Suspicious Activity Reports, Banks and the Governor of New York .

Suspicious Activity Reports, Banks and the Governor of New York .

It seems as if banks cannot get out of the news.  First, there is the ongoing financial meltdown, which involves banks and bank groups as culprits in packaging and selling asset-backed securities and otherwise making imprudent credit decisions.  Now there is bank disclosure of currency transactions that has resulted in the resignation of New York Governor Eliot Spitzer, who was not exactly beloved by the banks’ securities affiliates.  For it was former New York Attorney General Spitzer who launched the investigation into the improper practices in the securities industry associated with initial public offerings (“IPOs”), particularly the hyping of IPOs by research analysts when these IPO companies were more deserving of criticism.  As is now so well-known, Eliot Spitzer has been revealed to be a regular client of a high-class (i.e., expensive) prostitution ring, and he was apparently ensnared by bank reports of the large payments that his patronage of the ring demanded.  He was in effect caught by laws and regulations that are basically designed to trace the proceeds of illegal activity (known as money laundering) and recently to address the financing of terrorism.

Under the Bank Secrecy Act of 1970,  financial institutions, including banks, have basic recordkeeping and reporting obligations as to currency transactions.  The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department issues and enforces regulations under the BSA.  A basic FinCEN rule is that a bank must automatically file a report of any receipt of or transaction in currency involving more than $10,000, or multiple transactions meeting this same dollar threshold that it knows are on behalf of the same person during the same business day.   Since Spitzer’s wire transfers to the ring’s account were all reported never to have exceeded $5,000 on any given day, they did not trigger this automatic bank reporting.  However, banks are also required to file Suspicious Activity Reports (“SARs”) if a transaction involves at least $5,000 in funds or other assets and if the bank “knows, suspects, or has reason to suspect that the transaction” falls into one or more of several categories.   These categories include evading BSA requirements, including reporting requirements, and having “no business or apparent lawful purpose” or being unusual for the particular client (with the bank unable to come up with a reasonable explanation for the transaction).  It appears that this requirement of a SAR filing led prosecutors to focus upon Spitzer, for his bank filed a SAR for one of his wire transfers from his personal bank account to the ring.  Apparently, bank compliance officers became suspicious because the transfer was to a shell company of the prostitution ring, ultimately resulting in the resignation of Governor Spitzer on March 12, 2008 (effective March 17, 2008).

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