http://counterterrorismblog.org/2007/05/the_holy_grail_of_publicprivat.php
The Holy Grail of Public-Private Counterterrorism Cooperation By Jeffrey Breinholt In this, my maiden voyage as a contributor to the Counterterrorism Blog, I want to take the opportunity to introduce myself and touch on some important counterterrorism developments masquerading as money laundering issues. For the last several years, I have been Deputy Chief of the Counterterrorism Section at the Justice Department. My background is financial crime. The team I assembled there prosecutes terrorist financiers within the United States. It was amazing to me before 9/11 and the PATRIOT Act that the government tolerated a wall the prevented full dissemination of FBI-developed intelligence with federal prosecutors. Thankfully, those days are history. The next wall to tear down is between government agents and American bankers. When this occurs, the fields of counterterrorism and money laundering will be finally wedded, to the benefit of all Americans. Since 1986, the U.S. has had an anti-money laundering regime that involves banks reporting certain types of banking transactions - including those that bankers find merely "suspicious" and indicative of customer criminality. For the last twenty-plus years, banks have been the government's eyes and ears. More recently, they have been brought into the intelligence community. In intelligence parlance, banks are "intelligence collectors." Their tasking comes from the Bank Secrecy Act (BSA) and the regulations promulgated thereunder. People who do not like this need to get over it. Bank information comes into the government without a case-related requests. There are complaints that the government does not make effective use of this information, the mandate for which has spawned an entire industry of money laundering compliance experts, replete with conferences, expositions, software, and continuing education opportunities for practitioners. To examine the validity of the complaints from the banking industry that the government does not properly exploit the information that involves the expenditure of so much private resources, my friends at the FBI did something in the aftermath of 9/11 that has not been publicized much, and for which they do not get proper credit. Led by Counterterrorism Blog contributor Dennis Lormel, they gathered a group of agents who are trained empiricists, and set them lose on BSA-required data. The goal was to determine how American law enforcement could interrelate better with the banking industry, through rigorous quantitative analysis. The study I will describe involves a particular policy question: should the amount of a customer financial transaction that triggers the requirement that a bank file a Currency Transaction Report (CTR) be raised from $10,000 to $30,000? Proponents of this change generally point to the cost of BSA compliance, and the fact of inflation. How much would the FBI lose if banks were relieved of filing CTRs for transactions in amounts between $10,000 and $30,000? To understand the methodology for the FBI study, imagine yourself as a state transportation official responsible for giving the governor advice on whether to eliminate a toll booth on a state highway. Let's say that the toll booth costs $150,000 per year to maintain. Let's also assume that the governor could double the toll for the booth that immediately follows the booth considered for elimination. What facts would you want to know in order to give the governor sound advice of the proposal? The answer, if you think about it carefully, is how many cars that travel through the first booth typically get off the highway before getting to the second booth. If the state could double the toll at the second booth without losing many cars, the elimination of the first toll booth would be warranted. In fact, it would be warranted if the tolls lost from the eliminated booth total less than $150,000. The same idea was used to determine the impact of raising the CTR requirement from $10,000 to $30,000. First, let's look at the data about all CTR filings. Between 2000 and 2005, CTR fillings, by amount, break down as follows: . 38.6% of all the CTRs filed reported amounts between $10,000 and $14,999. . 18.5% of all CTRs filed reported amounts between $15,000 and $19,999. . 10.8% of all CTRs filed reported amounts between $20,000 and $24,999. . 6.2 % of all CTRs filed reported amounts between $25,000 and $29,999. What this means is that approximately 75 percent of all CTRs filed between 2000 and 2005 would not have been required if the minimum filing requirement was $30,000 during this period. To what extent would the FBI have not received valuable intelligence if deprived of CTRs filed on transactions between $10,000 and $30,000? To answer that question, we need to find a way to label a CTR as undeniably valuable to the FBI's operations. Here's the ingenious solution from the FBI empiricists: classify a particular CTR as valuable - in intelligence language, "pertinent"- if the information contained in the filing can be matched, either by name of the bank customer or Social Security Number, to a person who is the subject of an FBI investigation. The CTRs that fall in this category are "pertinent:" their filing gives the government additional information about persons in whom it was already interested. Here are the results of the CTR amounts of "pertinent" CTR filings between 2000 and 2005: . 29.2% of the "pertinent" CTRs reported transactions in amounts between $10,000 and $14,999. . 20.2% reported transactions in amounts between $15,000 and $19,999. . 10.2% reported amounts between $20,000 and $24,999. . 6.2% reported amounts between $25,000 and $29,999. What these figures show is that 72 percent of the reported CTRs deemed pertinent to FBI investigations were in amounts less than $30,000. The undeniable conclusion from this study, as described by the FBI's Mike Morehart at a recent Congressional hearing: "The practical effect on law enforcement activities of an increase to the CTR threshold reporting amount would be to severely limit or even preclude law enforcement access to financial data associated with cash transactions that are not otherwise documented." Perhaps the more interesting question is whether this methodology and empirical rigor could be used to go to the next level of public-private cooperation: increasing the quality of "suspicious activity reports" (SARs). Unlike CTRs, SARs are not triggered mechanically, but instead rely on expertise of the particular financial institution's compliance department. Still, they are not optional. Banks that fail to file SARs that they should are penalized. Just ask Riggs, Amsouth, or Arab Bank. What if we were to determine the universe of "pertinent" SARs? Then, from the universe of those filings, we could reverse-engineer and determine, from the narrative section of the SARs, the factors that financial institutions actually highlighted. Armed with this information, the private sector could be told what factors they should consider in complying with the BSA: customer activity that correlates positively and significantly to activities that FBI investigative targets exhibit to their banks When that occurs, we will be one step closer to the Holy Grail of public-private cooperation against terrorist financing. [Non-text portions of this message have been removed] -------------------------- Want to discuss this topic? 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