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American Banker

Suspicious-Activity Ruling Reinforces Bank Immunity


February 18, 2003
Copyright © 2003
Thomson Financial, Inc. . All rights reserved. 

Banco Popular de Puerto Rico got a lot of unwelcome attention last month when it was fined $21.6 million for failure to report suspicious deposits that resulted in the laundering of millions of drug dollars.

Less heralded was a federal court ruling Feb. 10 in favor of the bank's reporting a potential fraud to the Federal Bureau of Investigation.

The cases are different: The January action by U.S. enforcement agencies cited "gym bags full of cash" deposited between 1995 and 2000; the most recent decision involved a lot less money in Banco Popular's dealings with one person.

But last week's ruling by the U.S. Court of Appeals for the First Circuit has broad implications for banks that file suspicious activity reports in compliance with the USA Patriot Act, according to Banco Popular's attorney.

Sam Seymour, a partner at Sullivan & Cromwell, said that if the ruling had gone the other way, "for every future filing a bank would ask: Are we exposing ourselves to liability, and should we file?"

A tangled series of events led Banco Popular to report one of its customers to the FBI for bank fraud. That report eventually resulted in his arrest and his suit against the bank.

The relationship began in June 1995, when Palmer Stoutt, the president of Rancal International Inc. and its Rancal Puerto Rico subsidiary, a car rental and information technology company, entered into negotiations with Banco Popular for a five-year, $1.5 million loan. The conditions required that the loan be collateralized with Treasury bills.

According to the court, Mr. Stoutt obtained the collateral by arranging with Euro-Atlantic Securities, a Chicago broker-dealer, to lease $10 million in Treasuries for $300,000 a month. Euro-Atlantic required that he make a "good faith" deposit of a month's lease, which he raised by getting a $300,000 line of credit with Banco Popular.

For reasons both parties dispute, the Banco Popular branch manager refused Mr. Stoutt's August 1995 request to draw on the line of credit. Mr. Stoutt contends that the manager told him that if he deposited a check from another bank he could make an immediate withdrawal without waiting for the funds to clear.

Mr. Stoutt then deposited $300,000 at Banco Popular with a check drawn on a Citibank account in Miami. He said he thought the account had received profits from an investment in surplus Treasury bills from the Euro-Atlantic Securities arrangement.

The check bounced. In the meantime, Mr. Stoutt had transferred $300,000 from a Banco Popular account to make a deposit with Euro-Atlantic Securities, thereby overdrawing the account.

Mr. Stoutt said he was a victim of a scam by the broker-dealer and had lost his deposit without securing the promised Treasury bills, but Banco Popular officials were concerned about the size of the overdraft and concluded that he was engaged in check-kiting.

In November 1995 the bank filed a criminal complaint with the FBI, which began an investigation and later arrested Mr. Stoutt.

The charges were dismissed without prejudice a year later. In 1997, Mr. Stoutt sued Banco Popular for malicious prosecution, unlawful arrest and incarceration, and defamation. In July 2001 a court decided that the bank was immune from litigation under the safe harbor provision of the Annunzio-Wylie Anti-Money-Laundering Act.

Mr. Stoutt's attorneys argued on appeal that Banco Popular was not immune. Because it had known about his arrangement with the broker-dealer to obtain the collateral, they said, it had not acted in good faith in making the report to the FBI.

The latest court finding states that regardless of its motive, Banco Popular is protected from litigation arising from the suspicious-activity report.

The case also interested the bank regulator most involved in preventing money-laundering and other financial crimes. The Federal Reserve Board of Governors filed an amicus brief on behalf of Banco Popular.

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