IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON JOHN NORTON and KRISTINE 

### NORTON, individually, and derivatively on behalfof LARCO-BOLIVAR INVESTMENTS, LLC, and SHELL LA PAZ, LLC; NORTHLAND CAPITAL LLC, individually, and derivatively on behalfof NDG-BRYCON, LLC; and P.R.E. ACQUISITIONS, LLC, Respondents,

v. U.S. BANK NATIONALASSOCIATION, d/b/a U.S. BANK, Appellant, and JOSE NINO DE GUZMAN and NDG INVESTMENT GROUP, LLC, Defendants. No. 68531-7-1 DIVISION ONE

PUBLISHED OPINION

FILED: February 18, 2014 

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### Becker, J. — Before us on discretionary review is an order requiring a bankto produce documents containing information about how the bank conducts internal monitoring and investigations to detectfraud and money laundering. Because such information is privileged from discovery underfederal law, weNo. 68531-7-1/2 conclude the trial court abused its discretion by ordering discovery and we remand for entry of a protective order. Jose Nino de Guzman is a former U.S. Bank employee. In 2006, he left the bankto engage in real estate development in Peru through his investment 

### company, NDG Investment Group LLC. Plaintiffs John and Kristine Norton invested $11 million. Some ofthe money they invested was deposited in 

### accounts held by Nino de Guzman and his company at U.S. Bank. In2009, the Nortons discovered that Nino de Guzman had been running a 

### Ponzi scheme and their money was gone. The Nortons brought suit against Nino de Guzman and NDG Investment to recover their losses. Neither Nino de Guzman nor NDG Investment is defending the action. The Nortons added U.S. Bank as a defendant. Againstthe bank, the 

### Nortons alleged thatwhen Ninode Guzman leftthe Bank's employ, he enlisted otheremployees and paid them bonuses and commissions to help him solicit investors; thatthe bank did not properly investigate or supervise its employees 

### who were simultaneously working both forthe bank and for Ninode Guzman; that money held bythe bank intrustor fiduciary accounts was diverted into personal accounts of Ninode Guzman; and that inthe summerof2008, the bank initiated a money laundering investigation concerning Ninode Guzman and became aware ofthe possibility that he was engaging in criminal activity but took

no action and continued to profit from his accounts. The Nortons' complaint 

### charged the bankwithbreach of fiduciary duty, securities violations, aiding andNo. 68531-7-1/3 

### abetting fraud, conversion, unjustenrichment, consumerprotection violations, and negligent hiring, retention, and supervision. Inresponse to discovery requests by the Nortons, U.S. Bank produced account statements and account opening documents for accounts belonging to Nino de Guzman and his company, copies ofthe checks, and documentation of international wire transfers. According to the Nortons, these documents showed that Nino de Guzman opened over 30 accounts at U.S. Bank, through which he circulated investor money to Peru and then back to his accounts. Some of his checks were written to U.S. Bank employees. His accounts showed repeated overdrafts. The Nortons believed that Nino de Guzman's transactions aroused 

### suspicion and caused the bankto monitor his accounts and the accounts ofthe employees. They made discovery requests for, generally, alldocuments 

### generated bythe bank in internal investigations relating to Nino de Guzman's accounts. For example, an interrogatory asked the Bankto describe "any due 

### diligence, investigation and/or inquiryconducted by or on behalfof U.S. Bank 

### regarding the background and/or conductof Ninode Guzman and/or hisAffiliated Entities." Another interrogatory asked for the reason any such investigation was initiated and asked the Bankto describe any action taken in response to such 

### investigation. As well, the Nortons asked fordisclosure ofthe bank's methods and policies for monitoring suspicious activity and detecting money laundering.No. 68531-7-1/4 

### The bank moved for a protective orderon the ground that disclosure of material responsive to these requests was prohibited by the Bank SecrecyAct, 31 U.S.C. § 5318(g). The bank asked the trial courtto: enter an orderbarring discovery ofdocuments and information concerning (a) any alleged suspicious activity monitoring, investigation, or reporting conducted by U.S. Bank related to 

### accounts held by Nino de Guzman or NDG at U.S. Bank, including but not limited to any documents or information thatwould reveal the existence or non-existence ofany such investigation; and (b) the methods, policies and procedures U.S. Bank employs generally to monitor and detectfor suspicious activity

.... The trial court denied the bank's motion for a protective order and ordered the 

### banktorespond fully.1 This order isbefore us on the bank'smotionfor discretionary review. The issue involves interpretation of a statutory privilege. Our review is de

novo. Jane Doe v. Corp. of President ofChurch ofJesus Christ ofLatter-Day Saints. 122 Wn. App. 556, 563, 90 P.3d 1147 (2004). review denied. 153 Wn.2d 1025(2005). Congress enacted the Bank SecrecyAct in 1970 to require national banks 

### to assistthe government inmonitoring forfinancial crimes. In 1992, Congress gave the Comptrollerofthe Currency the powerto require financial institutions to report suspicious transactions to the federal government. 31 U.S.C. § 

### 5318(g)(1); Union Bank ofCalif, v. SuperiorCourt. 130 Cal. App. 4th 378, 389, 29 Cal. Rptr. 3d 894 (2005). The statute also provides that banks may not notify



### 1Thetrial court denied U.S. Bank's request for oral argument. Given the complexity and sensitivity ofthe privilege issue, this is a case where oral argument likely would have been helpful.No. 68531-7-1/5
persons involved inthe suspicious transaction that ithas been reported. 31 U.S.C. § 5318(g)(2)(A). 

### Underthe comptroller's regulations, each bank is required to "develop and provide forthe continued administration of a program reasonably designed to

assure monitoring compliance withthe recordkeeping and reporting requirements" ofthe act. 12 C.F.R. § 21.21(b). When a bank detects a known or suspected violation offederal law or a suspicious transaction related to money laundering, the bank mustfile a "SuspiciousActivity Report" (also known as SAR) to an officer or agency designated by the Secretary ofthe Treasury, using a form prescribed by the comptroller. 31 U.S.C. § 5318(g)(1),(4); 12 C.F.R. § 21.11(a), (b), (c). Specifically, banks mustfile a reportwhen they suspect: (1) a bank 

### insideris involved, (2) violations aggregating $5,000 or more where a suspect

can be identified, (3) violations aggregating $25,000 or more regardless of 

### potential suspect, or (4) violations aggregating $5,000 or more involving potential money laundering or violations ofthe Banking SecrecyAct. 12 C.F.R. §§ 21.11(c)(1)-(4). As provided by regulation, SuspiciousActivity Reports are confidential. Banks are prohibited from responding to a discovery request for a Suspicious 

### ActivityReport or any information thatwould reveal the existence of a Suspicious Activity Report. (k) ConfidentialityofSARs. ASAR, and any information that would reveal the existence ofa SAR, are confidential, and shall not be disclosed except as authorized in this paragraph (k). 

### (1) Prohibition on disclosure by national banks—(i) General rule. No national bank, and no director, officer, employee, or agent of a national bank, shall disclose a SAR or any information thatNo. 68531-7-1/6 would reveal the existence of a SAR. Any national bank, and any 

### director, officer, employee, or agent ofany national bankthat is subpoenaed or otherwise requested to disclose a SAR, or any information that would reveal the existence of a SAR, shall decline to produce the SAR or such information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify the following ofany such request and the response thereto: (A) Director, Litigation Division, Office ofthe Comptroller of the Currency; and (B) The Financial Crimes Enforcement Network (FinCEN). 12 C.F.R. § 21.11(k)(1)(i). The prohibition constitutes an "unqualified discovery and evidentiary privilege" that cannot be waived. Whitnev Nat'l Bank v. Karam. 306 F. Supp. 2d 678, 682 (S.D. Tex. 2004). As stated inthe regulation, the 

### privilege extends beyond the report itself to any information thatwould reveal whether such a report exists. The comptroller has declared compelling policy reasons for maintaining 

### the confidentiality of information thatwould reveal the existence of a Suspicious Activity Report: 

### For example, the disclosure of a SAR could result in notification to 

### persons involved inthe transaction that is being reported and compromise any investigations being conducted inconnection with the SAR. In addition, the OCC believes thateven the occasional disclosure of a SAR could chillthe willingness of a national bank to file SARs and to provide the degree ofdetail and completeness in 

### describing suspicious activity inSARs thatwill be ofuse to law enforcement. Ifbanks believe that a SAR can be used for purposes 

### unrelated to the law enforcement and regulatory purposes ofthe BSA, the disclosure of such information could adversely affect the 

### timely, appropriate, and candid reporting ofsuspicious transactions. Banks also may be reluctant to report suspicious transactions, or 

### may delay making such reports, forfearthatthe disclosure of a SAR willinterfere with the bank's relationship with its customer. Further, a SAR may provide insight into how a bank uncovers 

### potential criminal conductthat can be used byothers to circumvent detection. The disclosure of a SAR also could compromise 

### personally identifiable information or commercially sensitive information or damage the reputation ofindividuals or companiesNo. 68531-7-1/7 

### that may be named. Finally,the disclosure of a SAR for uses unrelated to the law enforcement and regulatory purposes for which 

### SARs are intended increases the riskthat bank employees or others who are involved inthe preparation or filing of a SAR could become targets for retaliation by persons whose criminal conduct has been reported. 

### Confidentiality ofSuspiciousActivityReports, 75 Fed. Reg. 75,576, 75,578 (Dec. 3, 2010). As one court has stated, permitting the release of a SuspiciousActivity Reportthrough civildiscoveryjeopardizes the law enforcement interests the act

was intended to promote. "Release ofan SAR could compromise an ongoing law enforcement investigation, tip off a criminal wishing to evade detection, or reveal the methods by which banks are able to detect suspicious activity. 

### Furthermore, banks may be reluctantto prepare an SAR if itbelieves that its cooperation may cause its customers to retaliate. Moreover, the disclosure of an SAR may harm the privacy interests ofinnocent people whose names may be contained therein." Cotton v. PrivateBank &Trust Co.. 235 F. Supp. 2d 809, 815 (N.D. III. 2002). Conscious ofthe policy concerns thatjustify the privilege, courts have 

### refused to limit its coverage to documents thatexplicitly referto Suspicious ActivityReports. The comptroller has specifically recognized Cotton, Whitnev. and Union Bank as cases that carry outthe policy ofthe law—"namely, the creation ofan environmentthat encourages a national bank to report suspicious 

### activity withoutfear ofreprisal." Confidentiality ofSuspiciousActivityReports, 75 Fed. Reg. at 75,579 &n.23. InCotton, questions arose about how a bank handled securities thatwere 

### supposed to be held intrustto fund periodic payments under a structuredNo. 68531-7-1/8 

### settlement agreement. The securities were liquidated, and thefunds were diverted out ofthe trust. The bank became a defendant in a lawsuit in federal 

### court. Discovery requests were made to the bankfordocumentation ofany internal investigations ofthe account, including a requestfor all Suspicious 

### Activity Reports filed bythe bank and for alldocuments relating "any inquiry or 

### investigation orreview" conducted by the bank concerning accounts of the parties involved. Cotton. 235 F. Supp. 2d at 811. Likehere, the bank resisted discovery based on the Bank SecrecyAct, and the issue came before the court on a motion to compel. The court denied 

### the motion, noting first that SuspiciousActivity Reports are absolutely privileged. Cotton. 235 F. Supp. 2d at 814-15. The court next observed that underthe 

### regulations, a bank is required to maintain files of SuspiciousActivity Reports and "any supporting documentation" forfive years. Cotton. 235 F. Supp. 2d at 815, quoting 12 C.F.R. § 103(18)(d). The court divided "supporting documentation" 

### into twocategories. In the first category are factualdocuments which give rise to suspicious activity. These items include "transactional and accountdocuments such as wire transfers, statements, checks, and deposit slips." Union Bank. 130 

### Cal. App. 4th at 391, citing Cotton. 235 F. Supp. 2d at 814. These documents are to be produced in discovery "becausethey are business records made in the ordinarycourse ofbusiness." Cotton. 235 F. Supp. 2d at 815. In the second 

### category are documents that are not to be produced in discovery"becausethey would disclose whether a SAR has been prepared or filed." Cotton. 235 F. Supp. 

### 2d at 815. This second category includes drafts ofSuspiciousActivity Reports or

8No. 68531-7-1/9 

### "otherwork product or privileged communications that relate to the SAR itself." Cotton, 235 F. Supp. 2d at 815. The documents at issue in Cotton were inthe second category and therefore were held not discoverable. InWhitnev, law enforcement officials suspected the plaintiffs were 

### involved in illegal lending activities. The plaintiffs sued Whitney National Bank for 

### defamation on the theory thatthe bank had falsely accused them of illegal activity in its communications to the government. They made a discovery requestfor communications between the bank and government agencies relating to their activities. The bank resisted, and the issue came before the court on the bank's motion for a protective order. The plaintiffs acknowledged thatthey were not entitled to receive copies ofSuspiciousActivity Reports or any information that would reveal the existence of such a report, butthey argued that other communications between the bank and enforcement agencies were outside the scope ofthe privilege. The court rejected the argument and granted the bank's motion, finding that "the line defendants seekto draw is not one the cases recognize." Whitney. 306 F. Supp. 2d at 682. The court held thatthe privilege 

### protects "a broader range ofcommunications from production." Whitnev, 306 F. Supp. 2d at 682. Communications to government agencies orofficials about suspected violations ofthe law are protected even ifthey do not culminate inthe filing of a SuspiciousActivity Report: 

### TheWhitney Bank Parties are protected from the production of communications they made to governmental agencies or officials 

### reporting possible or suspected violations of laws or regulations by the defendants, or pertaining to such reports. Such communications 

### may consist of a SAR itself; communications pertaining to a SAR or its contents; communications preceding the filing of a SAR andNo. 68531-7-1/10 

### preparatory or preliminary to it; communications thatfollow the filing of a SAR and are explanations or follow-up discussions; or oral communications or suspected or possible violations that did not culminate inthe filing of a SAR. The Whitney Bank Parties must 

### produce documents produced inthe ordinary course ofbusiness pertaining to the defendants' banking activities, transactions, and accounts, but may not produce documents or information that could 

### reveal whether a SAR or other report ofsuspected or possible violations has been prepared or filed or what it might contain, or the discussions leading up to or following the preparation orfiling of a SAR or otherform ofreport ofsuspected or possible violations. Whitnev. 306 F. Supp. 2d at 682-83. In Union Bank, the plaintiffs were investors who alleged they were defrauded in a Ponzi scheme. They sued the bankthat opened and operated the trust accounts that were allegedly looted, making claims similarto the Nortons'. The plaintiffs first attempted, unsuccessfully, to obtain any SuspiciousActivity Reports the bank had filed with the government. Inthe course ofdiscovery, the plaintiffs discovered that the bank had its own internal procedures to identify, register, and describe what might constitute suspicious activity. Inparticular, the bank had its own "Form 00244" for internal communications about suspicious activity. Union Bank, 130 Cal. App. 4th at 386. The plaintiffs made a discovery requestfor every Form 244 related to the accounts at issue. The bank resisted, and the issue came before the trial court on the plaintiffs' motion to compel. The trial court granted the motion, reasoning that a routine bank form used by the bank for internal purposes would not necessarily reveal that a SuspiciousActivity Report had been prepared or filed. The California Court ofAppeals granted discretionary review and directed the trial courtto vacate its order. Looking at the substance of Form 244, the

10No. 68531-7-1/11

court concluded that itwas part ofthe process the bank used to comply with the 

### comptroller's regulations that require reporting suspicious activity. Union Bank, 130 Cal. App. 4th at 394-95. "Unliketransactional documents, which are evidence ofsuspicious conduct, draft SAR's and other internal memoranda or 

### forms that are part ofthe process offiling SAR's are created to reportsuspicious conduct." Union Bank, 130 Cal. App. 4th at 391. "Abank's internal procedures 

### may include the development and use of preliminary reports subjectto various 

### quality control checks beforethe bank prepares the final SAR that will be filed. Revealing these preliminary reports, the equivalentof draft SAR's, woulddisclose whethera SAR had been prepared." Union Bank. 130 Cal. App. 4th at 392. The Union Bank courtwas mindful ofthe general rule that "evidentiary 

### privileges should be narrowly construed becausethey prevent otherwise admissible and relevant evidence from coming to light." Accordingly, the court 

### observed thata bank "may not cloak its internal reports and memoranda with a 

### veil of confidentiality simply by claiming they concern suspicious activity or
concern a transaction that resulted inthe filing of a SAR." Union Bank, 130 Cal. 

### App. 4th at 392. The Nortons cite this language as authority for theirargument that the privilege does not cover internal investigations and monitoring. What they overlook is that the Union Bank courtproceeded to hold that the privilege does coverthe bank's internal reports of its investigations ofsuspicious activity,


### even ifthe internal reports are notcommunicated to federal authorities. Union Bank, 130 Cal. App. 4th at 392.

11No. 68531-7-1/12 

### The comptrollerstates thatthe Bank SecrecyAct privilege reaches "to material prepared bythe national bank as part of its process to detect and report suspicious activity." Confidentiality ofSuspiciousActivity Reports, 75 Fed. Reg. at 75,579. The cases discussed above supportthe comptroller's interpretation. The privilege is not limited to documents that contain an explicit reference to a 

### SuspiciousActivityReport. Itcovers documents related to a bank's internal inquiry or review of accounts at issue (see Cotton, 235 F. Supp. 2d at 811), communications between a bank and law enforcement agencies relating to transactions conducted by the person suspected ofcriminal activity (see Whitney. 306 F. Supp. 2d at 682-83), and internal forms used in a bank's process for detecting suspicious activity that must be reported (see Union Bank. 130 Cal. App. 4th at 395). 

### Againstthis background, the Nortons seek disclosure ofdocuments relating to internal monitoring and investigations conducted by the bank to detect fraud and money laundering. They have requested the names ofbank employees who were in charge of or involved inany internal investigation into the transactions involving Nino de Guzman and his company. They wantthe bankto 

### divulge the details ofthe system ofalerts ituses to track its customers' banking activities. They contend that conflictwith the regulations underthe Bank Secrecy Act can be avoided by redacting from the documents any explicit reference to a SuspiciousActivity Report. The Bank SecrecyAct privilege cannot be enforced merely by redacting explicit references to the existence of a SuspiciousActivity Report. Requiring

12No. 68531-7-1/13 

### U.S. Bank to disclose informationabout internal investigations or monitoring of the Nino de Guzman accounts in particular, or internal methods of tracking unusual patterns in banking activity ingeneral, would reveal the existence of a 

### SuspiciousActivity Report and would undermine public policy. Just as disclosure of a SuspiciousActivity Report "may provide insight into how a bank uncovers potential criminal conductthat can be used by others to circumventdetection," 

### Confidentiality ofSuspiciousActivityReports, 75 Fed. Register 75576-01, at 75578 (Dec. 3, 2010), so too will disclosure ofwhat kinds oftransactions trigger internal "red flag" alerts. Revealing the names of bank personnel involved in internal investigations potentially makes them targets for retaliation by persons whose criminal conduct has been reported. The banks are required by statute to establish internal policies, procedures, and controls to detect and report money laundering. 31 U.S.C. § 5318(h); Union Bank, 130 Cal. App. 4th at 392. Any internal system a bank has established for detecting and investigating money laundering will, however it is labeled, be intertwined with the bank's obligation to report suspicious activity to the government. Discovery into these matters will produce documents suggesting that a SuspiciousActivity Report has been or might be under consideration or has already been filed. InWhitnev, the court barred discovery of "discussions leading up to or following the preparation or filing of a SAR or other form of report ofsuspected or possible violations." Whitney, 306 F. Supp. 2d at 683. Similarly here, and for the same reasons, we hold that U.S. Bank may not

13No. 68531-7-1/14 

### be ordered to describe or disclose its internal investigations, either generally or those specifically related to this case. As discussed above, Cotton held thatfactual documents that supportthe 

### filing of a Suspicious Activity Report are discoverable "because they are business records made inthe ordinary course ofbusiness." Cotton. 235 F. Supp. 2d at 815. The Nortons argue a bank's reporting ofsuspicious activity should be discoverable to the extent it is done inthe ordinary course ofbusiness. This is



### an unpersuasive attemptto escape the line drawn in Cotton. Internal reports and methods used to investigate suspicious activityare preciselythe type of documentation Cotton indicated was within the second, undiscoverable type of supporting documentation. 

### The Nortons suggestthat at a minimum, U.S. Bank should be required to submitdocuments concerning internal investigations for incamera inspection by 

### a judge who would then determine whetherthe documents are privileged. But there is no reason to believe thatthe bank is withholding discoverable 

### documents. The bank has produced ordinary business records, including wire transfers, statements, checks, and deposit slips. The bank has produced 

### accountopening statements displaying the names of the employees who were 

### involved in opening the accounts. The bank has also produced some sections of itsoperating procedures manuals and employee training materials. The only 

### type ofinformation the bank has refused to produce that the Nortonsclaim is outside the privilege isinformation about the bank's internal investigations and 

### monitoring of suspicious activity. Under the Bank SecrecyAct, thatinformation is

14No. 68531-7-1/15 

### privileged. We conclude the Nortons have not articulated a basis for requiring in

camera review. U.S. Bank moved to strike the Nortons' briefof respondent under RAP 10.7 because it includes various extraneous, irrelevant, and unauthenticated materials from the internet and from unrelated trial court proceedings that are outside ofthe record under review. We have not considered the materials that 

### the Nortons improperly included intheirbrief, and we therefore need not address the motion to strike. The bank's motion for attorneyfees and sanctions under RAP 10.7 is denied. 

### Reversed and remanded for entry of a protective orderas requested by
the bank. 

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WE CONCUR: 

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