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Money Laundering, Suspicious Activities Reports, and Structuring


Let’s start with the Bank Secrecy Act (BSA). The BSA came into law in 1970. It required that a bank fill out a form every time a person did a currency transaction amounting to $10,000 or more. So, if I deposit $10K in cash, or withdraw $10K in cash, the bank will make me fill out a form with, among other things, my tax ID number, so that the IRS can make sure I’m paying all my taxes.  This relates to cash/currency transactions because check transactions and wire transfer transactions generate a paper trail that identifes both the giver and the receiver of the money.

Under the original version of the statute, if I decided to try to circumvent the reporting requirement, let’s say by limiting all my cash transactions to only $8,000, the only way the government would know about it was if a bank teller chose to pick up the phone and report it. This rarely happened as a matter of bank policy because banks were concerned about their depositors’ rights to financial privacy, so the activity would have to be REALLY REALLY worrisome before the bank would call.

This all changed in 1986 with the passage of the Money Laundering Control Act which mandated that banks report transactions over $5,000 that were structured to avoid the $10K limit and removed liability from suits by bank customers from banks who over-reported (OK,  let loose the hounds–yes, this reminds me of immunity for telcoms).

However, the opening of the MLCA contains an important nuance with respect to the Spitzer investigation:

Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such financial transaction which in fact involves the proceeds of specified unlawful activity

(B) knowing the transaction is designed in whole or in part–
(i) to conceal or disguise the nature, location, the source or the ownership or control of the proceeds of specified unlawful activity; or
(ii) to avoid transaction reporting requirements under State or Federal law,

[emphasis mine] violates the statute.

Under section (a) (3) the same thing applies to a person who promotes illegal activity, which someone here will no doubt argue means that it could apply to Spitzer giving the money to promote his hiring of a prostitute, but the plain language of omnibus first paragraph clearly states that the defendant must know that the money is the "proceeds of some form of illegal activity."

I have seen no news report that the money Spitzer used was the proceeds of illegal activity. Spitzer is a wealthy individual and, until I see something in the press that tells me otherwise, I assume he used his own money to do these transactions. Assuming it’s his own legitimate money, there would be no way the government could make out the first 2 elements of this crime, viz 1) that the money is in fact the proceeds of some specified unlawful activity, and 2) that Spitzer knew the money was the proceeds of unlawful activity.

So the mere fact that he may have met the other elements of the crime such as structuring his transactions to obscure the source of the funds or to avoid transaction reporting requirements, becomes moot.

So, how did Spitzer even come to be under federal scrutiny? Well that’s because of FinCen. The Financial Crimes Enforcement Network collects reports from financial institutions including depository institutions (e.g., banks, credit unions and thrifts); brokers or dealers in securities; money services businesses [MSBs (e.g., money transmitters; issuers, redeemers and sellers of money orders and travelers’ checks; check cashers and currency exchangers)]; and casinos and card clubs.

These reports include SARS

Under 12 CFR 21.11, national banks are required to report known or suspected criminal offenses, at specified thresholds, or transactions over $5,000 that they suspect involve money laundering or violate the Bank Secrecy Act. Similar regulations by other regulators apply to other financial institutions.

To make that report, the filing institution prepares a SAR, which it files with the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury through the IRS Detroit Computing Center. The reports are then made available electronically to appropriate law enforcement agencies.

Remember, I told you that these financial institutions no longer have liability to their customers for over-reporting suspicious activty? Well, it developed among bank security officers (and after some bank got into trouble for under-reporting) that the best CYA thing to do was to set computer programs to filter for certain criteria and then report everything that triggered the filters.

When you open a new bank account, the bank does a little mini background check on you based upon your other banking relationships, your credit check and similar data, then it assigns you a score. The score influences how sensitive the computer data mining filters will be for your transactions.  Kinda like "degree of difficulty" score enhancements in olympic gymnastics.

One of the factors that influences this score is whether or not you are a PEP–politically exposed person. A PEP automatically gets a very sensitive filter. PEPs are not just Democratic Governors of states with lots of electoral college votes. They are also UN officials, generals from foreign countries, some heads of NGOs might qualify.

The thing is, Spitzer had to know he was a PEP from his days as NYS AG. He had to know that his transactions were bound to be spit out by the bank’s computers. He also should have expected that when these reports were spit out by the bank’s computers and sent to the IRS, that they would get at least a cursory going over.

So, was Eliot Spitzer targeted because he was the governor?  Or because he pissed off impotant rich people and Wall Street types? Was this investigation opened without the usual underpinnings?

There are not enough facts out there for us to know yet. But I do know that Spitzer coulda, shoulda, woulda known that these activities would have triggered a SARs.

photo by crazyneighborlady 

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In rugby, the looseheadprop is the player in the front row of the scrum, who has the ability to collapse the scrum, pretty much at will and without the referee knowing who did it.
While this can give the LHP's team a great tactical advantage, it also exposes scrum players from both teams to the dangers of catastrophic spinal cord injury.
Consequently, playing this position makes you understand your responsibility to put doing the right thing ahead of winning, and to think beyond your own wants and desires. It also makes you very law and order oriented.