-Caveat Lector-
For those who have not been paying attention...
You now live in a Police State.
Merry Christmas!
flw
Friday, December 24, 1999
LOS ANGELES TIMES 12/24/99
Reporting Laws Turn Banks Into Government Agents
Finance: Regulations require disclosure of 'suspicious' transactions, but
critics say errors ensnare the innocent.
By EDMUND SANDERS, Times Staff Writer
Banks are not only watching their customers more closely these days. They're
telling on them, too.
In an attempt to combat money laundering, a little-known federal law has
turned U.S. banks into an army of secret government agents. Each year, banks are
reporting tens of thousands of their customers as suspected criminals to law
enforcement agencies. In most cases, customers never learn that their names and
private financial information have been disclosed.
The goal of the filings--which are up 56% over the past two years--is to
nab drug dealers, gun traffickers and corrupt politicians.
But in the government's effort to catch criminals, critics worry that the
system also is ensnaring innocent people, whose privacy is compromised because
of mistakes or misunderstandings by banks. As a result, some customers may find
themselves explaining their finances to the Internal Revenue Service, under
government surveillance or, in extreme cases, facing the seizure of their bank
accounts or imprisonment.
"It ruined me," said Terry "Bo" Digby, who was handcuffed, arrested and
thrown in jail after his Texas bank incorrectly fingered him for fraud. Digby,
44, had defaulted on a $100,000 loan, and he believes his bank reported him as a
way to get even. Eventually he convinced a jury that the charges were bogus, and
last year he collected $1 million from Texas Bank, which today is part of Wells
Fargo. But the damage, he said, was already done.
"I became the biggest crook in town," said Digby, who runs a trucking
business in Odessa, Texas. His wife divorced him. He said he was embarrassed to
go to the grocery store.
"People don't realize what can happen when your bank turns you in," he
said.
Most people never find out. Banks are prohibited by law from telling
customers they've filed a so-called suspicious activity report, or SAR. Digby
found out only by accident, his attorney said.
Once reported, the information--which includes a customer's name, address,
occupation, Social Security number and basic account details--is forwarded to a
special database run by the Financial Crimes Enforcement Network, or FinCEN, a
government intelligence agency under the Treasury Department that is in charge
of battling money laundering.
From there, the reports--expected to total 124,000 this year, including
about 31,000 in California--are analyzed by law enforcement agencies nationwide,
from the FBI to the IRS to local police departments. Foreign governments are
also given access on request. No search warrant or court order is required.
Recently appointed FinCEN director James Sloan calls the reports one of the
most effective anti-money-laundering tools at his disposal. "We are relying on
the experience and instincts of the financial community," he said.
But exactly how helpful they are remains unclear. FinCEN will not say how
many reports result in investigations or convictions. While there have been no
studies to determine how many innocent people are being reported, a 1998 FinCEN
review estimated that as many as one in five reports are unrelated to a serious
crime. In addition, about 45% of all reports involve amounts under $10,000, far
below what most law enforcement agencies require to launch an investigation.
That has led some critics to worry that the reports are missing their
intended target. Rather than uncovering global money-laundering schemes and drug
rings, too many reports are being filed on small, ordinary bank customers, said
Gregory Nojeim, legislative counsel for the American Civil Liberties Union.
"The vast majority of transactions involve people who are engaging in
innocent activities," Nojeim said. "They are never charged and many are never
even investigated."
Earlier this year, Rep. Ron Paul, a Texas Republican, sponsored legislation
that would repeal the SAR program. Alternatively, Paul wants to give consumers
the right to review their FinCEN files and correct mistakes, as they can for
other types of government files kept on citizens.
Though helpful to law enforcement agencies, the reports represent one of
the fastest-growing threats to the privacy of Americans, according to Paul.
"We're teaching bankers to spy on people," Paul said. "This just gives the
government additional information about people that it shouldn't have. It throws
a blanket of suspicion over all people."
Bankers 'Deputized' as Government Agents
Banks have long had a duty to report suspected criminal activity, and in
1985 "criminal referral forms" were created to make the process easier. But what
began as an effort to improve communication and cooperation between banks and
law enforcement has evolved into a strictly enforced mandate that forces banks
not only to report suspected criminal activity but to actively hunt for it among
their customers.
In 1996, FinCEN replaced the old criminal referral forms with SARs as part
of a government crackdown on money laundering.
"All of you have been deputized," Miami attorney Gary Bagliebter told a
group of bankers at the American Bankers Assn.'s recent annual money-laundering
conference. "You don't carry a badge or what the FBI calls 'creds,' but I'm here
to tell you, you should all consider yourselves to be agents of the government
in the war on drugs."
Helping FinCEN enforce the rule are bank regulators such as the Federal
Deposit Insurance Corp. and the U.S. Comptroller of the Currency, which now
review SAR filings as part of every institution's regular audit for safety and
soundness. If a bank isn't filing as many reports as its peers, regulators may
cite or criticize the institution, creating informal quotas for the filings.
As a further incentive for banks to monitor their customers, federal law
permits the government to fine or file criminal charges against a bank for
failing to file a SAR on the criminal activity of its customers. Banks are
liable even if they were unaware of the criminal activity, as long as
authorities can show that the bank "should have known" about it.
It's little surprise, then, that filings are soaring. In 1996, banks filed
about 50,000 reports in the program's first nine months. This year, FinCEN is on
track to collect about 124,000 reports.
In return for their help, banks have demanded--and received--the same
immunity granted to law enforcement agencies to protect them against lawsuits
from customers in case they make mistakes or incorrect filings. The Digby case
was one of the few customer lawsuits to break through this so-called safe harbor
protection.
The combination of secrecy, legal immunity and government pressure to file
has created an environment in which banks have little to lose by reporting their
customers.
"The system is set up to encourage filing," said L. Richard Fischer, a
leading financial privacy attorney at Morrison & Foerster in Washington. "So
from the banker's perspective: When in doubt, file."
Deciding What Is Suspicious
What constitutes "suspicious" activity? Deciding which customers to turn in
is often the toughest part of the job, bankers say. Though the government
requires banks to report suspicious activities, it doesn't precisely define what
that means, leaving many bankers scratching their heads.
"It's like the definition of pornography," jokes one banker. "You're
supposed to know it when you see it."
Some activities are easy calls: intentionally writing bad checks; wiring
large amounts of money to offshore accounts or certain foreign countries;
depositing bags of cash; or attempting to avoid government-mandated currency
reporting rules by making several cash deposits just under the $10,000 limit, a
practice known as "structuring."
But the subjective nature of the regulation guarantees that activity
considered suspicious at one bank may not raise red flags at another. To help
sort out the confusion, regulators and industry experts have created a laundry
list of "suspicious" activities that often prove perfectly innocent, critics
say.
For example, Money Laundering Alert--a widely read industry newsletter
written by former federal prosecutor Charles Intriago--suggests that suspicious
customer behavior can include "unusual or excessively nervous demeanor,"
reluctance to answer questions about finances, frequently depositing dirty or
musty bills and opening a safe-deposit box but rarely visiting it.
On the other hand, excessive use of a safe deposit box is considered
suspicious by the Office of the Comptroller of the Currency's SAR handbook.
"It's mush ball," said Gordon Greenberg, an attorney at McDermott, Will &
Emery in Los Angeles and coauthor of some of California's money-laundering laws.
"Under the rule, almost anything can qualify as suspicious."
Banks stress that no single activity from these lists is usually enough to
merit filing a SAR.
"We don't do this lightly," said Frank San Pedro, chief of security at
Imperial Bank in Los Angeles. "Things may appear suspicious at first, but upon
investigation they make perfect sense."
Most banks say they carefully review the facts before filing a SAR,
consider the customer's history and discuss the case with top managers.
But banks admit that the task is made more difficult because bank tellers,
typically the lowest-paid and least-experienced employees, are their first line
of defense in spotting suspicious activity.
"Those are not exactly the skill sets we are looking for when we hire
tellers," said Stuart Lehr, chief compliance officer at Union Bank of
California.
Almost everyone agrees that mistakes are inevitable.
A report earlier this year from the Treasury Department's inspector general
found that "the accuracy of the SAR data needs improvement." The report
suggested that low-wage FinCEN contractors had made data-inputting errors,
including one example of a $5,000 transaction that was recorded as $5 million.
Rep. Paul's office has also been collecting stories about banks that have
mistakenly reported the wrong name or Social Security number.
Frequently, activities that look suspicious later turn out to be easily
explainable.
For example, last year several Los Angeles banks serving Chinatown noticed
a sudden surge in cash deposits by local merchants, all curiously just below the
$10,000 threshold for filing a currency transaction report. Suspecting merchants
were trying to launder cash, banks began filing SARs on the shopkeepers,
according to Gene Elerding, a banking attorney at Manatt, Phelps & Phillips in
Los Angeles.
Later, it was discovered that the merchants had all attended the same
small-business seminar in which they were cautioned not to keep more than
$10,000 cash at their shops. "So when the cash drawers got near $10,000, they
went to the bank," Elerding said.
Sometimes customers pay a stiff price for a bank's misunderstanding.
In Florida, BankAtlantic became suspicious about some third-party checks
moving from its offices in Miami to Colombia. The Fort Lauderdale-based bank
reported the activity to law enforcement agents, who promptly seized 1,100 bank
accounts--containing $22 million--that had some activity connected with
Colombia. In the end, no criminal case was brought and a judge ruled the bank
overreacted by turning over information about so many accounts.
But it was eight months before the customers--including many
immigrants--got their money back, causing hardship for cash-strapped families
and the collapse of some small businesses, according to Miami attorney
Montgomery Blair Sibley, who is representing one customer in a suit against the
bank.
Following the Money
Law enforcement officials say SARs have been helpful in cracking scores of
money-laundering cases. FinCEN's Sloan says banks have a duty and self-interest
to cooperate.
"It provides an opportunity for financial institutions to keep illicit
money out of their institutions," said Sloan, who has proposed extending the
reporting requirement to other types of financial companies, such as securities
firms, casinos and check cashers.
Law enforcement task forces--consisting of representatives from the Justice
Department, FBI, IRS, Drug Enforcement Administration, U.S. Customs Service and
U.S. Postal Inspection Service--are gathering each month in a growing number of
cities, including Los Angeles and San Diego, to review SARs filed in their
regions, looking for possible leads or trends and cross-checking names against
those of ongoing investigations. Some agencies receive daily downloads of SAR
data.
"We follow money. That's our job," said Albert Allison, branch chief of the
IRS criminal investigation division for Southern California. "And SARs are very
helpful."
Though reports are only supposed to be used for criminal investigations,
the IRS is seeking approval to begin using them for civil tax audits, Allison
said. In the meantime, IRS criminal investigators have found a way to refer
cases to auditors by transferring the file but removing the confidential SAR
form, Allison said.
To make the reports more accessible to law enforcement agencies, FinCEN
plans to put the database on a secured Internet site soon.
Privacy groups worry about the database falling into the wrong hands, but
Sloan said there is little harm to innocent people who are reported in the SAR
database, even if they are investigated, because most often no one ever knows
about it.
"There may be people [in the database] who are not guilty of anything,"
Sloan said. "But SARs are confidential for that reason."
Privacy advocates say consumers are hurt, regardless of whether they learn
about the report.
"It's like asking what's the harm if law enforcement goes into your home
while you're not there, rifles through your personal financial papers, and you
never know about it," Nojeim said. "This is not a criminal investigative tool,
it's a massive surveillance system, built on the theory that the government has
to watch every financial transaction in case someone does something wrong."
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