Friday, November 23, 2012

IRS Use of Suspicious Activity Reports of Financial Institutions (11/23/12; revised 11/24/12)

Financial institutions are required to file Suspicious Activity Reports with the Financial Crimes Enforcement Network (FinCEN).  31 USC § 5318(g), here; the SAR form is here; FinCEN guidance is here; see also Wikipedia entry here.  For general background, I offer the following from my Federal Tax Crimes book (footnotes omitted):
Although there is no general duty under American law to report crimes, certain financial institutions (including money services businesses and high cash businesses such as casinos) are required to file with FinCen a report, called a Suspicious Activity Report (“SAR,” but not to be confused with the Special Agent’s Report with the same acronym which we encountered earlier).  This SAR combines features of earlier reports and is in addition to the CTR if required.  The SAR is required if the financial institution “knows, suspects, or has reason to suspect the money was derived from illegal activities” or the transaction was “part of a plan to violate federal laws and financial reporting requirements (structuring).”  The financial institution is not required to investigate or confirm that a crime has been committed. The financial institution is prohibited from telling its customer of the filing of the report, even in response to a subpoena.  The financial institution is protected from liability to the customer.  The IRS may share this SAR with the IRS examination function having civil tax responsibility, but components of the IRS receiving the information are required to keep the information secure to the same extent as if received from a confidential informant.
Recently, some divisions of the IRS have released memoranda advising personnel about the control and confidentiality requirements with respect to accessing SAR information.  See e.g., a recent SB/SE Division Memorandum (SBSE-04-1012-063, dated 10/16/12), here, and an estate and gift tax memorandum dated July 13, 2012, here.  See also an earlier Memorandum of Understanding -- in Government acronym-speak, "MOU," referenced and available at IRM 4.26.14, here, Exhibit 4.16.14-2, here.  For some reason, the MOU is reviewable only on line and then on a page by page basis.

Addendum on 2/24/12:

I mention the CTR in the quote above.  The CTR  is the Currency Transaction Report.  I decided to provide my discussion of the CTR (footnotes omitted) because it is a key complement to the SAR:
2. Bank Secrecy Act and CTRs. 
The Currency and Foreign Transaction Act, frequently referred to as the Bank Secrecy Act of 1970 (“BSA”), authorizes Treasury to issue regulations requiring financial institutions and other persons to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, regulatory, intelligence, and counter-terrorism matters, and to implement counter-money laundering programs and compliance procedures.  The BSA was based on Congress’ concern that financial institutions were used to launder proceeds of criminal activity and of unreported income.  Congress’ purpose was to identify cash movements for use in law enforcement by creating a paper trail from financial institutions back to the criminal organization. And, in a post-9/11 world, the reports required for financial institutions can be helpful in identifying or tracking the flow of funds needed for substantial terrorist activities. 
The BSA is quite complex and is generally beyond the scope of this book.  Here, I just summarize the provisions more relevant to tax crimes.  In broad strokes, the regulations adopted under BSA’s authority require the following reports and recordkeeping: 
Keep records related to certain monetary instrument purchases and funds transfers;
Report currency transactions of more than $10,000 by, through, or to the financial institution;
Report the transport of currency across U.S. borders;
Report certain accounts that United States citizens and residents hold at foreign financial institutions; and
Report suspicious transactions relevant to possible violations of the law. 
Financial institutions covered by the significant reporting provisions of the BSA include not only banks and savings and loans, but broad categories of NonBank Financial Institutions which include so-called “money service businesses” or acronymically “MSBs” – securities and commodity brokers, investment banking companies, currency exchanges, telegraph companies, certain issuers of travelers checks and money orders, casinos, insurance companies, operators of credit card systems, pawnbrokers, dealers in precious metals, travel agencies, real estate brokers, plus such other businesses as covered in regulations issued by Treasury. 
The covered financial institutions are required to maintain certain records and file reports on domestic and foreign transactions involving cash or monetary amounts of $10,000 or more.  Of course, merely transferring cash in excess of $10,000 does not mean that the person is going to commit a crime or that the money is either the fruits of a crime or, less likely, an instrumentality of a crime.  But in our economy which otherwise relies on checks, credit cards and, with respect to large fund transfers, wire transfers which create a paper (or digital, at least) trail, large flows of cash funds are unusual and probably a high percentage of such cash fund transfers implicate the violation of some law in some respect.  Accordingly, the congressional judgment was that businesses participating in the transfer be subject to reporting requirements.  The Government can use the reports to make its criminal enforcement efforts more efficient.  Correspondingly, the existence of the reporting requirement will make criminals' use of their ill-gotten gains less efficient. 
The principal reporting requirement for present purposes is the Currency Transaction Report, FinCEN Form 104 (formerly Form 4789) (“CTR”). CTRs are required for all cash transactions or series of related transactions that exceed $10,000.  Certain customers, where the likelihood of ill-gotten gains is low, are exempted from the requirements.  Transactions “structured” -- broken into less than $10,000 components -- to evade the reporting requirements are criminalized.  There are thus two key elements to the integrity of the requirements.  First, financial institutions must report.  Second, depositors and other persons dealing with financial institutions must not “structure” their dealings so as to prevent financial institutions from complying.  
In Ratzlaf v. United States, the Supreme Court held that the willfulness element then in the statute required that the Government prove not only that the defendant acted to evade the reporting requirements but also acted with the knowledge that evading the reporting requirements was illegal.  Congress quickly changed the statute to impose criminal liability only upon a showing that the defendant acted to evade the reporting requirement.  Whether or not the defendant knew that the structuring was illegal is now irrelevant. 
[I omit the SAR paragraph quoted above] 
The criminal penalties for violating the reporting requirements are stiff – five years and $250,000.   The penalties for structuring are equally stiff and parallel the reporting penalties – five years and fine under Title 18.  As with the reporting penalty, the penalties are doubled if the person structured “while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period.” 
Administration of the BSA’s reporting requirements is with Treasury’s Financial Crimes Enforcement Network (“ FinCEN”) and the IRS, both of which play a significant role in many forms of financial crime.  However, FinCEN partners with many other federal regulatory agencies that are the primary supervisors or functional regulators of financial institutions subject to the BSA.  These other agencies, through resources located both at headquarters and in field offices, are essential to the effective and efficient administration of the BSA.  For covered financial institutions without a federal regulator, FinCEN and the IRS work cooperatively. 
The IRS, through both its civil operating divisions and its criminal division, is the most frequent user of the financial information produced by BSA’s reporting requirements.

No comments:

Post a Comment

Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.

Post a Comment