serious questions about what bank regulators and other government authorities - most notably law enforcement agencies - expect of bankers. today, i want to provide some background information and describe what the federal reserve is doing, in coordination with the justice and treasury departments, to clarify expectations and dispel misconceptions about compliance with the bank secrecy act. but first i want to emphasize an important point about the bank secrecy act : implementation of the act has traditionally been accomplished through a partnership among banks, supervisors, and law enforcement authorities. the law requires reports and recordkeeping that is useful to all these entities. further, the law capitalizes on the role of banks in payment systems. as collectors of financial information, banks are in a good position to identify questionable or suspicious payments or activities. for the past decade, the key obligation of banks within this partnership has been the filing of suspicious activity reports, or sars, in accordance with regulations issued by the u. s. department of the treasury and all of the federal banking and thrift regulators. the agencies'rules require banking organizations to file sars to alert law enforcement authorities and federal bank supervisors about a known or suspected violation of law, or about any suspicious activity being conducted at, by, or through a bank, thrift, or credit union. by filing sars, banking organizations put critical information into the hands of the proper law enforcement authorities in a timely and effective manner. since the sar system was started in 1996, banking organizations have filed more than 1. 7 million sars. that is an enormous amount of cooperation and information sharing. however, recent criminal investigations and prosecutions based on bank secrecy act and sar reporting violations have attracted significant industry attention. most importantly, these cases have generated complaints from the financial industry about the increased burden of bank secrecy act compliance, as well as the uncertainty of future requirements - particularly for the filing of sars. believing that regulators and law enforcement authorities have set a zero - tolerance level for sar - filing deficiencies, banking organizations are concerned that in certain situations failing to file a sar could result in a criminal prosecution. bankers are telling us that regulatory criticism and criminal prosecutions based on sar - filing deficiencies can produce collateral consequences. for example, banks are tending to avoid customers, such as money transmitters and check cashers, who present perceived heightened risks. yet the closing of accounts for these types of businesses is effectively a denial of banking services to many categories of legitimate customers. banking organizations have also begun to file "

. for a more complete discussion of the greatly distilled account here, see the sources in note 9. - 10 believing that signs of rising inflation would soon appear. and meeting after meeting, inflation gradually declined. in retrospect, it may seem odd that it took great fortitude to defend “ let ’ s wait one more meeting, ” given that inflation was low and falling. conventional wisdom at the time, however, still urged policymakers to respond preemptively to inflation risk - - even when that risk was gleaned mainly from hazy, real - time assessments of the stars. with the experience in the new - economy period, policymakers were beginning to appreciate that, with inflation expectations much better anchored than before, there was a smaller risk that an inflation uptick under greenspan ’ s “ wait and see ” approach would become a significant problem. risk management in the face of shifting stars given what the economy has shown us over the past 15 years, the need for the sort of risk - management approach that originated in the new - economy era is clearer than ever before. that approach continues to evolve based on experience and the growing literature on monetary policy and structural uncertainty. experience has revealed two realities about the relation between inflation and unemployment, and these bear directly on the two questions i started with. first, the stars are sometimes far from where we perceive them to be. in particular, we now know that the level of the unemployment rate relative to our real - time estimate of u * will sometimes be a misleading indicator of the state of the economy or of future inflation. second, the reverse also seems to be true : inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization. part of the reason inflation sends a weaker signal is undoubtedly the achievement of anchored inflation expectations - 11 and the related flattening of the phillips curve. 14 whatever the cause, in the run - up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. thus, risk management suggests looking beyond inflation for signs of excesses. these two realities present challenges. the literature on uncertainty reviewed at the 2003 symposium - - and much refined since then - - provides important advice for how policy should respond, although not yet, in my view, an explicit recipe or rule that a prudent central bank should follow. 15 the literature on robust rules, such as so - called difference rules, for