Re: hoist with his own petard

[David Farber <dave () farber net>]

________________________________________
From: Jim Thompson [jim () netgate com]
Sent: Wednesday, March 12, 2008 10:59 PM
To: David Farber
Cc: ip
Subject: Re: [IP] hoist with his own petard

On Mar 12, 2008, at 6:00 AM, David Farber wrote:

> According to the story, *all* bank transactions,  are tracked.
> Conventional wisdom has been that only large transfers (the
> threshold is typically assumed to be $10K) are
> flagged and inspected, but that is apparently not true.  Banks flag
> some small fraction of transactions internally, forward those to the
> IRS, which filters again, and only a few ever get really looked at
> in detail.

The "conventional wisdom" is hogwash, and I'm not sure the poster (or
the story) came that close to the truth.

In the United States, the Bank Secrecy Act (1970) requires the filing
of a currency transaction report (CTR) for transactions of $10,000 or
more.  Financial institutions suspecting deposit structuring with
intent to avoid the law are required to file a suspicious activity
report. Title 31 of the United States Code, section 5324, provides (in
part):

No person shall, for the purpose of evading the reporting requirements
of section 5313 (a) or 5325 or any regulation prescribed under any
such section, the reporting or recordkeeping requirements imposed by
any order issued under section 5326, or the recordkeeping requirements
imposed by any regulation prescribed under section 21 of the Federal
Deposit Insurance Act or section 123 of Public Law 91–508— [...] (3)
structure or assist in structuring, or attempt to structure or assist
in structuring, any transaction with one or more domestic financial
institutions.

Section 5324 further provides that structuring violations are
prosecuted as federal money-laundering crimes, which may be punished
by a fine or up to five years in prison, or both.

In conjunction with these, 31 C.F.R. § 103.18 (1990) requires, in
part, that banks and credit unions to file a Suspicious Activity
Report if a transaction involves or aggregates at least $5,000 in
funds or other assets, and the bank knows, suspects, or has reason to
suspect that the transaction is designed to evade any requirements of
the Bank Secrecy Act.   In practice, the threshold for a transaction
that may be flagged as "structured" can be as low as $3,000.  See: <http://www.fincen.gov/fincenruling2005-6.pdf
>

These SARS go not to the IRS, but to FinCEN <http://www.fincen.gov/>
FinCEN provides "platform access" (including office space) to Federal
investigating agencies (including the FBI, DEA and certain parts of
the IRS). <http://www.fincen.gov/le_plataccessprog.html>.  State and
'local' investigating agencies can access the FinCEN data via a web-
browser: <http://www.fincen.gov/le_stlocallawenf.html>  Last year,
depository banks filed 567,080 SARs, and other financial institutions
filed another 496,400.

As an aside, the USA PATRIOT Act Section 314(b) permits financial
institutions, upon providing notice to the United States Department of
the Treasury, to share information with one another in order to
identify and report to the federal government activities that may
involve money laundering or terrorist activity.

So its both 'true' and 'not true' that "only a very few ever get
really looked at in detail".   If the filters applied to the
dataset(s) (which you will note can and *are* intra-bank now) manage
to identify a given set of transaction as somehow 'structured' to
otherwise elude detection, you can bet that every transaction in that
set will be subject to further analysis, but I find that this is
unlikely to have been Spitzer's undoing.

> Reportedly, "politically exposed persons" (PEPs), including all
> politicians with a national reputation, their wives, children, even
> brothers-in-law, get extra scrutiny.


According to the FBI affidavit (*) in the Emperor's Club case, Client
9 (a.k.a. Spitzer) chose to pay for services in cash rather than wire
transfer. Assuming that Spitzer was withdrawing large sums of money
from his account to pay for his visits from Kristen and her co-
workers, his bank's system would have flagged the activity as possible
structuring.

While it's not illegal to take large sums of money from your bank
account, many reports get filed on customers with perfectly legitimate
reasons for their withdrawals. In fact, it's up to your bank to
determine whether or not the activity its systems flag on your account
even warrants an SAR at all, and banks aren't allowed to tell their
customers, or anybody, that they have filed SARs.

Here's where it helps if you're not a public official; because the
name on the account was Eliot Spitzer, the bank likely had no choice
but to file the SAR to Treasury officials. In this case, the
suspicious activity could be covering up corruption, misuse of
campaign finances, bribes, or any number of illegalities.

Now imagine you are a paper-pushing bureaucrat in a nondescript IRS
office in suburban New York, who examines reports from the FinCEN
database all day every day. One day you see a report filed on the
governor of New York. You can imagine that's a pretty eventful day in
that particular bean counter's life.  The rest, sadly, is human nature.

Jim
(*) <http://www.thesmokinggun.com/archive/years/2008/0310082spitzer1.html
>



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