FinCEN and the federal banking agencies have clarified that Suspicious Activity Report (SAR) confidentiality does not prevent banks from communicating with customers about the underlying transactions or conduct that prompted concern, including explaining certain fraud-related restrictions or account closures.

The September 2 joint statement from FinCEN, the Federal Reserve, FDIC, NCUA and OCC does not change the Bank Secrecy Act or impose new supervisory requirements. Instead, it clarifies what the agencies apparently believe has been a source of unnecessary confusion among financial institutions, based on comments the agencies received in response to a Request for Information on how to mitigate the risk of payment fraud, especially check fraud.

The clarification is particularly significant in the context of the Administration’s “fair banking” and anti-debanking initiatives: while banks must continue to shield the existence of SARs, they should not treat SAR confidentiality as a blanket prohibition on explaining adverse account actions to customers. The statement therefore points toward greater transparency in bank-customer relationships without changing the underlying SAR confidentiality rules.

Banks Can Explain the Problem Without Disclosing a SAR

The basic rule remains unchanged: a bank cannot disclose a SAR, or information that would reveal that a SAR has been filed, to the customer who is the subject of the SAR. The prohibition is important because disclosure could compromise law-enforcement investigations and discourage financial institutions from filing SARs.

But the agencies emphasize an important distinction. SAR confidentiality does not cover the underlying facts, transactions and documents on which a SAR is based.

Consequently, a bank generally can tell a customer that a particular transaction is suspected of being fraudulent, ask about the source of funds or purpose of a transaction, explain that a deposit was rejected because of suspected fraud, warn the customer about a fraud scheme, or explain that an account restriction or closure may be related to suspected fraud or other suspicious activity.

That clarification could materially change how some banks approach customer communications.

The Debanking Connection

The timing and language of the statement are particularly interesting because the agencies expressly connect the clarification to Executive Order 14331, “Guaranteeing Fair Banking for All Americans.” The agencies say that greater transparency concerning actions taken with respect to customer accounts is intended to enhance customer engagement and provide customers with greater assurance of fair access to financial services.

That puts the statement squarely in the middle of the Administration’s broader effort to address allegations that financial institutions have improperly denied banking services to customers for political, religious, social or other reasons.

There is an important distinction, however. The new statement does not say that a bank must keep an account open simply because the customer asks for an explanation. Nor does it prohibit a bank from closing an account because of legitimate fraud, AML or risk concerns. Rather, it makes clear that SAR confidentiality should not be used as a blanket justification for refusing to communicate with the customer.

That distinction could become increasingly important as regulators scrutinize bank account closures and other forms of alleged “debanking.” Indeed, the statement comes at a time when the issue is receiving substantial attention from both regulators and Congress.

A Practical Change in Bank-Customer Relations

For banks, the message should be straightforward: continue to protect SAR confidentiality, but do not assume that confidentiality prevents meaningful communication with the customer.

For customers, the clarification is potentially more significant. A customer whose account has been frozen, restricted or closed may now be entitled to a much more useful explanation of what happened, even though the bank still cannot disclose whether it filed a SAR.

The result should be a better balance between two legitimate objectives: protecting the integrity of the SAR system while giving customers greater transparency about actions affecting their access to financial services.

In an environment in which “debanking” has become a major regulatory and political issue, that is an important change in emphasis, even if, as the agencies insist, it is not a change in the law.