Suspicious activity reports and currency transaction reports are some of the primary means by which financial institutions share information with law enforcement.
Financial institutions must prepare and submit CTRs and SARs for a couple of reasons. First, the Bank Secrecy Act regulation requires both reports. CTRs are required to report cash activity over $10,000. SARs are required to report a myriad of suspicious activity — money laundering, structured cash transactions, wire fraud, and terrorist financing — just to name a few. The important thing to remember is that it is not the financial institution’s responsibility to convict someone, but rather to report activity that appears suspicious in nature.
Second, law enforcement relies on reports filed by financial institutions to aid them in criminal investigations. The big question is: Does anyone really look at these reports? The good news is that they do. There have been numerous crimes identified due to required BSA reporting.
The SAR Activity Review has reported that SARs are commonly filed for structured cash transactions, whether it be cash withdrawals or cash deposits. In either case, the main goal of the subjects is to evade federal reporting.
In one case, law enforcement officials discovered a nearly $2 million case of tax evasion as the result of SARs filed. The defendants, who owned their own business, cashed almost $500,000 in checks over a period of three months. The checks were business revenues made payable to the defendants personally, and as a result, for the most part, the checks were not traceable on bank statements. Over a period of three years, the defendants cashed more than $3 million in checks, all under $10,000. Law enforcement executed a search warrant because of the SARs filed and discovered $1.8 million of cash (unreported income) in a closet in their home. Can you imagine having a closet full of millions of dollars?
The income was earned legally; however, the defendants converted the revenues to cash to evade income taxes. Because they understated their gross income, it resulted in over $500,000 in lost revenue for the government. The defendants pleaded guilty to tax evasion.
In another case, the New York State Police Special Investigations Unit was able to identify suspicious cash transactions after reviewing SARs filed by a single financial institution that reported an unusual pattern of cash deposits believed to have been derived from the illegal sale of marijuana. The cash was deposited at banks in the Hudson Valley Region and immediately withdrawn from ATM locations throughout the United States.
The multi-agency investigation resulted in a seizure of 16 firearms, 14 kilos of cocaine, 12 pounds of marijuana, 90 grams of crack cocaine, 153 grams of heroin, 75 oxycodone pills, $200,000 in cash, and several vehicles resulting in the indictment of 55 individuals. As evidenced in this example, it is important to consider not only the source of funds for cash deposits, but also where the money is going or how it is used after being deposited to the accounts.
One high profile case that was all over the media about 10 years ago was the downfall of former New York governor Eliot Spitzer. According to the New York Times, law enforcement agencies were alerted to Spitzer’s activities by a SAR filed by a bank. Through its automated transaction monitoring system, the bank was alerted to unusual activity based on three wire transfers that totaled roughly $10,000. The bank assumed Spitzer split up the transactions because he thought his bank would have to report transactions over $10,000, not realizing the reporting threshold was limited only to cash transactions.
To add to the suspicious activity, Spitzer asked his private banker to remove all his identifying information (name and account number) from the wire transaction records. Spitzer was sending payments via wire transfers to a shell company for a high-priced “call-girl” service. Although Spitzer was never charged with any crime, he endured a major investigation and his reputation was destroyed, causing him to resign from office to avoid likely impeachment.
Amid everyday suspicious activity monitoring, it’s not unusual for financial institutions to become focused on only large dollar transactions; however, in this case, not all suspicious activity took place in large dollar amounts. Criminals have become wiser and may deliberately conduct transactions for lower dollar amounts in attempts to stay under the radar.
The time-consuming efforts of financial institutions to monitor transactions for suspicious activity do not go unnoticed. All the time spent on completing CTRs and perfecting SAR narratives is actually worth it. BSA monitoring can not only protect your financial institution and customers, it can also play a major role in assisting law enforcement agencies in identifying and stopping criminal activity. So, for those of you immersed in BSA on a day-to-day basis, remember the significance of these reports does not end at your institution!
Kristen Ferwerda, CRCM, is a senior specialist in compliance at Wipfli LLP. You can reach her at [email protected]