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Money Laundering: Latest Trends in the Reporting of Suspicious Activities

A staff reporter

29 January 2005

Officials from the US Treasury Department have outlined the surprising results of last year’s suspicious activity reports from banks and other financial institutions all over the US; the findings, published at the sixth international money laundering conference hosted by Money Laundering Alert in Miami last week, caused controversy among the great and the good. A government-led system for the reporting of suspicious activities and transactions by banks is essential for any effective money laundering effort in any country. More than 500,000 voluntary suspicious activity reports (SARs, filed by financial firms under the US Bank Secrecy Act 1940 with the regulators at FinCEN, a wing of the US Treasury Department) have been generated since 1996; they are now piling in at a steady rate of 12,000 a month. The conference discussed the latest SAR findings, the subject matter that SARs ought to contain and the legal protection from prosecution that the filers of SARs enjoy. The most frequent areas for SARs David Vogt, assistant director at FinCEN, "broke" the year’s first SAR figures to the conference. He told the world’s premier money laundering experts that correspondent bank accounts, the subject of many recent news reports on Complinet, have risen near to the top of the list. The most frequent subjects for the reporting of suspicious activity, in order of importance, pertain to: identity theft (gleaned from reports from 41 US states); foreign origin travellers’ cheques; correspondent accounts (between US banks and banks in 17 countries, more than half of them in the former Soviet Union); US domestic shell companies; phone cards (14 US states); automated teller machines (ATMs); activity at casinos (five US states); and shifts in black market peso exchange methods. More than 1,000 reports dealt with identity theft, of which at least 70 per cent were to do with the theft of people’s social security numbers in attempts to obtain credit for the purchase of vehicles. Banks absorb the losses which these activities generate. The foreign origin travellers’ cheques represent a new laundering trend, although the element of fraud in this activity is greater than that of laundering. Many of them are issued by Mexican bureaux de change and end up being deposited by the US subsidiaries of foreign banks. The signatures on the cheques are often bad imitations of the true signatures. FinCEN has been looking at the area of correspondent banking for more than two years. The incidence of correspondent banking SARs has rocketed in the past year, but officials suggested that this could be a reaction to Senator Carl Levin’s report (covered elsewhere on Complinet) which has damaged the reputations of many offshore banks and territories. The use of US shell companies, where such entities are legal, notably in Delaware, has also featured more prominently in recent SARs. Lastly, companies that engage in the business of selling telephone cards are now filing SARs which tell of very complex transactions at the structuring stage of the washing process and of "unusual" withdrawals of deposits. Structuring occurs when launderers distort the normal shape of transactions to try to avoid detection by threshold-based reporting requirements. In the US, $10,000 is the statutory threshold; in the UK it is £10,000. Some less than observant launderers are conducting transactions at the suspicious size of $9,999 when in fact the reporting transactions apply only to sums above $10,000, noted conference delegates. The sum total of SARs Vogt also looked at the cumulative tally of various voluntary filings since 1996, with figures for the year 2000 included. The results according to FinCEN, never before publicised, were as follows and include the classification of financial crime associated with each set of SARs. Money service businesses 11,708 laundering Insurance 7,063 laundering Securities 2,182 laundering Mortgage finance 3,722 loan fraud Credit cards/phone cards 398 fraud Travel services 67 laundering Casinos 55 laundering Miscellaneous Eight false statements No sooner were these figures out than they were instantly called into question. Notwithstanding the fact that the figures do not add up to the total of half a million, or even a fifth of the annual figure of about 150,000, the figure of 55 for casinos was disputed by a compliance officer from New Jersey, who said that the casinos of her state voluntarily filed more than 55 during last year alone. She then asked where the figures came from. Vogt was at a loss to explain; Charles Intriago, the conference convenor, admitted: "We may have found a glitch here". Others noted that the figure for insurance money laundering, at three times that for securities, was "incredible". Throughout the conference, however, practically no mention was made of specific cases or types of money laundering through insurance. Vogt added: "I can’t tell you how many prosecutions have taken place as a result of these figures. We get a lot of questions along the lines of ‘what happened to my SAR?’ It doesn’t always lead to immediate activity. Many of these SARs are linked to other SARs." As a matter of long-known fact, most SARs receive no reply from US law enforcers and the ones that do sometimes take two years. The overtaxed National Criminal Intelligence Service in the UK is another target for the same criticism. What is a suspicious activity? Since reporting began in 1996, the badly specified nature of "suspicious activity" under the 1940 Act has been a bone of contention among compliance officers and anti-money laundering teams. Robert Chandler Jr (CEO of Grupo Financiero Banorte in Mexico) and John Byrne (director of the financial intelligence unit or FIU at Fleet Boston) attempted their own definition of suspicious. The rule for them was that if an activity seemed to be suspect, it was: "if it walks like a duck and squawks like a duck, it probably is a duck". People at banks had many reasons for ignoring the warning signs. This includes friendship with the perpetrators, financial gain for themselves, the exercise of non-existent authority, and they singled out private banking as an area in which AML is not considered a core activity. They emphasised the importance of looking for unusual activity, relationships and transactions rather than looking for things that a normal onlooker would consider suspect. They added that wire transfer activity was one area for scrutiny: "If there are two wire transfers coming into the country and one going out, this is a cause for concern. You must also look for structured cash coming in and wire transfers out. Moreover, if the customer’s address is in California and we find that he’s been structuring his deals in Florida, it’s unusual and we consider it." They also told the audience to look for incoming wires that are listed as anonymous. This was the source of some amusement to other compliance officers, who later told Complinet that these people obviously had not seen much in the way of informal transfers from Switzerland, all of which are anonymous. The "sawtooth" pattern of transactions was also discussed. This describes the normal pattern which occurs when the payment of cash into an account is followed by multiple and fairly predictable debits which rarely wander out of a fixed range. If "spiking" takes place (where one huge wire transfer takes the place of many smaller ones) or if there is a surging quality to the outgoings from an account, the institution should file an SAR. "Safe harbours" for the issuers of SARs John Byrne, a senior counsel at the American Bankers’ Association, addressed the problem of "safe harbours" which banks enjoy from prosecution by the people about whom they file SARs. Almost every year, some bill or other is passed by one or both houses of the US Congress on the subject of money laundering. The Wylie Gonzalez law of 1992 is one such provision, protecting banks which would otherwise infringe the rights of the individual by filing an SAR. It provides absolute protection for "making a disclosure about any possible violation of law. Pamina Dexter, a renown compliance expert at CBC in New York, pointed out that this protection only worked at a federal level and not at a state level. Nonetheless, Byrne said, there are some sensible "dos and don’ts" for SARs. Financial institutions should: provide limited information, avoiding the temptation to open up all their files to the law-enforcers; make sure that they do not leave out mitigating factors which might make the activity look less suspicious than at first sight; have written SAR policies and follow them; keep records of what they file and when; and centralise the reporting process. This last, he said, was especially important. "Recently we’ve seen regulators saying that banks should have filed SARs when they did not. To get round that, you should document why you didn’t file this-or-that SAR and get it all in a centralised file." How safe is the harbour? Byrne pointed to the old FinCEN "advisory" of August 1996 which says that "protection of financial institutions from liability to customers is an essential part of the US program for reporting suspicious transactions". He added that "this is still good for letting you know what to do". However, as Dexter pointed out, the FinCEN statement is a policy statement from the US Treasury. It contains no regulations but merely states the government’s interpretation of the "safe harbour" against civil liability for SAR filers. Its theme is echoed in the 40 recommendations of the Paris-based Financial Action Task Force, but this statement is also not legally binding.