On January 25, 2022, the Financial Crimes Enforcement Network (“FinCEN”) solicited commentary regarding its proposed rule that would create a time-limited pilot program to expand the ability of financial institutions to share Suspicious Activity Reports (“SARs”) and SAR-related information.  (See 31 U.S.C. § 5318(g)(8)).  The proposed program would permit a financial institution with a SAR reporting obligation to share, subject to certain specified limitations, SARs and related information with the institution’s foreign branches, subsidiaries, and affiliates.  The proposed rule would expand on previous guidance FinCEN issued in 2006 and 2010 regarding SAR sharing within organizations.

According to FinCEN, the purpose of the program is to assist financial institutions in combating illicit cross-border finance by promoting “enterprise-wide risk management.”  FinCEN seeks to achieve this goal while also continuing to ensure “adequate safeguards are in place to protect SAR confidentiality.”  FinCEN also suggested that this pilot program would provide valuable feedback for “longer-term approaches towards SAR sharing with foreign affiliates.”

Nuts and Bolts of Participation

To participate, a financial institution would need to:

  • submit a written application to FinCEN that discloses, among other items, “the particular purpose or purposes for which the foreign branches, subsidiaries, and affiliates intend to use SARs and related information”;
  • provide a description of internal controls established to prevent unauthorized disclosures of SARs and related information; and
  • submit quarterly reports to FinCEN.

The quarterly reports would disclose to FinCEN:

  • the number of shared SARs and their recipients;
  • the legal, compliance and technical issues encountered;
  • enhancements to the financial institution’s AML/CFT program enabled because of participation in the pilot program; and
  • “lessons learned.”

Benefits and Challenges

There is little doubt that a foreign-affiliate SAR sharing program is a step in the right direction.  A well-developed AML program with clear guidance for sharing SARs and supporting documents with affiliated foreign entities may allow financial institutions to detect potential money laundering more holistically.  This may help expedite institutions’ ability to end relationships with bad-actor customers.  Further, this enhanced visibility will increase the possibility of mitigating the harm to victims of actual or potential fraud schemes, reducing some risks to the financial institutions these schemes seek to exploit and expediting the investigation and prosecution of wrongdoers.

However, permitting SAR-sharing with foreign affiliates under the contours of the pilot program, especially if it becomes a longer-term reality, presents challenges.  First, this additional avenue for SAR sharing may create regulatory compliance risks for financial institutions that are slow to adopt it and fail to timely detect cross-border financial schemes.  In addition, participating financial institutions would face increased compliance obligations and costs.  The written application requires a description of the financial institution’s newly considered and implemented controls, including the critical protection of sensitive information in a cross-border setting.  Combined with additional reporting obligations, participating financial institutions may be compelled to broadly examine at least the suspicious activity detection and reporting procedures of their AML programs and self-disclose “any identified inefficiencies in the financial institution’s AML/CFT program.”  Finally, there is the potential for misapplication and confusion around complying with SAR-related confidentiality requirements, especially considering the continued disparate body of case law analyzing what constitutes protected SAR information.

FinCEN has acknowledged the potential for issues and anticipates questions from interested parties concerning expected costs and benefits, technical challenges, the merits of quarterly reporting, and how to protect SAR confidentiality.  While these challenges are substantial and should be carefully considered prior to applying to participate, the proposed program’s benefits may outweigh these burdens for institutions willing to take on these additional obligations.

The proposed program will terminate three years from the enactment of the AML Act – January 1, 2024 – and be subject to approval and conditions set by FinCEN.  FinCEN noted that all interested parties and financial institutions that would like to participate should submit written comments on the Notice of Proposed Rulemaking by March 28, 2022.

McGuireWoods’ Government Investigations and White Collar Litigation practice group provides legal counsel to financial institutions on all facets of Bank Secrecy Act and Anti-Money Laundering compliance. Contact one of the authors or another member of the team if you would like further information on the Firm’s experience and capabilities in this area.