Spring 2003-10 Bank immunity for reporting apparent crime affirmed

Number 51
Spring 2003

Follow up

Bank immunity for reporting apparent crime affirmed

A 2001 decision by the U.S. District Court for the District of Puerto Rico, declaring that Banco Popular was immune from suits resulting from its report of an apparent crime, has now been affirmed by the U.S. Court of Appeals for the First Circuit. Stoutt v. Banco Popular de Puerto Rico, 320 F.3d 26 (1st Cir. 2003).

The 2001 District Courts decision-158 F.Supp. 2d 167-was reported in the Fall 2001 issue of Puerto Rico Business Law Developments.

Sham transaction

In order to provide collateral security for a loan solicited from Banco Popular, Palmer Paxton Stoutt contacted Euro-Atlantic Securities, in Chicago, who had offered to lease him $10,000,000 in U.S. Treasury Bills. The leased T-Bills would secure the loan, and at the same time produce enough money to pay the cost of the lease-$300,000 monthly. Stoutt procured a line of credit from the bank and wired $300,000 to Euro-Atlantic, who was to deposit the T-Bills with La Jolla Capital. The latter would then transfer $800,000 back to the Popular account. The entire transaction was to move quickly in order to cover the wired $300,000. The $800,000 never arrived, because the leased T-Bills transaction had been a sham from the beginning.

Banco Popular filed a Report of Apparent Crime with the Federal Bureau of Investigations and the office of the U.S. Attorney. Stoutt was arrested for bank fraud due to check kiting (drawing checks with insufficient funds, in order to cover them with drawings from other accounts also with insufficient funds). The U.S. Attorney’s office dismissed the case for lack of sufficient evidence.

Good faith

Stoutt filed suit against the bank, claiming that it had not acted in good faith in filing the report of apparent crime, because it had presented inaccurate and incomplete information to the federal authorities. He indicated that he had discussed with the branch manager the nature of the transaction before it had taken place, and that the bank was aware that it was not a kiting operation.

The District Court dismissed the complaint, finding that the immunity granted to banks by the Anti-Money Laundering Act, 31 U.S.C. § 5318, contains no good faith qualification.

Court of Appeals

The Court of Appeals first considered if the bank’s conversations with the FBI that followed the filing of the report were also protected by the statutory immunity, or if they were to be distinguished from the report itself. The court found that the purpose of the statute forces the conclusion that the immunity extends beyond the act of filing. “If the original core disclosure was text,” the court said, “ordinary follow-up answers to investigators would be footnotes and should be similarly protected.”

To the argument of an implied good faith precondition, the court answered that such a reading of the law would create a risk of second guessing and discourage filing the reports intended by Congress.

Government enforcement

The immunity is limited to private suits, however. Banks are still subject to enforcement actions by the government, should they willfully file false reports. n

© 2003 Goldman Antonetti