All domestic and foreign banking organizations supervised by the Federal Reserve are required to file Suspicious Activity Reports (SARs) regarding known or suspected criminal activities by current and former officers, directors, employees and other institution-affiliated parties (IAPs), and others.1 Board staff reviews SARs on a regular basis to identify significant cases in order to ensure that appropriate enforcement actions are brought against IAPs, subject to the jurisdiction of the Federal Reserve, whose misconduct is reported in SARs. Staff also reviews SARs to facilitate coordination with law enforcement authorities investigating the matters reported on the forms. The SARs identified by Board staff during these reviews are referred to the Reserve Banks for follow-up action. Reserve Banks also independently review SARs filed by supervised institutions within their districts on a regular basis to identify IAPs whose misconduct warrants enforcement actions, and they review SARs prior to an examination or inspection of a state member bank, bank holding company and other supervised institution in order to evaluate a banking organization's compliance with the Board's SAR reporting rules and the Bank Secrecy Act.2
The Special Investigations Section of the Division of Banking Supervision and Regulation has recently had its responsibilities expanded and is now responsible for enforcement actions against IAPs handled by the Division.3 This SR letter provides guidance to Reserve Banks regarding the coordination of enforcement matters with the Special Investigations Section once a SAR against an IAP has been identified for follow-up action.
Generally, Reserve Bank follow-up is required on SAR filings involving IAPs when any of the following criteria is met: (1) the amount of the loss is $25,000 or greater; (2) multiple SARs have been filed on an individual, regardless of the amount of loss; (3) the conduct resulted in unjust enrichment; or (4) the conduct would have resulted in a significant loss had it gone undetected or had restitution not been paid. Once either Board staff or a Reserve Bank identifies a SAR fitting one of these criteria, then the Reserve Bank should contact the financial institution to discuss the details of the SAR and ascertain law enforcement's involvement. Of course, Reserve Banks should continue to contact banking organizations and law enforcement authorities regarding a particular SAR filing when other events raise supervisory concerns.
If law enforcement intends to prosecute the IAP, the Reserve Bank should monitor law enforcement's efforts and notify Board staff of law enforcement's interest. If informed that a guilty plea is likely, the Reserve Bank should provide law enforcement with the following paragraph to be included in the plea agreement:
"Defendant further agrees not to become or continue serving as an officer, director, employee, or institution-affiliated party, as defined in 12 U.S.C. Section 1813(u), (the Federal Deposit Insurance Act, as amended), or participate in any manner in the conduct of the affairs of any institution or agency specified in 12 U.S.C. Section 1818(e)(7)(A), without the prior approval of the appropriate federal financial institution regulatory agency as defined in 12 U.S.C. Section 1818(e)(7)(D)."
The use of this language in a plea agreement obviates the need for the Board or any other banking agency to take a separate enforcement action barring the individual from the banking industry. The aforementioned paragraph was drafted in consultation with the other federal financial institutions supervisory agencies and the U.S. Department of Justice.4 Reserve Banks should also notify Board staff if a conviction is obtained.
If law enforcement declines to prosecute an IAP identified in a SAR filing meeting one or more of the above-mentioned criteria, the Reserve Bank should do the following:
After obtaining the documentation available from the financial institution, and considering whatever additional information that the Reserve Bank has about the IAP, the Reserve Bank should evaluate the quality of the documentation, weigh any other relevant circumstances and determine whether to recommend that the Board take an enforcement action against the IAP. Possible actions include a permanent ban from the banking industry through a prohibition order or a cease and desist order requiring restitution and corrective actions addressing the IAP's misconduct and future employment. If the Reserve Bank decides to recommend an enforcement action, then the Reserve Bank should continue to follow current procedures relating to the submission of enforcement action recommendations to Board staff, which include a memorandum summarizing the facts, along with a copy of the supporting documentation. The Reserve Bank should also notify Board staff when it recommends that no action be taken.
Reserve Banks are asked to distribute this letter to appropriate supervisory and examination staff. For SARs and related enforcement action recommendations meeting the criteria described in this SR letter, Reserve Bank staff should contact Carmina Hughes, Special Counsel and Manager of the Special Investigations Section, at (202) 452-5235, or John Davidson, Senior Attorney, at (202) 452-2808. Questions can also be directed to Herbert A. Biern, Senior Associate Director, at (202) 452-2620 or to Ms. Hughes or Mr. Davidson.