Anti-Money Laundering Reports Help Take Down NY GovernorSARs Tip Off Investigators About Unusual Payments
This was the story-behind-the-story this week in New York, where Gov. Eliot Spitzer resigned after revelations that he is under investigation for his alleged involvement with a high-priced prostitution service.(Read FBI affidavit). The affidavit filed by an FBI agent in New York City federal court states a client (Spitzer -- identified by law enforcement as Client Number 9) paid $4,300 in cash to have sex with a prostitute at the Mayflower, a posh Washington D.C. hotel on Valentine's Day eve.
Spitzer's name made the headlines, but the real news to financial institutions is that this investigation was spurred by SARs filed by two New York banks (North Fork Bank and HSBC) with the U.S. Treasury department and the Internal Revenue Service after Spitzer moved large sums of cash in bank accounts he controlled.
The banks reported the transactions because they looked like "structuring" transactions. A structured transaction, according to the FFIEC's Bank Secrecy Act (BSA) exam manual, is used to evade BSA reporting and certain recordkeeping requirements. They are used to hide the source, destination or reason the money is being sent. (See Bank Secrecy Act Anti-Money Laundering Examination Manual Appendix G: Structuring)
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Initially, investigators theorized that Spitzer was somehow involved in illegal campaign finance or low-level political corruption payments, but investigators now believe the transactions were meant to hide payments from Spitzer to the service.
The news of the investigation broke on Monday, March 10. Spitzer announced his resignation at a news conference held on Wednesday in New York. Once dubbed "The Sheriff of Wall Street" for his investigations as crusading New York Attorney General into securities firms and senior management compensation amounts, Spitzer had been viewed as a powerful political figure both in New York and on a national front, with talk of a future presidential run.
That talk just might have been silenced by the SARs.
'The System Works'
For financial institutions that might question the value of their compliance work to file SARs and Currency Transaction Reports (CTR), the lesson from the Spitzer case is - the system works.
"When an individual as visible as Governor Spitzer is tied into a process that financial institutions are regularly acquainted with, this raises a public visibility that is generally not seen otherwise," says Richard Riese, Senior Vice President, Center for Regulatory Compliance American Bankers Association. While SARs are not publicly available for review, Riese believes this case might encourage bank customers to learn more about the banking systems that are in place, such as the ongoing BSA/AML and counter-terrorism efforts. "It makes people more curious," Riese says.
Along with the increased interest from the public, institutions can expect continued scrutiny by industry regulators. "Regulators continue to put a lot of pressure on banks to ensure their institutions are not being used to launder money," says Eva Weber, Regulatory Compliance Analyst at Aite Group, the Boston-based financial services consultancy. "Involvement in money laundering carries significant financial and reputational risks for the institution."
When it comes to SARs, institutions file more than half-a-million reports per year. "We know they won't all lead to individual cases because in many occasions there aren't enough resources for law enforcement to follow up on every one of them," Riese says. In many cases, institutions report on things that may be unusual - which is not to say illegal. "But it still is a burden on the institutions to report them," Riese says. "Many of our members are in the mode of 'when in doubt, file a report.'"
Federal regulators also view BSA/AML compliance as an important part of an institution's responsibility. "Our expectations are the banks comply with the requirements of the joint agency BSA/AML manual, and that we examine them for their compliance," says Kevin Mukri, head of public affairs at the Office of the Comptroller of the Currency, which oversees all national banks in the U.S.
Since all banks have been through the exam cycle on this a few times, "Banks' compliance and examiner expectations are clear," Mukri says. "Prior to the issuance of the BSA/AML manual a few years ago, there was some confusion in the industry on how the agencies were applying the BSA/AML requirements. But since the manual, we hear few questions concerning agency expectations."
Aftermath of Spitzer Case?
One highly-publicized case does not a crusade make, cautions the ABA's Riese. "I would be disappointed if this somehow changed examiners' views, and examiners started going into institutions and saying, 'By the way, here's your governor, here's your local congressman -- are they customers at your institution? And show me if you've filed any SARs on them, and show me their transactions, so I can decide if you should have filed any SARs on them.' I don't think we're going to be going down that path. If I start to hear that from the industry, I would be very upset."
Larger financial institutions have implemented technology to help in their BSA/AML compliance. Manual processes can miss suspicious activity cues, particularly in institutions offering numerous products and services over a diverse client base, says Aite's Weber. As a result, many institutions have turned to technology solutions that monitor customer transaction activity. "Many of these technology solutions are rules-based, allowing the bank to set parameters on what activities to look for - typically including the various types of suspicious activity on which banks are required to file SARs," Weber says.
When the technology solution comes across activity the bank has set it to monitor, an alert is generated for the bank to follow up on and perform additional investigation if necessary. "Potential structuring of payments - breaking transactions down to smaller sums to avoid Bank Secrecy Act (BSA) reporting requirements - is something banks must look for, and it's a common reason for the filing of SARs," Weber adds. (In the last FINCEN "By the Numbers" report, structuring is still the predominant categorization of SARs filed among depository institutions at 48%.)
A SAR (Suspicious Activity Report) is filed on transactions or attempted transactions involving at least $5,000 that the financial institution knows, suspects, or has reason to suspect the money was derived from illegal activities.
A CTR (Currency Transaction Report) is filed by financial institutions that engage in a currency transaction in excess of $10,000.