Excerpt from the SAR Activity Review The Safe-Harbor Protection for Employment References:
A Long-Awaited Tool To Deter Money Laundering,
Terrorism & Fraud
by Robert B. Serino (Senior Advisor for Financial Services, Watkins Consulting)
On October 26, 2001, President George W. Bush signed the Uniting and Strengthening
America by Providing Appropriate Tools Required To Intercept and Obstruct
Terrorism Act (USA PATRIOT Act of 2001). In so doing, the President
developed new tools and imposed additional requirements on the federal government
and the financial services industry to address the dual threats of terrorism
and money laundering. While some of the act's changes will impose additional
burdens on financial institutions, others will protect them and their employees
from liability when they take steps to keep dishonest individuals out of the financial
services industry.
The USA PATRIOT Act expands the safe harbor that currently protects banks and
their employees from being held liable when they file suspicious activities reports
with the federal government. It also, for the first time, protects an expanded list of
financial institutions and their employees when they make disclosures in certain
employee references. Note 1
PREDICATE FOR THE LEGISLATION
Congress had previously given federal regulators appropriate remedies to remove
and bar dishonest individuals from the banking industry. Regulators have the
statutory power to commence a formal administrative action to remove and ban
bank employees and officials when it can be established that they have violated
their positions of trust. Likewise, existing statutes permit regulators to summarily
suspend bank personnel if they are indicted for crimes of dishonesty, breaches of
trust, or money laundering. Also, a person convicted of such a crime is, by operation
of law, barred from serving in a depository institution, unless he or she has
prior approval of the Federal Deposit Insurance Corporation.
Through its 1989 passage of the Financial Institutions Reform, Recovery and
Enforcement Act, Congress attempted to strengthen the removal statute by mandating
that if an individual was removed from one depository institution, he or
she would be barred from any other depository institution.
If an individual is barred from banking for any of these reasons, it is illegal for a
bank to employ that individual. If a bank or individual knowingly violates this
prohibition, they are subject to criminal prosecution or a civil money penalty up
to $1 million for each day the violation continues.
While the existing statutory remedies are helpful, they are only effective if a
formal action or prosecution has been taken against the individual. These provisions
do not address situations in which there was no prosecution or regulatory
sanctions of the individual.
To avoid committing such a violation and to protect themselves from employee
abuse, financial institutions must have a due diligence program to evaluate the
background of individuals before they are employed. One of the major sources of
information an institution should check before employing someone is prior
employment records.
For years the industry and its regulators have been concerned about the problem
that is created when a person is terminated from an institution for being involved
in wrongdoing but is not prosecuted. Subsequently, that person could become
employed at another institution without the second institution learning about the
problems at the first. Until now, banks have been reluctant to share such adverse
information about former employees for fear that they might be sued for providing
the facts of the wrongdoing that caused the termination.
In previous years Congress and the regulators have addressed this concern. In
testimony given on June 11, 1998, before the Committee on Banking and Financial
Services of the U.S. House of Representatives, the Comptroller of the
Currency's Office supported the goals of the legislative proposals before the
committee, specifically:
the expansion of the statutory .safe harbor. for banks and individuals that
report potential crimes and suspicious transactions, and the creation of a
new .safe harbor. for banks and individuals who share information in an
employment reference about a prospective employee's possible involvement
in a violation of law or a suspicious transaction. Banks and their
employees must feel free to report suspicious transactions, and to share
information in the employment context about individuals involved in
misconduct, without fear of liability.... Note 2
Although the committee approved a provision dealing with the issue, the legislation
never became law.
The issue was again brought up in the legislative debates on the Money Laundering
Act of 2000 (the predecessor of the USA PATRIOT Act). In testimony before
the Subcommittee on Crime of the Committee of the Judiciary, the American
Bankers Association's senior counsel and compliance manager, John Byrne,
pointed out the limitations banks have faced in disclosing the facts regarding
former employees who have been terminated for committing fraud. Note 3
Clearly, one of the major obstacles has been the fear and cost of responding to
litigation. To address this concern, Byrne noted, about a dozen states already had
provided for liability protection to employers who responded to requests for
references, including when they advised that an individual had been suspected of
criminal wrongdoing.
LEGISLATIVE CHANGE
To address the industry's concerns about potential litigation, Congress passed a
provision in the USA PATRIOT Act that, for the first time, gives financial institutions
and their employees a .qualified. safe harbor protection from liability when
they provide information to another institution about a former employee's employment
record. This provision deals with information regarding former employees,
not customers. Note 4 To come within the act's protection, banks must
strictly comply with its provisions. The requirements mandate that the disclosure
be in writing and be in response to a request from another institution. The protection
only exists for disclosures between financial institutions, including uninsured
branches and agencies of foreign banks.
Although the statute does not mandate disclosures between institutions, it does
protect an institution and its employees if a disclosure is made. The protection
also covers written termination notices or employment references that are provided
pursuant to rules of a self-regulatory organization registered with the
Securities and Exchange Commission or the Commodity Futures Trading Commission.
We refer to this as a .qualified. safe harbor because the USA PATRIOT Act.s
provision amending the FDIC Act provides that any disclosure made with .malicious
intent. will not be shielded from liability. While this provision is only in the
section of the act dealing with disclosures between .depository institutions,. out
of an abundance of caution, all financial institutions should be concerned that this
factor will be read into their safe harbor.
EFFECT ON FINANCIAL INSTITUTIONS
Because the statute provides that maliciousness would defeat the safe harbor, it
can be easily assumed that when a person sues an institution or individual for
.defamation. or other tort stemming from an employment reference, there will be
an allegation of malice. Note 5 Such a claim would probably allege that the bank
or its employees made the employment reference out of personal animosity and
without a true factual basis. Generally, because the question of malice will hinge
on the facts of each case, a bank probably will not be able to merely obtain a
summary judgment or a dismissal of a suit. Note 6 To defeat such allegations, a
financial institution or person sued will be required to defend the action by
establishing that its actions and responses were made without malice. This will
become a debate on the facts and could involve substantial discovery.
In order to ensure that the Act's safe harbor protects financial institutions and
their employees, it is strongly advised that the language of the statute be followed
literally and that institutions set up detailed processes to handle employment
record requests. If the issue of malice is raised, the institution can point to its
strict compliance not only with the statute but also with its established policies
and procedures.
Among the actions an institution should take to support the argument that an
employment reference was made in accordance with the act and without malice
are the following:
The handling of the requests for information should be centralized and if
possible reviewed by counsel. This will help rebut the contention that the
person making the reference had a personal dislike or intent to injure him. It
would also provide for a separate set of eyes to review the particular matter
and make an independent determination consistent with prior matters. Such
a process should lead to more objective and less personalized references.
The response must be in writing and in response to a request from another
financial institution. Although the act does not state that the request be in
writing, to ensure that there is no question that a request was made - and to
avoid the contention that the .referring bank. made the reference with
malice because it was not .requested. - a written request should be obtained.
Having this on file would lend credibility to the argument that there
was no malicious intent involved.
The disclosure is made only in a situation in which a SAR or report has
already been filed. The regulations of the agencies require that financial
institutions file a SAR when they suspect violations of law or suspicious
activities involving amounts of money greater than $5,000, unless the
individual is an insider in the institution - in which instance there is no
dollar limit. Because institutions should have a review process to determine
whether a SAR should be filed, this should be another independent indication
to help refute the allegation of personal animosity toward
the individual.
The response cannot disclose that a SAR has been filed but can contain the
allegations made in the SAR. A SAR is considered a confidential document
and the fact that one has been filed cannot be disclosed.
The response should recite accurate facts without the use of pejorative
words or speculation. This is one of the most important considerations in
making a reference. It is where personal animosity could be detected, especially
if the reference was spiced with incriminating, highly charged facts
that ultimately prove to be inaccurate. An undisputed recitation of the facts
as to what transpired is the safest course. There probably should be no
suggestion of what the requesting bank should do about hiring the individual
(i.e., there is no benefit in telling the requesting bank that it should
not hire the individual - the facts should speak for themselves).
Records should be maintained to show that the review of the request was
handled in accordance with bank processes and with appropriate review.
Copies of any memoranda summarizing a decision to file the SAR and the
reference, together with the incoming request, should be maintained to
establish that the matter was handled in accordance with normal bank
procedures and without personal animosity toward one individual. Financial
institutions should try to obtain a written admission from the offending
employee. This should be part of the supporting documentation and filed
with the bank records.
CONCLUSION
While the USA PATRIOT Act's creation of the safe harbor for employment references
is important and institutions should be encouraged to provide accurate and
truthful reports, it is also important that financial institutions establish an internal
process to ensure that the protections are maintained. Without such a process, it
may be difficult for an institution to defeat a claim that information was provided
with malice toward the former employee and avail itself of the act's safe harbor
protection.
Notes:
See Sections 351 and 355 [351 amends the present 31 USC 5318(g)(3), and
355 amends the FDIC Act by adding section (w) to 12 USC 1828].
See testimony of Robert B. Serino, Deputy Chief Counsel, Comptroller of the
Currency, before the Committee on Banking and Financial Services of the
U.S. House of Representatives, June 11, 1998, concerning markup of H.R.
4005 (Money Laundering Deterrence Act of 1998) and H.R. 1756 (Money
Laundering and Financial Crimes Strategy Act of 1997).
Hearing before the Subcommittee on Crime of the Committee on the
Judiciary, U.S. House of Representatives, on February 10, 2000. The testimony
covered several issues presented in The Money Laundering Act of 2000 and
also focused the subcommittee on the employment reference provision.
The sharing of customer information would be covered by the provisions of
the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act, and this safe
harbor would not protect them.
In several cases brought over the past few years, individuals have sued banks
alleging that the banks, in making referrals to law enforcement, have violated
the individuals. rights. In defending themselves, banks have contended that
they were immune from liability for this disclosure under the .unqualified.
safe harbor provisions of the Annunzio-Wylie Anti-Money Laundering Act.
See 31 USC 5318 (g)(3)[SAR safe harbor]. In some early cases, courts found
that there was a factual issue to determine if the banks had acted in bad faith
and therefore in some cases did not grant the banks. motions for summary
judgment or motions to dismiss. See Lopez v. First Union National Bank, 129
F.3rd 1186 (11th Cir.1997). Nevertheless, in the key case dealing with the
breadth of the .suspicious activity report. safe harbor, the court in Lee v.
Bankers Trust, 166 F.3d 540 (2d Cir., 1999), concluded that the plain
language of the statute (and the congressional intent) did not require the
referral to be made in good faith. The court concluded, therefore, that there
was no question of fact. See also Stoutt v. Banco Popular De Puerto Rico, 158
F.Supp 2d 167 (D.P.R July 24 2001). The absence of the language in the SAR
safe harbor is in stark contrast to the specific language of Section 355 of the
USA PATRIOT Act, where Congress specifically allows for malice to defeat
the protection of the safe harbor.
Courts are reluctant to issue summary judgment where there are potential
issues of motive and intent. See Stoutt v. Banco Popular De Puerto Rico, 158
F.Supp 2d 167 (D.P.R. July 24, 2001). However, .even in cases where elusive
concepts such as motive or intent are at issue, summary judgment may be
appropriate if the nonmoving party rests merely upon conclusory allegations,
improbable inferences, and unsupported speculation.. Ibid., citing Ayala-
Gerena v. Brystol Myers-Squibb Co., 95 F.3d 86,95 (1st Cir. 1996).
Excerpted from SAR Activity Review Issue 4, page 53
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