The Bottom Line
- Financial
institutions have a responsibility to intervene when they suspect their
services are being used to facilitate elder financial exploitation.
- Deciding
whether to place transaction holds or file suspicious activity reports
requires evaluating the facts and using subjective and objective
standards.
- The best defense for an institution is to carefully
document investigative steps they have taken in cases of suspected elder
financial exploitation.
Elder financial exploitation, or
EFE, is on the rise, with vulnerable adults losing more than $28 billion
annually, according to a recent AARP study.
Whether these frauds are perpetrated by family members and
acquaintances or professional criminals unknown to the victim, financial
institutions may find themselves in trouble if they don’t respond
appropriately to being caught in the middle of a fraud scheme.
Financial
institutions providing services to, or holding accounts for, a
vulnerable adult have a series of steps to consider when suspicious
underlying circumstances involving the individual are present: placing a
transaction hold on transactions within the account and/or
disbursements from their accounts, and/or filing a suspicious activity
report with the Financial Crimes Enforcement Network, or FinCEN.
The
standard in many states for effecting a transaction hold is synonymous
with whether the financial institution “reasonably believes,” after
initiating an internal review, that the transaction will result in
financial exploitation. If so, the institution may (but isn’t required
to) place a hold on the transaction, pending further review and
providing appropriate notification to specified state agencies.
A financial institution is required
to file a SAR if it has a reasonable suspicion that a transaction (or
attempted transaction) through the financial institution is an effort to
facilitate criminal activity.
Placing a Hold
A “reasonable belief” is a term that connotes both objective and subjective components. A belief is “a state or habit of mind in which trust or confidence is placed in some person or thing”—or what a person subjectively believes. Reasonable, as a legal requirement, has long been identified as an objective standard.
The North American Securities Administrators Association Inc., created
a “NASAA Model Act to Protect Vulnerable Adults From Financial
Exploitation,” which has been adopted in various forms in nearly 40
states. The commentary to the Model Act states reasonable belief is
“intended to be both a subjective and objective standard – i.e.,
a qualified individual must have a subjective belief in the existence
of financial exploitation, and this belief must be objectively
reasonable.”
This blended standard is intended to be flexible and
capture instances of actual knowledge of exploitation—as well as
instances in which the reviewer has a belief of exploitation, and a
reasonable person armed with the same information would reach the same
conclusion.
Further adding flexibility to the Model Act standard
(and permitting a transaction hold under appropriate circumstances) is
the inclusion of the word “may”—that is, “the requested [transaction]
may result in financial exploitation of the eligible adult.” With this
additional modifier, financial institutions only have to rationally
believe that financial exploitation could take place.
A shorthand
way to describe this standard is: “Do I believe, after a review has been
commenced, that a transaction may be exploitive, and would a
hypothetical co-worker agree with me?”
Although not necessarily
explicitly embodied in cases or statutes, this operates similarly to a
preponderance-of-the-evidence standard that exploitation could take
place. Under those circumstances, a financial institution is permitted
(but not required) to put a transaction hold in place.
This careful balancing makes sense
when it’s understood that a vulnerable adult’s funds are at issue, and
potentially being held for weeks. Many vulnerable adults rely on their
retirement and investment accounts to meet periodic and other living
expenses. However, there is a collective societal interest in putting
measured, appropriate safeguards in place to protect the most vulnerable
from theft, fraud, or other illegal activity.
One other
significant safeguard for financial institutions is the availability of
immunity for reporting suspected exploitation to state officials and
putting transaction holds in place, as long as the financial institution
acted in “good faith.”
In one of the few reported cases on the
scope of statutes designed to protect vulnerable adults and financial
institution responsibilities, a North Carolina federal district judge
gave a broad interpretation to immunity provisions for financial
institutions.
Given the overall purposes
underlying these statutes and their paternalistic nature, financial
institutions have broad space to make judgment calls and, at minimum,
buy time to more fully and completely investigate the underlying facts.
In
some circumstances, the investigation of the underlying facts and the
consequent judgment call will result in no transaction hold (or anything
else) taking place. Other instances may result in law enforcement and
protective services’ involvement, potentially leading to legal
proceedings.
Filing a SAR
In stark contrast, if a
financial institution has a reasonable suspicion a transaction (or
attempted transaction) is being used to facilitate criminal activity, it
is required by law to file a SAR. This includes instances of EFE. As
FinCEN has explained in the context of EFE, financial institutions “are
uniquely situated to detect possible financial exploitation through
their relationships with older customers.”
The reasonable
suspicion prong for SAR-filing appears, on its face, to be an objective
standard. Analogizing to the well-developed body of criminal law under Terry v. Ohio—which
applies a similar standard in the context of brief law enforcement
interaction with a suspect—such a legal threshold is lower than probable
cause.
Along the same lines, reasonable suspicion requires
something more than a mere hunch, but a showing of a reasonable belief
isn’t required. Applying a rough percentage range for the reasonable
suspicion standard, something like a 33% to 40% likelihood (and
certainly well short of 51%) that criminal activity may be occurring
seems generally reasonable.
In determining
whether a reasonable suspicion is present, all surrounding facts and
circumstances must be considered. This will consist of, among other
things: the unique characteristics of the customer, the historical and
known transaction history in the relevant accounts, other assets and
income that the customer may have, and the customer’s risk tolerance and
investment objectives.
While there can’t be a precise formula for finding reasonable suspicion because it is inherently fact-based, regulators have identified the following examples of red flags supporting a reasonable suspicion:
- Unusual types of account activity (for the customer, the type of account, or similarly situated customers)
- Customer appears distressed or fearful
- Caregiver shows unusual or excessive interest in the customer’s business or accounts
Enforcement cases
against financial institutions for failing to file SARs have been
prevalent in recent years. However, because there are a wide range of
judgment calls in this space, enforcement cases typically involve
instances in which financial institutions have done little in terms of
either SAR filings or documenting the underlying investigative steps and
reciting why a filing a SAR wasn’t appropriate.
At bottom, a SAR
filing is mandatory in instances when the financial institution
evaluates a set of facts and merely has a reasonable suspicion it is
being used to facilitate criminal activity through the financial
institution.
Suggested Steps
As noted above, the same set
of facts of suspected EFE will, in many instances, necessitate both a
transaction hold and a SAR filing. However, other instances may require
one step or the other—or maybe neither step. A non-exhaustive list of
suggested practices to consider in these circumstances include:
Immediately contacting the financial professional responsible for the accounts or investments.
This should be among the first steps considered, unless the
professional is suspected of being involved in the EFE. The financial
professional likely will know the vulnerable adult well and be able to
shed light on financial, personal, and physical situations.
Attempt to contact the customer.
What the customer says (or doesn’t say), and how the customer reacts,
may provide clues as to what is occurring in their personal and
financial life.
Attempt to contact a trusted contact person or third party reasonably associated with the vulnerable adult.
Many financial institutions have been encouraging customers to identify
a trusted contact person, or TCP, for the account. Several states also
permit contacting a third party reasonably associated with the
vulnerable adult (in addition to or instead of the TCP) if there is a
reasonable belief exploitation may be occurring. However,
neither the TCP nor any other third party associated with the vulnerable
adult should be contacted if they are suspected of being involved in
the EFE.
Conduct a comprehensive review of the account activity and documents.
Review the recent transactions giving rise to the concern against
historical transaction data and the account’s investment objectives. An
email review using the customer’s known email address may provide
additional clues, such as other people who are suddenly being copied on
the vulnerable adult’s communications.
Document investigative and evaluative steps considered and taken.
A well-documented file will be the best shield against any potential
regulatory or civil liability. A broad continuum of gray area exists for
transaction holds and SAR filings. Documenting findings, as well as
investigative steps taken and steps considered, will be the best support
for whichever “reasonable” standard is at issue.
After these
steps have been taken, stress-test the facts. The findings and steps
should be discussed with at least one other person to assess whether the
findings and conclusions are objectively supportable. If the conclusion
is debatable, additional investigation may be necessary.
In the
case of a transaction hold, once a hold is put in place, continued
communication will remain key. Communication with the customer about the
status of their funds and any communications with law enforcement or
regulators should be frequent and well documented.
Outlook
EFE
will keep rising given the continued aging of the US population,
coupled with overall investment returns since 2010. The nature and types
of EFE also will be dynamic as technology rapidly advances.
Financial
institutions will continue to face facts in which EFE may be occurring.
Investigation of the underlying facts will often result in concluding
that both the “reasonable belief” and “reasonable suspicion” standards
were or weren’t met, though in limited instances, one or the other
actions may be appropriate. Above all, financial institutions should
document their investigative steps and conclusions to make the decisions
defensible down the road.
This article does not necessarily
reflect the opinion of Bloomberg Industry Group, Inc., the publisher of
Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Jeff Ziesman
is partner at Norton Rose Fulbright, assisting financial institutions
with regulatory matters brought by the SEC, FinCEN, FINRA, and state
securities regulators.
Andrew L. Adams
is counsel at Norton Rose Fulbright, focusing his practice on
securities litigation and regulatory investigations involving
broker-dealers, registered investment advisers, international banks,
insurance companies, and other financial services clients.
Full Article & Source:
Separating Belief From Suspicion in Elder Abuse Investigations
