What do soon-to-be-former Governor Eliot Spitzer of New York and Societe General's rogue trader Jerome Kerviel have in common? It appears that an understanding of bank risk management systems and regulatory requirements was something that both men were able to exploit, but also something that proved to be their respective undoings.Kerviel's knowledge of SocGen's risk management technology enabled him to make a series of unauthorized and costly trades. In Spitzer's case, he evidently (and allegedly) understood enough about anti-money laundering regulation and suspicious activity reporting (SAR) requirements to try to arrange his payments to the now-notorious Emperors Club in a way that they would be too small to attract attention. In a press release that went out on March 12, New York-based risk/compliance technology provider Fortent identifies this practice as structuring, "a favorite method used by money launderers to attempt to avoid detection," according to Dr. Michael Recce, the company's chief scientist. "Due to the Bank Secrecy Act and the USA PATRIOT Act regulations, banks are required to report customer transactions of $10,000 or more to federal authorities. So in order to get around these requirements, an individual could 'structure' or divide payments into a set of transactions where each individual transaction is below this $10,000 threshold. This maneuver increases the chances that the individual would fly under the radar of banks' compliance departments." As the world now knows in all-too-graphic detail, Spitzer outsmarted himself -- the wire transfers did, in fact, attract the attention of his (as yet unidentified) bank, which notified the IRS, which then investigated the transactions. In the Fortent press release, Recce points out, "Divided transactions raise suspicion levels, and banks have systems in place to detect just this sort of criminal behavior." The rest, as they say, is history. So, the system worked, seemingly better than it did at SocGen. It will be very interesting to learn the identity of Spitzer's bank, if that information ever emerges, as well as the risk management/AML technology that was in place. As to whether or not Spitzer was targeted or entrapped as a result of any type of political gamesmanship, I'll leave that analysis to the lawyers. As to what combinations of arrogance, compulsion, pride, neurosis and stupidity drove Spitzer to his actions, I'll let the psychologists and comedians figure it out. However, it's clear that there is at least one huge difference between Eliot Spitzer and Jerome Kereviel. Kerviel already has attained a kind of Robin Hood, semi-heroic stature in France, and thanks to the intricacies of French labor laws he hasn't even been fired. Spitzer, on the other hand, is finished professionally and will probably spend the rest of his life as a punchline.
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio