For all of the hype surrounding former New York State Gov. Eliot Spitzer's involvement with a prostitution ring, his professional demise can be attributed in great part to routine anti-money laundering processes and technologies. According to reports, by trying to hide money transfers intended to pay for his illicit activities, Spitzer actually drew the attention of alert bank employees.
While banks must report transactions in excess of $10,000 to the Internal Revenue Service, Spitzer apparently split his transfers into smaller sums to stay under the radar (a practice referred to as structured transactions) and even went so far as to ask the bank to remove his name from some transactions. Those acts were enough to trigger red flags at his bank -- North Fork Bank, a division of Capital One (McLean, Va.) -- and a suspicious activity report (SAR) was submitted to the Financial Crimes Enforcement Network (FinCEN).
"Regulators continue to put a lot of pressure on banks to ensure their institutions are not being used to launder money," notes Eva Weber, an analyst in the AML and compliance area with Boston-based Aite Group. "As a result, many institutions have turned to technology solutions that monitor customer transaction activity. Potential structuring of payments is something banks must look for, and it's a common reason for the filing of SARs."
The Spitzer case is a typical example of AML solutions operating effectively, adds TowerGroup research director Virginia Garcia. The technology used by North Fork likely was a standard AML solution that scans all transactions to pick up anomalous patterns. Questionable files then are sent to a case management solution and an individual looks at the transactions to determine whether to send a SAR to FinCEN.
"This is all standard [AML] procedure," says Garcia, who adds that banks have invested heavily in technology to reduce the compliance burden. "Banks spent a fortune on compliance solutions, especially those in high-risk areas for financial crime, such as New York or Miami, where they see a lot of SARs filed. The ability to process their compliance burden efficiently becomes important."
The Human Element
Still, Garcia stresses, while many AML solutions employ sophisticated analytics, the effectiveness of any AML program often comes down to human intervention. In Spitzer's case, she notes, "The transactions themselves may not have warranted scrutiny, but since it involved a public figure, a human being decided it needed more attention."
Of course, it can take time to identify money laundering, points out Kevin Byrne, senior compliance consultant with Amsterdam-based Wolters Kluwer. Once suspicious patterns are picked up on a customer's transactions, they usually must be followed over a long period of time before a judgment can be made, he says.
Further, banks must examine transaction patterns in aggregate, explains Karin Yuklea, director of AML products with New York-based Actimize. "An aggregate of a variety of activity will determine whether there is real suspicious activity involved," she says.
And the number of SARs will only increase, TowerGroup's Garcia adds. As a result, "Human intervention is necessary to show that a file warrants more attention," she says. "In the Spitzer case, he made a request to remove his name from a wire, and likely someone in the wire room at the bank recognized this as strange. So there really needs to be a combination of technology and humans [for effective AML]."