Statement of Interest of the United States filed in the case of FDIC v. Flagship Auto Center, Inc.

IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

FEDERAL DEPOSIT INSURANCE ) Case No. 04-7233 CORPORATION, ) ) Plaintiff, ) U.S. District Court James G. Carr ) vs. ) Magistrate Judge Vernelis K. Armstrong ) FLAGSHIP AUTO CENTER, INC., ) et al., ) ) Defendants. )

STATEMENT OF INTEREST OF THE UNITED STATES

Pursuant to 28 U.S.C. § 517,¹ the United States Department of Justice, by its undersigned attorneys, hereby submits this Statement of Interest to protect from unauthorized disclosure any Suspicious Activity Reports (SARs) submitted by financial institutions under the Bank Secrecy Act, 31 U.S.C. § 5318(g)(1).

¹ 28 U.S.C.§ 517 provides in pertinent part: "Any officer of the Department of Justice[] may be sent by the Attorney General to any . . . district of the United States to attend to the interests of the United States in a suit pending in a court of the United States[.]"

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Background

The Financial Crimes Enforcement Network ("FinCEN") is a bureau of the United States Department of the Treasury, whose mission is to safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity. Pursuant to a delegation of authority from the Secretary of the Treasury, FinCEN administers the recordkeeping, reporting, and anti-money laundering program requirements of the Bank Secrecy Act, 31 U.S.C. §§ 5311, et seq., and maintains a government-wide data access service that includes reports collected under this authority. See 31 U.S.C. § 310.

This litigation involves an attempt by private parties, two defendants in this action, to compel FinCEN's fellow federal banking regulator, the Federal Deposit Insurance Corporation (FDIC), to provide it with the most sensitive type of report collected under the Bank Secrecy Act – the Suspicious Activity Report ("SAR"). The Bank Secrecy Act provides specific limits on who may have access to any such reports collected under its authority (generally, certain government agencies) and the use to which any such reports may be put (criminal, tax, regulatory, and counter-terrorism). The Bank Secrecy Act extends special confidentiality protection to SARs and even to the fact that one has been filed. Under this authority, FinCEN, the FDIC, and the four other federal banking regulators all have promulgated regulations strictly protecting the confidentiality of these highly sensitive reports. The portion of the two defendants' pending motion to compel production of an SAR by its very nature calls into question the SAR regulations of the federal banking regulators, and places at risk one of the pillars of the suspicious activity reporting system – its confidentiality. The United States, therefore, has an interest in protecting the SARs against unauthorized disclosure, as set forth in the Bank Secrecy Act.

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Two defendants in this action have moved to compel FDIC to provide them, inter alia, with a Suspicious Activity Report (SAR). The issue presented by the motion to compel is whether the defendants, who are not within the class of entities statutorily entitled to such information, may nonetheless compel its production despite the statutory and regulatory prohibitions on its disclosure.

Statement of Facts

This action is brought by the FDIC in its capacity as receiver of a failed insured bank seeking restitution, recovery on notes, and damages against six defendants for an alleged fraudulent check kiting scheme. Two defendants, Flagship Auto Center, Inc., and Pamela Siegenthaler, as executor of an estate, filed a request for production of documents (No. 5) seeking, inter alia, documents provided to any entity with regulatory or law enforcement jurisdiction over the bank in receivership. The two defendants then filed a motion to compel production of documents, attaching an FDIC privilege log including reference to a Suspicious Activity Report of Liberty National Bank dated November 20, 2001. The United States files its Statement of Interest in this action in order to protect from disclosure under the Bank Secrecy Act this SAR and any other SARs which may be implicated. The United States takes no position in this Statement of Interest on any document other than any SAR's existence, text, source, or substance which may be sought in this action against any entity.

Summary of Argument

The two defendants in this action may not compel the production of SARs, or even the acknowledgment of their existence or non-existence. The Bank Secrecy Act authorizes FinCEN (as the Secretary of Treasury's delegee) to require financial institutions to file reports, including reports of suspicious activity, for regulatory, tax, criminal, and counter-terrorism purposes. The Act further

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authorizes FinCEN to provide these reports to certain government agencies, to maintain them in a government-wide data access network, and to administer the network according to applicable legal guidelines and policies. Defendants' demand does not fall within these legal requirements.

Moreover, SARs are entitled to additional protection from disclosure. Financial institutions that file them are statutorily prohibited from disclosing to anyone involved in the transaction that the transaction has been reported. Pursuant to this authority, FinCEN, the FDIC, and the other federal banking regulators have promulgated regulations prohibiting financial institutions from notifying anyone other than appropriate law enforcement and regulatory agencies of the filing. Courts have upheld these regulations as reasonable interpretations of the statute because disclosure, for example, in litigation, makes it more likely that the persons involved in the transaction will be notified of the filing, in derogation of the Act. In an attempt to make an end-run around this prohibition, the two defendants have sought to compel disclosure from a governmental agency – the FDIC, rather than from the filing bank. But that disclosure, too, is prohibited. The Bank Secrecy Act forbids governmental officials from making such disclosure, unless the disclosure is necessary to fulfill their official duties. Plainly, the fact that a non-governmental party might find an SAR (or the fact of its existence or nonexistence) useful to its case has no bearing on the official need for a governmental official to disclose it. Were it otherwise, the disclosure prohibition would be rendered meaningless.

Congress did not enact the Bank Secrecy Act to provide tools for civil discovery, and there is no injustice in honoring that choice. As FinCEN, the FDIC, and the courts have noted in the past, the disclosure prohibition on SARs does not extend to the underlying transactional documents (such as account records), and the two defendants are free to seek such documents, question witnesses about

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them, and ultimately, to argue the inferences therefrom to the ultimate trier of fact. Accordingly, the motion to compel, as it pertains to SARs, should be denied.

ARGUMENT

A. The Statutory and Regulatory Framework

Congress enacted the Bank Secrecy Act in 1970 to authorize the Secretary of the Treasury to require reporting and recordkeeping deemed to have a "high degree of usefulness" to governmental criminal, tax, or regulatory investigations or proceedings. See 31 U.S.C. § 5311 (declaration of purpose).² The implementing regulations, found at 31 C.F.R. Part 103, create a system of reporting and recordkeeping obligations intended to provide a paper trail to enable government investigators to follow the money. See generally California Bankers Ass'n v. Shultz, 416 U.S. 21, 26-30 (1974). Section 5319 of the Bank Secrecy Act requires the Secretary to provide information contained in Bank Secrecy Act reports to a governmental agency upon request.³ Implementing regulations prescribing those governmental entities entitled to seek access to Bank Secrecy Act information, and the methods for requesting it, are found at 31 C.F.R. § 103.53.

The initial focus of the Bank Secrecy Act was the tracking of large currency transactions, and the initial regulations required reporting of various transactions over $10,000 in currency. See 31

² In the USA Patriot Act of 2001, Congress amended 31 U.S.C. § 5311 to include as a purpose of the Bank Secrecy Act "the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism." Pub. L. 107-56, Title III, § 358(a) (October 26, 2001).

³ The USA Patriot Act of 2001 amended this provision to include within the definition of "agency" a self-regulatory organization registered with the Securities and Exchange Commission or the Commodities Futures Trading Commission. Pub. L. 107-56, Title III, § 358(c) (October 26, 2001).

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C.F.R. § 103.22 (currency transaction reports); 31 C.F.R. §103.23 (reports of transportation of currency and monetary instruments); 31 C.F.R. § 103.24 (reports of foreign financial accounts).

Congress expanded this focus in 1992 with the passage of the Annunzio-Wylie Anti-Money Laundering Act, Pub. L. 102-550, Title XV, § 1517 (1992), which added 31 U.S.C. § 5318(g) to the Bank Secrecy Act. This provision authorizes the Secretary of the Treasury to "require any financial institution, and any director, officer, employee or agent of any financial institution, to report any suspicious transaction relevant to a possible violation of law or regulation." Recognizing both the sensitive nature of the information and the need to encourage the filing of these reports by the provision of appropriate legal protection, Congress included in the new statutory authorization two important provisions. First, it provided that filers and their agents "may not notify any person involved in the transaction that the transaction has been reported." 31 U.S.C. § 5318(g)(2)(A)(i). Second, it provided a "safe harbor" for filers and their agents, under which they "shall not be liable to any person under any law or regulation of the United States [or] any constitution, law or regulation of any State . . . for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure or to any other person identified in the disclosure." 31 U.S.C. § 5318(g)(3)(A).

In the Annunzio-Wylie Act, Congress further instructed the Secretary to designate a single agency or official to whom SARs shall be made. See 31 U.S.C. § 5318(g)(4). The Secretary designated FinCEN.⁴ In 1996, FinCEN, along with the five federal banking regulators,

⁴ The Secretary's delegation of Bank Secrecy Act authority to FinCEN is now embodied in Treasury Order 180-01 (available at Treasury's website, www.ustreas.gov).

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promulgated suspicious activity reporting rules for banks.⁵ The rule requires that a bank file an SAR with FinCEN on any transaction conducted or attempted to be conducted through it, which aggregates at least $5,000, and which the bank knows, suspects or has reason to suspect: (i) involves funds derived from illegal activities; (ii) is designed to evade Bank Secrecy Act requirements; or (iii) has no business or apparent lawful purpose and is not the sort in which the customer should normally be expected to engage and the bank knows of no reasonable explanation for the transaction. 31 C.F.R. § 103.18(a)(2).

FinCEN's regulation places additional disclosure restrictions on SARs. Specifically, the rule requires that "any person subpoenaed or otherwise requested to disclose a SAR or the information contained in a SAR, except where such disclosure is requested by FinCEN or an appropriate law enforcement agency or bank supervisory agency, shall decline to produce the SAR or to provide any information that would disclose that a SAR has been prepared or filed," 31 C.F.R.§ 103.18(e). The FDIC's suspicious activity reporting regulation governing national banks, which apply to the filer Liberty National Bank, as a bank regulated by the OCC, contains similar language, see 12 C.F.R. § 21.11(k).⁶

⁵ See 31 C.F.R. § 103.18. The five federal banking regulators are: the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. Each agency promulgated a separate rule, although the rules are substantially similar, with the main difference being special treatment for insider abuse in the banking agency rules. More recently, FinCEN has issued suspicious activity reporting rules for money services business; broker-dealers in securities; and commodities futures commission merchants, all with the same disclosure restrictions discussed herein.

⁶ The FDIC has a similar provision in its suspicious activity reporting rule which is applicable to insured banks not regulated by another federal banking regulator. See 12 C.F.R. § 353.3(g).

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The USA Patriot Act codified FinCEN's role in administering the collection, use, and dissemination of Bank Secrecy Act reports. See 31 U.S.C. § 310. FinCEN is charged with maintaining a government-wide data network that includes Bank Secrecy Act reports, 31 U.S.C. § 310(b)(B)(1); analyzing and disseminating the material for certain purposes, 31 U.S.C. § 310(b)(C); and, as the Secretary's delegee, providing appropriate standards and guidelines for who is to be given access to the information and the uses to which it may be put, 31 U.S.C. § 310(c)(2).

At the same time, Congress strengthened the SAR confidentiality provisions, adding new subsection 5318(g)(2)(A)(ii), which provides that "no officer or employee of the Federal Government or of any State, local, tribal, or territorial government within the United States, who has any knowledge that such report was made may disclose to any person involved in the transaction that the transaction has been reported, other than as necessary to fulfill the official duties of such officer or employee." Consistent with its regulatory interpretation of § 5318(g)(2)(A)(i), FinCEN interprets this provision to prevent governmental officers and employees from making disclosures likely to lead to a disclosure to a person involved in a reported transaction, with the added qualification of official necessity. FinCEN interprets official necessity to mean necessary to accomplish a governmental purpose entrusted to the officer or employee, for example, disclosure at trial required by statute (such as the Jencks Act), or the U.S. Constitution (such as exculpatory evidence).

B. Judicial Development of the Unqualified Privilege for Suspicious Activity Reports

Not long after the suspicious activity reporting requirements became effective, plaintiffs in civil litigation sought to obtain such reports and to hold banks liable for filing (or not filing) them. The Second Circuit addressed the interplay between the SAR confidentiality provision and the safe harbor

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provision in Lee v. Banker's Trust Co., 166 F.3d 540 (2d Cir. 1999), affirming the district court's dismissal of a defamation claim against a bank based on its alleged filing of an SAR concerning the plaintiff. "Disclosure of even the filing of an SAR," declared the court, "let alone disclosure of its substance, is prohibited by law." Id. at 543, Noting the confidentiality provision of the Federal Reserve's regulation, 12 C.F.R. § 208.20(k) (1998), which is identical to that of FinCEN and the FDIC, the court stated:

Our conclusion based on the language of the Act [that the filing of the SAR is protected by the safe harbor] is bolstered by a common sense appraisal of the safe harbor's place within the Act. Financial institutions are required by law to file SARs, but are prohibited from disclosing either that an SAR has been filed or the information contained therein. See 12 C.F.R. 203.20(k) (1998). Thus, even in a suit for damages based on disclosures allegedly made in an SAR, a financial institution cannot reveal what disclosures it made in an SAR, or even whether it filed an SAR at all.

166 F.3d at 544. This reasoning has been followed by a number of lower courts faced with motions to compel the production of SARs. In Weil v. Long Island Savings Bank, 195 F. Supp. 2d 383, 389 (E.D.N.Y. 2001), the court found that the suspicious activity reporting rules prohibit disclosure of SARs or their content, and that the confidentiality privilege created by the statute and implementing regulations is not qualified and is not subject to waiver. Accord, Gregory v. Bank One, Indiana, N.A., 200 F. Supp. 2d 1000, 1003 (S.D. Ind. 2002) ("There is no provision in the [Bank Secrecy] Act or the Rule allowing a court-order exception to the unqualified privilege"); Cotton v. Private Bank and Trust Co., 235 F. Supp. 2d 809, 815 (N.D. Ill. 2002); Whitney National Bank v. Karam, 306 F. Supp. 2d 678, 682 (S.D. Tex. 2004).⁷

⁷ Although Cotton notes that in one Freedom of Information Act case a portion of a SAR was ordered to be produced, Dupre v. Federal Bureau of Investigation, 2002 U.S. Dist. LEXIS 9622 (E.D.

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Courts have determined that, although the statute specifically bars the disclosure of the SAR only to the persons involved in the transaction, the regulations forbidding any disclosure are authorized by the statute because a disclosure in litigation would make it more likely that the report would be disclosed to the persons involved in the transaction. See, e.g., Cotton, 235 F. Supp. 2d at 815 (citing In re Bankers Trust Co., 61 F.3d 465, 469 (6th Cir. 1995), and Chevron USA, Inc. v. National Resources Defense Council, 467 U.S. 837 (1984) ("federal regulations should be adhered to and given full force and effect whenever possible")). As Cotton noted, a judicially-created exception to the non-disclosure rule would harm the interests the Bank Secrecy Act was intended to promote, by compromising an ongoing investigation, revealing methods by which banks are able to detect suspicious activity, deterring banks from filing by subjecting SAR preparers to retaliation by customers, and harming the privacy interests of innocent third parties whose names may appear in a report. Id. Indeed, the harm from disclosure of an SAR was recognized to be so serious, and the law protecting it to be so clear, that the Florida Court of Appeals issued the rarely granted writ of certiorari to vacate a discovery order issued by a state court. See International Bank of Miami v. Shinitzky, 849 So.2d 1188, 1191-93 (Fla. Ct. App. 2003).

However, as FinCEN and the regulators always have acknowledged and the courts have recognized, this prohibition does not extend to underlying transactional documents. Financial institution business records, such as account statements and wire transfer advices, are discoverable under the standards of the Federal Rules of Civil Procedure. See, e.g., Whitney, 235

La. May 22, 2002), after defendant filed an appeal and obtained a stay from the court of appeals, the plaintiff withdrew the request and the case was dismissed as moot. Although this information does not appear in the subsequent history, it can be found in that court's electronic case docketing system.

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F. Supp. 2d at 682-83; Cotton, 235 F. Supp. 2d at 815-16. The two defendants are free to seek such documents. What they cannot do is invade the confidentiality of the suspicious activity reporting system itself.

Perhaps recognizing the strength of this body of law, the two defendants in this case have not sought SARs from banks, but from one of their regulators. If the confidentiality protections for SARs were held not to apply in such circumstances, then they would be rendered meaningless; a non-government party could always circumvent these protections by asking the government, rather than the filers, for the reports. The reports would then routinely be obtainable in civil litigation. This would yield the type of absurd result forbidden by the principles of statutory construction. See, e.g., United States v. X-Citement Video, Inc., 513 U.S. 64, 69-70 (1994).

Section 5318(g)(2)(B) of Title 31 clarifies that this is not the result Congress intended. Rather, government officials are subject to the same disclosure restrictions as filers, except with respect to disclosures necessary for the performance of their official duties. There is no legal basis for finding that disclosure of an SAR to a non-government party in a civil lawsuit is necessary to the performance of a bank regulator's official duties. Seeking a court order to convert such disclosure into an official duty is bootstrapping in the extreme. Rather, this is a narrow category -- examples of necessary official disclosures would include prosecutorial disclosures mandated by statute or the U.S. Constitution, such as where a report may contain a statement of a government witness to be called at trial, impeachment material of such a witness, or material exculpatory of a defendant.

In sum, the two defendants do not fall within the categories of persons entitled to disclosure of an SAR, nor does private civil litigation constitute a permitted use under the Bank Secrecy Act. SARs are

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not discoverable in civil litigation, either from the filers or from the government agencies that regulate the filers. In the Bank Secrecy Act, Congress carefully balanced the interests of the government users and filers to craft a reporting system that would provide the appropriate incentive to encourage reports of wrongdoing while protecting law enforcement confidentiality and individual privacy interests. These interests also have been carefully balanced by FinCEN and the bank regulators in issuing and interpreting the implementing suspicious activity reporting regulations. The equities at stake go far beyond the individual motion to the entire reporting system.

CONCLUSION

For the foregoing reasons, the United States respectfully requests that this Court deny the motion to compel to the extent it seeks the disclosure of any Suspicious Activity Report unauthorized by the Bank Secrecy Act.

Respectfully submitted,

PETER D. KEISLER Assistant Attorney General

ARTHUR R. GOLDBERG Assistant Branch Director

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OF COUNSEL: JUDITH R. STARR Chief Counsel Financial Crimes Enforcement Network P. O. Box 39 Vienna, Virginia 22183 Telephone: (703) 905-3534 Facsimile: (703) 905-3735

/s/ Herbert E. Forrest HERBERT E. FORREST Lead Attorney – Attorney to Be Noticed Federal Programs Branch Civil Division – Room 7112 U.S. Department of Justice 20 Massachusetts Avenue, N.W. Washington, D.C. 20530 Telephone: (202) 514-2809 Facsimile: (202) 616-8470 herbert.forrest@usdoj.gov D.C. Bar No. 4432

Attorneys for the United States

May 9, 2005

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CERTIFICATE OF SERVICE

I hereby certify that on May 5, 2005, a copy of the foregoing Statement of Interest of the United States was filed electronically. Notice of this filing will be sent by operation of the Court's electronic filing system to all parties indicated on the electronic filing receipt. No other party to be served by regular U.S. mail has been identified. Parties may access this filing through the Court's system.

/s/ Herbert E. Forrest HERBERT E. FORREST Lead Attorney – Attorney to Be Noticed Federal Programs Branch Civil Division – Room 7112 U.S. Department of Justice 20 Massachusetts Avenue, N.W. Washington, D.C. 20530 Telephone: (202) 514-2809 Facsimile: (202) 616-8470 herbert.forrest@usdoj.gov D.C. Bar No. 4432

Attorney for the United States

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