Poetic justice: Former New York governor Eliot Spitzer’s intimate knowledge of the tools used to foil organized crime didn't keep him from running afoul of his own bank's anti-money-laundering software.
U.S. State Department
Anti-money-laundering software scrutinizes bank customers' every move, no matter how small.
If there is a lesson from former New York governor Eliot Spitzer's scandal-driven fall (aside from the most obvious one), it is this: banks are paying attention to even the smallest of your transactions.
For this we can thank modern software, and post-9/11 U.S. government pressure to find evidence of money laundering and terrorist financing. Experts say that all major banks, and even most small ones, are running so-called anti-money-laundering software, which combs through as many as 50 million transactions a day looking for anything out of the ordinary.
In Spitzer's case, according to newspaper reports, it was three wire transfers amounting to just $5,000 apiece that set alarm bells ringing. It helped that he was a prominent political figure. But even the most mundane activities of ordinary citizens are given the same initial scrutiny.
"All the big banks have these software systems," says Pete Balint, a cofounder of the Dominion Advisory Group, which helps banks develop strategies for combatting money laundering and fraud. "Depending on their volume, they might have thousands of alerts a month."
Most of the systems follow fairly simple rules, looking for anomalies that trigger heightened scrutiny. Software company Metavante says that its software, for example, contains more than 70 "best-practice" rules, covering a wide variety of transaction types ranging from cash deposits to insurance purchases. The simplest rules might flag large cash transactions, or multiple transactions in a single day.
In Spitzer's case, the three separate $5,000 wire-transfer payments reported by the Wall Street Journal would likely have triggered one of the most obvious of these rules, without any recourse to more advanced capabilities.
Banks are constantly on the lookout for activity that seems to be an effort to break up large, clearly suspicious transactions into smaller ones that might fly under the radar, a practice called structuring. Spitzer's transactions almost certainly fit that profile, says Dave DeMartino, a Metavante vice president. Newspaper reports have identified New York's North Fork Bank, owned by Capitol One, as Spitzer's personal bank. A spokeswoman for the bank declined to identify which, if any, anti-money-laundering software the institution uses.
But banks, and law enforcement, are also looking for things that they can't predict and thus can't write rules for.
"If you're just writing scenarios, you aren't going to find things that you didn't know about," says Michael Recce, chief scientist for Fortent, another prominent vendor of anti-money-laundering systems. "About 60 percent of the things our customers find are things they knew about. The rest are things they didn't know about."
The simplest way to identify the unexpected is by contrast to the routine. A person who deposits just two paychecks a month for two years might be flagged if he suddenly deposits six large checks in two weeks, for example.
But software packages also group customers and accounts into related "profiles" or "peer groups," in order to establish more-general behavioral baselines. Some software might group together all personal checking accounts with an average balance of less than $15,000, or merchant accounts with turnover of less than $100,000 per month. Some might go deeper, grouping together all business accounts specifically tied to dry cleaners or consulting firms.
The most sophisticated software packages can sort people or accounts into several categories at once: a single customer might be compared to other schoolteachers; to people who bank mostly at a single regional branch; and to people who have stable, pension-based monthly incomes, for example.
Each category is analyzed to determine patterns of ordinary behavior. Every single transaction by customers in these groups, and even patterns of transactions stretching back as far as a year, are then scrutinized for evidence of deviation from this norm using measures such as the number, size, or frequency of transactions, among others.
Accidental Discovery? I think not.
This stinks like day old fish, the same way anything does that's been touched by Bush and Cheney.http://www.gregpalast.com/elliot-spitzer-gets-nailed/
This is proof that SAR limits need to be bumped. . .
Note the dramatic increase in SAR reports over the past 6 years. Does anyone think that all of a sudden 400% more Americans are engaging in suspicious activity? I think not.
This arbitrary $10,000 number has been in place for YEARS, and it needs to be bumped. It is interesting that I can't deposit $11K without being deemed officially "suspicious", and being investigated by a Financial Crimes Enforcement network, but your average illegal alien can send thousands via Western Union across the border without a Social Security number.
Keeping track of financial transactions is a desirable thing, although we all know that the rich and powerful will be exempt from all this. (On a side note, Spitzer's downfall was engineered by his enemies. The other politicians are equally corrupt and immoral as Spitzer was/is. You think they don't go with prostitutes?...)
But the really scary part is how different databases are converging in the hands of the government. Notice that not only they follow financial transactions, but they also combine this with personal data: your job, your daily habits, your social network, and your telecommunications.
Creepy!
Driving Bank Customers Overseas
Clearly this level of intrusion and scrutiny into the personal affairs of individuals will drive hordes of bank customers to open offshore bank accounts. We are becoming a much more mobile society and this constant chipping away at our freedoms will likely cause a serious migration of wealth to occur.
We live in a country where there are more laws than anyone can possible be aware of. When it come to finding fault with an individual, we need only turn the lights on high beam. I no longer feel safe in this country.
Transaction Monitoring - Hookers and Drug Dealers
The lesson lost on Mr. Spitzer is that he failed to recognize that Drug Dealers have been "structuring" transactions for quite a while as to "fly below the radar". That said - this is an excellent tool to stop drug dealers, and other non-tax paying business interests. I prefer to see this expanded myself, and combine it with a US Treasury rule that does away with the $10, $20, $50 and $100 bill and convert $1 and $5 to some metalic form so a person involved in cash transactions has to pocket a bunch of coins to do business. A $1000 transaction - like the Governors Ball, would force the lawbreakers into carrying about 200 pounds of metal for every trick turned. Drug dealers on the other hand would clink their way down the street -an easy target even for the most over-weight-donut-eating cop to chase down.
My 2 cents!
Spitzer Caught in his Own Mouse Trap?
Borald's article is very interesting, but here is another spin... Some may not be aware that Spitzer was an important catalyst in developing the market for robust transactional monitoring technologies that the financial services industry today uses to uncover money laundering, fraud and market manipulation. Eliot Spitzer as Attorney General was a major proponent for the use of transactional monitoring technologies within the securities industry. As such, he was intimately aware of the types of sophisticated ‘suspicious’ scenarios analytics can uncover from mountains of data. To read more on the topic, go to: http://circularnumber6.blogspot.com/2008/03/spitzer-caught-in-his-own-mouse-trap.html
Please tell me exactly what is wrong with America. This is so Big Brother I am amazed that your not all kicking in the door of the Outhouse over this blatant abuse of government power.
Banks do analysis and then make reports to the police based upon their own criteria for finding evidence of fraud.
Isn't this a form of vigilantism?
Isn't vigilantism against the law?
Aren't there laws against making false claims? Everytime these guys submit a suspicious activity report, and it pans out wrong...isn't that the equivalent of a citizen making a false report to the police?
Using arbitrary analysis rules may catch some, but these rules have never been validated and statistically tested therefore they are the equivalent of assisting the government in "fishing expeditions", i.e. targeting citizens without probable cause.
I wonder if they track Karl Rove?
Now you don't thiink the Feds were using this for political purposes, do you? Do they monitor Karl Rove? Tom Delay? Bush Senior (all that Saudi money, you know.)
They wouldn't be using this for political purposes would they? The Bush Administration would NEVER do that!
Re: I wonder if they track Karl Rove?
Is anybody else here reminded of the government investigator who noticed that cash in circulation made a five billion dollar spike just before and after 9/11/01? He was told to ignore the information by superiors, and when he didn't, he was fired. The money trail would have obviously led straight to the real 9/11 perps, just as all of the un-investigated short trades against certain airlines would have led to the people who had fore-knowledge of the attack. Some people DO have a free pass.
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Tracking Spitzer
Of course - it may be that this was a secondary factor and that Spitzer was brought down by people setting investigators onto him.
WSJ Blog
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