The Community Bank is under siege!

Your partners at Superior Consulting realize that the community bank is under siege from an unprecedented volume of new regulation, ever increasing competition, thin profit margins, and an unusually hostile regulatory environment. Our singular mission is to provide you with Guidance You Can Trust during these troubled times in order to ensure your institution does not become yet another statistical casualty of this environment.

Suspicious Activity Reporting & Director Responsibilities

As a member of the Board of Directors of a highly regulated institution, you have many responsibilities encompassing a wide array of issues and concerns ranging from the solvency and profitability of the bank to compliance with a divergent series of regulatory requirements. As a Director, shouldn’t you ensure that you are receiving precise, accurate information -information that tells us what we need to know and doesn’t overload us with “excess baggage”? The answer is yes! But sometimes the desire to scale down or condense information can go too far and leave us with virtually no meaningful information, which may impair the Board’s ability to execute its fiduciary responsibilities. One area where this event has been common is in relation to the Bank Secrecy Act (BSA). It seems as though monthly reporting to the Board of Directors on the topic of BSA has become routine reporting to the Board regarding how many Currency Transaction Reports (CTRs) were filed that month and if any Suspicious Activity Reports (SARs) were reported.

Since filing statistics regarding SARs is what the Directorate most commonly receives regarding BSA, let’s take this opportunity to remind ourselves of the importance of the SAR program and ensure that we are receiving good information and that we are aware of the high confidentiality of this information. The 2010 BSA/Anti-Money Laundering Manual (BSA Manual) states, “Suspicious activity reporting forms the cornerstone of the BSA reporting system. It is critical to the United States’ ability to utilize financial information to combat terrorism, terrorist financing, money laundering, and other financial crimes.” Bank management, including directors, can easily forget how important their institution is to the overall success or failure of the SAR reporting function as a whole. Banks in rural areas can easily fall prey to a mentality of “that kind of activity does not happen in our community; terrorist financing, money laundering, and financial crimes only happen in larger metropolitan areas, etc.” The belief that terrorist financing or money laundering cannot happen in our Midwest communities could not be further from the truth. It was not long ago that an organization in the state of Missouri was charged with sending funds for the benefit of a specially designated global terrorist with ties to al-Qaeda and the Taliban. In addition, although international terrorism is likely limited in nature within this area, money laundering in relation to domestic drug trafficking activities is certainly a high risk activity. As directors, you must not lose sight of the importance of a strong SAR process and how your community bank plays a vital role in the success or failure of the overall SAR program administered by financial crimes enforcement authorities. In order for the SAR process to work, banks need to have a sufficient program in place to recognize possible suspicious activity, a process of reporting the activity internally to appropriate personnel, and finally a process to complete SARs.

After a SAR has been completed, bank management is required to notify the Board of Directors that a SAR has been filed. The regulations do not specifically state the format in which directors should be notified. Banks may, but are not required to, provide copies of SARs to the board. Although the BSA Manual states that copies of SARs may be provided to the Board, certain precautions must be taken to maintain the confidentiality of SAR information. If board members are provided actual copies of SARs, it is highly recommended that those copies are collected before the meeting is adjourned and immediately shredded. Instead of providing copies, banks may also provide summaries or perhaps tables of SARs filed for certain violation types. Regardless of the method of notification, bank management should provide sufficient information on all SAR filings to the Board of Directors in a timely manner, ideally meaning at the next board meeting following the filing of a SAR. Once the Board has been informed of the filing of a SAR, it should be documented in the Board minutes; however, there is only certain information pertaining to a SAR that should be included in the minutes. Specific information such as the name of the suspect involved in a SAR should never, under any circumstance, be mentioned in minutes, and a copy of a SAR should also never be included in the Board packets that are kept on file. We have to remember that we must keep even the existence of a SAR confidential. Per the BSA Manual, “No bank, and no director, officer, employee, or agent of a bank that reports a suspicious transaction may notify any person involved in the transaction that the transaction has been reported. Thus, any person subpoenaed or otherwise requested by FinCEN or an appropriate law enforcement or federal banking agency, shall decline to produce the SAR or to provide any information that would disclose that a SAR has been prepared or filed”. Therefore, this brings Board minutes into play as they could be subpoenaed, and thus providing information of the existence of a SAR. Information regarding the filing of a SAR included in the Board minutes should be nothing more than, “the Board was informed that (fill in the number) SARs were filed this month”. However, discussion of a SAR filing in the meeting can get as detailed as the Board chooses, unless the filing of a SAR happens to include a director (and yes, this happens…). If a SAR filing happens to include a director, the Board must take extra precaution and may not share this information with the Board member involved.

In addition, as a director of a community bank, it is quite possible that you may personally know individuals on whom the bank has filed a SAR. As stated above, you must keep this information confidential, and you may not share it with anyone. As a director, you must keep in mind that the SAR reporting process is vital to keeping our communities and our country safe, even if we think that “nothing bad happens here”.

 By: Brad Coursey

This articles appeared in the Directors Supplement of the Missouri Independent Bankers Association’s July 2012 Newsletter.

January 1, 2014

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