Guest Post: FinCEN Promotes the Use of Section 314(b) of the USA PATRIOT Act

By Andrew Cochran

I am very pleased to post the views below of Mr. James F. McGinnis, Managing Director for Anti-Money Laundering Ethics & Compliance at BNP Paribas, on the use of Section 314 of the USA PATRIOT Act, which authorized enhanced information sharing among financial institutions and with law enforcement. I addressed that section on the day we opened in 2005 and recently discussed whether there is sufficient information sharing with money service businesses.

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James H. Freis. Jr., is the director of the Financial Crimes Enforcement Network (“FinCEN”) at the Treasury Department. I have just read his remarks to the Florida Bankers Association Town Hall Meeting. It was interesting to note what may be a slightly defensive tone as he emphasizes that FinCEN is not exclusively engaged with fighting money laundering and terrorism but addresses all kinds of financial crime. He goes on to discuss the results of his outreach program in which he has been talking to some of the larger financial institutions. He finds that some firms have expressed concern over the costs of AML efforts. In response, he attempts to make the business case that, in addition to the public benefits of anti-terrorism and anti-money laundering programs, such efforts also combat fraud, which provides direct cost savings to financial institutions.

He suggests that the fact that AML programs of many institutions are run separately from fraud detection units may contribute to the perception that there is little direct cost benefit to AML programs. He goes on to cite efforts of institutions to share fraud related information as a means of preventing and detecting fraud and mentions the 314(b) program as a well received means of sharing information between participating institutions. He promises that FinCEN will be promoting greater use of this program in the future. His remarks go on to include specific examples of his agencies cooperative efforts to combat mortgage and medical fraud in the state of Florida.

Section 314(b) of the USA PATRIOT Act allows participating financial institutions to share otherwise confidential information with each other. It is, in effect, a safe harbor from privacy requirements. Each participating institution must register with FinCEN and designate an individual to send and receive information requests. Participation is voluntary, although most major institutions participate. Even after agreeing to participate an institution is not required to respond to any particular inquiry. This section of the act should be distinguished from Section 314(a), which allows law enforcement agencies to send information requests to financial institutions.

The idea behind 314(b) is that when I discover activity at my bank which I think is questionable, I can contact another participating institution that may have relevant information. I can reach out to their designated 314(b) contact and ask for information which will help my investigation. Let’s say that I notice a series of checks drawn on Bank “X”, deposited in one of my customer’s accounts. I can’t readily explain where the money is coming from. One of my options is to reach out to the 314(b) contact at Bank X and ask what they know, or can find out, about the checks. I, in turn can share information about my client, and the result may be that one or both of us file Suspicious Activity Reports.

That is the way it is supposed to work, and often it does, but the program is probably not used as much as it could be. There are a number reasons for this. One is that some institutions do not maintain their listings with FinCEN current. It is not uncommon to try to contact the listed 314(b) representative and find that they have left the bank. Since sharing information outside the scope of 314(b) is generally prohibited by law, one must take pains to insure that the letter of the rule is being followed. This is also why it was somewhat disingenuous of Mr. Freis to mention 314(b) in the context of fraud prevention. His agency’s rules state that the information received under the program can not be used for any purpose other than identifying and reporting on activities that may involve terrorism or money laundering. While it could be argued that any kind of financial crime could, almost of necessity, result in some form of money laundering, most Compliance officers are probably cautious before invoking Section 314(b).

Lastly, many banks seem reluctant to be really open about sharing. Generally they will send or respond to specific questions but will not volunteer any information. I have seen some 314(b) queries that look like interrogatories written by litigators and ask such detailed questions that few institutions would have the resources or inclination to respond. There is also an open question in the industry as to whether or not it is appropriate for 314(b) participants to share SAR information.

FinCEN could perhaps improve the process by broadening the scope of 314(b) to make it clear that information concerning any potentially suspicious activity, including simple fraud, may be shared and encouraging sharing institutions to coordinate SAR filings. The real problem is, I suspect, the same kind of natural reticence on the part of financial institutions that makes law enforcement reluctant to share information that would improve financial institutions’ monitoring processes. After being rigorously drilled on the need for confidentiality, it is difficult to appropriately shift into sharing mode.

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