United States: Bank Examination Privilege Set Aside By Southern District Of New York

Keywords: bank examination privilege, civil litigation, Bank of China, BOC, Office of the Comptroller of the Currency, OCC

A recent decision in the Southern District of New York casts doubt on the protections afforded by the bank examination privilege in civil litigation. That privilege is intended to promote the forthright exchange of information between regulators and institutions under their supervision, and it typically shields those communications from discovery.

On April 9, 2013, in Wultz v. Bank of China Ltd., No. 11-CV-1266 (S.D.N.Y.), Judge Scheindlin ordered Bank of China (BOC) to produce materials shared with the Office of the Comptroller of the Currency (OCC). The court reasoned that, to the extent the privilege applied at all, the public interest in disclosure trumps it, notwithstanding the potential chilling effect on future communications between banks and their regulators. The OCC promptly filed a motion for reconsideration, which is currently pending.

The action arose out of an April 2006 suicide bombing attack in Israel. Family members of the victims sued BOC, and others, alleging that the bank, among other things, aided and abetted international terrorism under the Antiterrorism Act (ATA).1 The plaintiffs moved to compel production of (i) BOC internal investigation files, (ii) BOC compliance communications that the bank was required to submit periodically to the OCC and (iii) reports and communications concerning the OCC's examination of BOC.2 BOC sought to invoke the bank examination privilege as a basis for holding back these materials.

Judge Scheindlin commenced her analysis by observing that the bank examination privilege belongs to, and must be asserted by, the regulator, not the bank. Here, the OCC had failed to clearly assert the privilege, at least with respect to BOC's internal investigation files and certain communications with the OCC. With regard to bank examination reports, Judge Scheindlin rejected the OCC's position that the privilege shields the entirety of such reports and ruled that the factual portions of the OCC bank examination reports were discoverable.

The only materials the court recognized as being covered by the bank examination privilege were the non-factual portions of the OCC's communications with BOC and the non-factual portions of certain documents submitted by BOC to the OCC. And even with respect to these documents, Judge Scheindlin noted that the bank examination privilege is not absolute. A party may overcome the privilege by showing good cause in light of: (i) the relevance of the evidence sought to be protected, (ii) the availability of other evidence, (iii) the "seriousness" of the litigation and the issues involved, (iv) the role of the government in the litigation and (v) the possibility of future timidity by government employees who will be forced to recognize that their communications are discoverable.

Judge Scheindlin held that the plaintiffs had shown good cause to override the bank examination privilege, because disclosure of opinions, analyses or deliberations communicated between the OCC and BOC might demonstrate whether BOC had notice of criticisms of its anti-money laundering and counter-terrorism financing policies, and any BOC responses. She also reasoned that the nature of the suit supported disclosure, insofar as the federal government has a strong and compelling interest in depriving terrorist organizations of financing. Judge Scheindlin concluded that the preceding factors outweighed the countervailing public interest in upholding the privilege to promote candor in communications between banks and their regulators. On this point, Judge Scheindlin opined that:

While the risk of a chilling effect is serious, the risk of regulatory inaction is as well – as the U.S. Congress recognized through the ATA by empowering private parties to enforce the public interest using the weapons of civil litigation. Given the limited resources of bank regulators, the OCC's supervisory mission might in some cases be helped as much as hindered by the intervention of private litigants.

It remains to be seen whether other courts will follow Judge Scheindlin's reasoning and grant requests for disclosure of documents that a regulator has claimed are subject to the bank examination privilege, or whether such instances may be limited to similar actions concerning alleged financing of officially designated terrorist organizations. Certainly, one lesson to be drawn from this case is that a bank seeking to uphold the privilege in the future would be well-advised to coordinate closely with its regulator to ensure that the basis and scope of the asserted privilege is clearly spelled out. Another lesson is that in light of the risks of possible disclosure in civil litigation, banks will have all the more reason to carefully weigh both the factual and non-factual content in their communications with regulators.

Footnotes

1 18 U.S.C. § 2333.

2 Plaintiffs also sought to enforce a subpoena they had served on the OCC seeking BOC-related materials. The court denied that application without prejudice

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