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Ignore those Suspicious Activity Reports

It’s highly likely that every bank and lending institution, and most regulators, had actual knowledge of cheating on mortgages in the run-up to the Great Crash. We know this in part because of the requirement that banks report suspicious activity to the Financial Crimes Enforcement Network. The relevant rules require reports whenever a national bank detects a scheme to defraud the bank, like selling fraudulent mortgages to the bank.

James Freis, the recently fired head of FinCEN, produced a bunch of reports and highly useful data on the subject. Take Palm Beach County, Florida. One report shows that it ranked 34th in the nation in subjects reported in SARs for mortgage loan fraud in 2006. If a law enforcement official in that county cared, they could have asked for more data from FinCEN, and used it with other information to find out what was going on.

Or suppose the Obama Administration cared about mortgage fraud. Someone from the Department of Justice could have looked at the data for 2008 and earlier years, and thought to themselves, whoa, that’s some increase year over year. There must be a lot of suspicious activity if these cretin banks are reporting on it. I’d better take a closer look.

A closer look might have revealed what the Financial Crisis Inquiry Commission found out. The Final Report of the FCIC says that Countrywide filed SARs in 13% of the cases where there was an internal referral of potentially fraudulent activity. A Wells Fargo fraud analyst testified that reports were not filed with FinCEN in “hundreds and hundreds and hundreds of fraud cases”. Even so, the number of SARs for mortgage fraud rose from 23,998 in 2005 to 37,547 to 65,004 to 67,507 in subsequent years.

It would have been nice if anyone had looked. Or maybe they did and didn’t like what they saw, any more than they like the messenger, Mr. Freis. Marcy Wheeler speculates that Treasury Secretary Geithner fired Freis because Freis insisted on reporting the data showing that mortgage fraud is a much bigger problem in his data than terrorist financing or money-laundering.

Or maybe it was because Freis was busily helping the Financial Fraud Enforcement Task Force. This is from the annual report of the FFETF, one of the only pieces of evidence that the group actually exists:

FinCEN prepared a report for the SEC Asset Management Unit on hedge funds reported in SAR filings, which contained more than 320 hedge fund firms and $150 billion in suspicious activity.

Gosh, it must be embarrassing for the SEC Asset Management Unit to have that data and to have produced no prosecutions, besides some useless insider trading cases. It’s enough to make you think Marcy is right to speculate that the worthless law enforcement officials of the Treasury and the Department of Justice would prefer that FinCEN concentrate on something non-controversial, like terrorist financing.

Rampant failure to file SARs, like that reported by the FCIC, isn’t going to be prosecuted any more than any other crime committed by the white-collar thugs in the financial sector. But that isn’t all that is amazing about the useless SAR regime.

Suppose a bank detects a Ponzi Scheme in the course of its anti-money laundering monitoring. How would that happen? Well, consider Bernie Madoff’s Ponzi. Banks are required to know the business of their customers. Madoff was supposed to be in the business of investing other people’s money in stocks. His bank might have noticed that none of the money that flowed into his accounts went to the purchase of securities, as would be expected from a hedge fund. The money sat there, or went into his personal accounts, or was sent to customers, but none of it went into stocks or bonds.

Even if the bank filed an SAR or two (the fraud was on-going, so it would have updated or filed new SARs from time to time), it was under no obligation to tell anyone anything. SARs are confidential. The statute says that even the existence of a SAR is confidential, and disclosing the existence of a SAR is illegal. The first set of rules on SARs seemed to allow the Office of the Comptroller of the Currency to release some information about them in certain cases. The OCC refused to release SARs, and eventually, under Freis, the rule was amended to state that under no circumstances will the OCC release a SAR. The rule expressly permits disclosure of information regarding facts, transactions and documents upon which a SAR is based.

And if it knew, and if it filed SARs, Madoff’s bank didn’t tell, and didn’t quit doing business with Madoff. It did, however, make money on the accounts, and it did start early getting its clients out of the deal.

The Bankruptcy Trustee in the Madoff case sued JPMorgan Chase, alleging that it knew that Madoff was a fraud. A SAR would provide important evidence about the knowledge of JPMorgan, but the law prohibits everyone from revealing this obviously crucial fact. ABC News obtained a copy of the British version of the SAR, filed by the London office of JPMorgan Chase. Too bad the Trustee can’t get the US version. If it exists. And if it got filed. And who cares, because either way JPMorgan made money for itself and its clients.

It would be great if banks had a duty not to participate in fraud. But that would be an entirely different world, now wouldn’t it?

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