions on all areas of BSA/AML compliance.


1The SAR Activity Review — Trends, Tips & Issues, Issue 2, June 2001