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FINCEN Advises That Participation in a Foreign Tax Regularization Program By Itself Does Not Trigger SAR Filing Obligation

The Financial Crimes Enforcement Network (“FinCEN”) recently advised that a financial institution is not required to file a Suspicious Activity Report (“SAR”) based solely upon a customer’s inquiry into or participation in a foreign tax regularization program.  FinCEN issued this statement on February 21, 2018 in response to Florida International Banker’s Association’s request for guidance (“FIBA Request”) in 2016, which initiated the request because a number of its members expressed an interest in tax regularization programs and sought clarification on the AML implications of such programs.

This issue, perhaps seemingly esoteric, involves a basic question of increasing practical importance, particularly in light of the Panama Papers related international scandals, and global criticism of the U.S. as a potential haven for foreign tax cheats and money launderers: does the possibility of foreign tax evasion by a bank client necessarily trigger the need to file a SAR?  Foreign tax evasion can represent potential violations of U.S. law, such as the federal mail or wire fraud statutes, which in turn may support a prosecution theory that related financial transactions involving foreign tax evasion and the U.S. financial system represent potential U.S. money laundering violations (for a detailed article on this issue, please see here).

Tax regularization programs, according the FIBA Request, are programs initiated by a foreign government to waive civil and criminal penalties for a historical tax non-disclosure and evasion. The FIBA Request provides examples of recent legislation in Argentina, Brazil, and Columbia and adds a prediction that many  Latin American countries will institute similar programs as the countries join the growing global financial transparency fight.” The FIBA Request emphasized that the newest iteration of these programs – unlike earlier programs – require specific documentation from the participants’ custodial financial institutions to corroborate the value of the disclosed assets.  Therefore, this process creates a concern that a customer’s inquiry about or participation in a foreign tax regularization program provides the financial institutions with knowledge of prior tax-noncompliance that could be viewed as requiring the U.S. financial institution to file a SAR.

The FIBA Request advocated a finding that no obligation to file a SAR occurred because a customer’s participation in a tax regularization program does not fit within the definition of a “suspicious transaction,” which is defined by the Federal Financial Institutions Examination Council (“FFIEC”) Examination Manual’s guidance to include deposits, withdrawals, transfers between accounts, exchanges of currency, exchanges of currency, extensions of credit, purchases or sales of securities or any other payments, transfers or delivers by, through or to a bank, and similar affirmative conduct. Further, the FIBA Request argued there is no specific regulation or statute identifying foreign tax evasion as a SAR reportable activity. Finally, the FIBA Request emphasized the conduct involved foreign crimes occurring outside the United States and there is a presumption against statutes applying to conduct outside of the United States unless a clear indication of extraterritorial intent is given, relying on Morrison v. National Australia Bank.

FinCEN’s Policy Division responded through a letter which offered helpful, but relatively narrow guidance. The FinCEN letter clarified that financial institutions have an obligation to file a SAR regarding a transaction under 31 C.F.R. § 1020.320if the transaction 1) was conducted by, at, or through the financial institution; 2) exceeds the applicable monetary amount; and 3) was suspicious, meaning it

  1. involves funds derived from illegal activity or is conducted to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any Federal law or regulation;
  2. is designed to evade any requirements of the BSA or BSA implementing regulations; or
  3. has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

FinCEN explained that a “customer’s inquiry into or participation in a tax regularization program does not by itself” does not meet the requirements for filing a SAR.  FinCEN also found the inquiry into or participation in such programs alone does not give the financial institution notice of a past activity requiring the filing of a SAR.  FinCEN noted that a customer may elect to participate in a tax regularization program for “a variety of reasons, for example, to obtain certainty in the face of a complex tax environment.” However, FinCEN also observed that a financial institution may choose to undertake a subsequent review of a customer’s account in light of the new information as part of its overall risk assessment of that customer and its account activity.

Importantly, the FinCEN letter is not a binding administrative ruling and is expressly intended only as an interpretive guide based on the request as presented.

This advice therefore should be viewed only as an expression that currently there is no categorical obligation to file a SAR based solely on a customer’s inquiry about or participation in a tax regularization program.  However, prudent financial institutions  should evaluate the circumstances surrounding the customer’s inquiry or participation in the tax regularization program and consider a closer review to determine if any prior activity meets the requirements for filing a SAR.  This advice also serves as a reminder that the use of U.S. financial accounts in furtherance of a foreign tax evasion scheme potentially can represent money laundering, or at least a more general form of criminal activity meriting the filing of a SAR.

Copyright © by Ballard Spahr LLP

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About this Author

Jessica Case Watt, Ballard Spahr, Deleware attorney, Commercial Litigation, Mortgage Banking, Securities Enforcement and Corporate Governance Litigation
Associate

Jessica Case Watt is an associate in the Litigation department. Ms. Watt practices complex commercial litigation, with experience in cases involving breach of contract, fraud, and disputes related to lending and finance agreements. She has experience representing commercial lenders in pursuing foreclosure actions to judgment and sale in the State of Delaware.

Ms. Watt practices corporate litigation, including matters of corporate control, corporate governance, statutory and contractual disputes, statutory demands for inspection of corporate books and records, and breach of fiduciary...

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