Following the Money

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T he Financial Crimes Enforcement Network has come a long way since its inception in April 1990, when financial crime investigators often sorted paper records by hand. Part of the Treasury Department, the nimble network celebrated its 10th anniversary in May. It now supports more than 150 federal, state and local law enforcement agencies, and handles more than 140 million computerized financial records compiled from 21,000 depository institutions and 200,000 nonbank financial institutions. Banks, casinos, brokerage firms and money transmitters all must file reports with FinCEN on cash transactions over $10,000. Besides its burgeoning databases, the agency now has regulatory responsibilities for the 1970 Bank Secrecy Act (BSA), the first anti-money laundering law. FinCEN's current budget is $29.7 million and the network has requested $34.7 million for 2001. And it continues to expand its digital sleuthing capabilities.

But that growing reach has riled FinCEN critics who charge that the agency's practices-especially its growing reporting requirements-don't produce enough prosecutorial payback to justify routinely violating citizens' privacy and civil rights.

Electronic Arsenal
During the anniversary fete, Treasury Secretary Lawrence Summers checked out FinCEN's computing wizardry at its low-key headquarters, the second floor of a modern office high rise in Vienna, Va., not far from the CIA's digs. Behind armed guards and two sets of security doors lies the FinCEN nerve center, which houses the agency's prized financial databases. Cables snake through orderly rows of monitors, networked computers, high-speed servers and state-of-the-art data storage boxes. A separate computer-lined room handles artificial intelligence, link analysis and data-mining queries. Such programs can rifle through trillions of bits of information and minutes later spew out elaborate diagrams revealing relationships between businesses, bank accounts and suspects.

FinCEN's electronic arsenal also includes a variety of law enforcement databases, such as those operated by the Drug Enforcement Agency and the Defense Department as well as numerous commercial databases containing public records on everything from property transactions to professional licenses to corporate filings. FinCEN remains mum on exactly which intelligence databases it uses. CIA, National Security Agency and Defense Intelligence Agency systems reportedly round out the mix. FinCEN collaborations with the CIA are infrequent and typically occur at "arms length," according to a former FinCEN official.

On any given day, FinCEN welcomes investigators from dozens of agencies, including the Alcohol, Tobacco and Firearms Bureau, Drug Enforcement Administration, Federal Bureau of Investigation, U.S. Secret Service, Internal Revenue Service, Customs Service and the U.S. Postal Inspections Service. The agents, 40 of whom are on long-term loan from their agencies, run names, addresses, Social Security numbers and the like through FinCEN's computing labyrinth, often generating new leads on the spot. Field agents and state and local law enforcement can also access online data remotely.

In an age when money can circumnavigate the globe in seconds, keeping up with the technology of money laundering is the toughest task faced by FinCEN's 168 employees, according to agency director James Sloan. He is a veteran federal law enforcement officer who spent 21 years with the Secret Service managing protective operations and anti-terrorism responsibilities. Wire transfers, automated teller machines, money orders, loans, car dealerships and post offices all can be stops on the money trail. And the villains are increasingly sophisticated. "The bad guys are certainly technologically literate and using all of the technology available on the market today to hide the placement of illegal funds," says Sloan, who took FinCEN's helm last April.

In theory, if FinCEN and its allies won their 10-year war against money laundering, then illegal gambling, drug running and corruption would turn unprofitable or too risky, and those types of crimes would wither. The real world, however, is more complex.

Leading Weapon
FinCEN's impact on money laundering has been hard to gauge, in part because no one knows for sure how big the problem is. The International Monetary Fund estimates that about $600 billion is laundered each year globally. Estimates of U.S money-laundering traffic hover at $300 billion, including about $60 billion in drug money alone. FinCEN is working on a model to more accurately pin down how much money is laundered in the United States. Although anecdotal evidence reveals that

FinCEN is racking up successes, attempts to assess impact are further muddied by the fact that the agency doesn't investigate any financial crimes itself. FinCEN's leading weapon in the war against money laundering is the Suspicious Activity Report (SAR). Financial institutions must file this three-page document with FinCEN when they suspect a customer has committed any of 17 violations, including money laundering, bribery, counterfeiting, check kiting and fraud-even on transactions as small as $5,000. On average, U.S. banks file about 10,000 SARs a month, half of which allege money laundering. As of early June, FinCEN had recorded 407,943 SARs since the reporting requirements took effect April 1, 1996.

FinCEN's other main tool to detect potential money laundering is the Currency Transaction Report (CTR), which tracks all cash transactions over $10,000. Each year roughly 12.8 million of the reports are filed with FinCEN. According to FinCEN agents, finding money laundering cases among the millions of CTRs is like looking for a needle in a haystack because the majority of reports represent legitimate business deals. SARs, which were initiated under former FinCEN director Stanley Morris, provide targeted intelligence and represent more of "a haystack of needles," agents say.

Nosy or Necessary?
The use of SARs is the chief bone of contention for FinCEN critics. Privacy and civil rights experts say the SARs turn bankers into law enforcement agents and give government officials access to personal financial information without a warrant or subpoena. "FinCEN collects hundreds of thousands of reports that result in the prosecution of a relatively small number of cases that suggests a massive invasion of privacy without an adequate law enforcement return," says Gregory Nojeim, legislative counsel for the American Civil Liberties Union Washington National Office.

Under the law, banks can't disclose to customers whether SARs have been filed on them. "When citizens are now falsely accused in a SAR of engaging in an illegal transaction they never know it and never have a chance to clear their name unless they are charged," Nojeim says. "This is wrong. It has to be fixed. FinCEN should let the customer know or give the SAR back when they decide not to prosecute."

Despite the deluge of SARs, the number of cases with money laundering listed as the lead charge referred for prosecution by major enforcement agencies declined by nearly 18 percent between 1995 and 1998. The Transactional Records Access Clearinghouse (TRAC) at Syracuse University tracks such cases using Justice Department data. The total number of money laundering referrals by all agencies fell by 14 percent, from 1,715 in 1995 to 1,477 in 1998, according to TRAC.

During that same period following introduction of the SARs, prosecutions by all agencies of prime money-laundering cases fell by more than 24 percent, from 825 in 1995 to 624 in 1998, TRAC found. Convictions declined by nearly 18 percent, from 463 to 380. In fact, 1997, the first full SAR reporting year, saw the steepest drops in referrals, prosecutions and convictions for money laundering. TRAC data for 1999 are not yet available. Critics charge the apparently minimal benefits of SARs clearly don't outweigh the costs to privacy.

But Treasury and Justice officials contend federal efforts to thwart money laundering have been increasingly successful and SARs are disrupting how criminals do business. In a June 8 letter to the Miami Herald, Deputy Treasury Secretary Stuart Eizenstat, for one, disputed an analysis of TRAC data by a newsletter called Money Laundering Alert. "Federal money-laundering investigations and prosecutions rose substantially between 1994 and 1998 and continue to rise," he wrote. Eizenstat cited statistics showing that money-laundering referrals for the IRS Criminal Investigation Division alone increased by 32 percent, from 1,243 in 1994 to 1,646 in 1999.

TRAC, which is run by former New York Times investigative reporter David Burnham and quantitative methods statistician Susan Long at Syracuse, stands by the general accuracy of the data obtained from Justice's Executive Office of the U.S. Attorneys under the Freedom of Information Act. Burnham acknowledges that data on secondary charges-to date withheld from TRAC by the Justice Department-may account for some of the discrepancies, but suggests that there may be problems with Treasury Department statistics. In 1997, before the Senate Finance Committee, TRAC challenged similar referral, prosecution and conviction data from 1992 to 1996, provided by the IRS Criminal Investigation Division, an important component of Treasury.

While allowing that discrepancies in the numbers may exist, a Treasury Department senior adviser maintains that statistics don't capture the full SAR story and that federal investigators and prosecutors are bringing more money-laundering cases. Nevertheless, FinCEN wouldn't disclose how many SARs directly result in investigations, indictments or convictions. And no studies are under way to tally how many reports are filed on innocent people. "Until the bank secrecy laws are repealed-which is probably not likely-individuals will be surveilled by their banks without their knowledge," says Deborah Pierce, a staff attorney with the Electronic Frontier Foundation in San Francisco.

FinCEN, for its part, maintains SARs are critical for fighting financial crime. "It's a matter of striking a very careful balance between the privacy of the 99.9 percent and the 0.1 percent that could run hundreds of millions of dollars through the Bank of New York," says David Gilles, who served as FinCEN's chief information officer in the1990s. He was referring to three individuals, including a bank insider, charged last fall with illegally funneling $7 billion from Russia through the Manhattan bank. Gilles returned to FinCEN in July to head up its regulatory compliance effort.

"We don't want these things [SARs] to be floating around any more than any other piece of information that law enforcement gets," FinCEN chief Sloan says. "We believe that the privacy concerns of the American public are the overriding concern when we advocate anything to do with BSA regulations," he says. For this reason, "We take great care in making sure the guidance that deals with SARs is kept up to date," he says.

Banks want more feedback and guidance on SARs, according to John Byrne, senior counsel for the American Bankers Association. Besides seeing regular reporting on how many SARs result in prosecutions and convictions, he says, "banks would like to know what is our responsibility after we file on a specific customer." Often, banks have no idea what becomes of a report or whether they should follow up with local police, says Byrne, a longtime member of the Treasury BSA Advisory Committee and co-chairman of a Treasury task force working to improve communication with the banking industry. Filing BSA forms costs banks plenty, and they expect some return. By FinCEN calculations, SAR and CTR compliance cost the banking industry $109 million in 1999. As of July 1, FinCEN now allows banks to exempt certain transactions such as routine cash deposits from large retailers to reduce the CTR load. If the new regulations don't cut the paperwork, banks may push for the $10,000 limit to be raised to $35,000, at least for businesses, Byrne says. Despite increasing automation, banks spend about $8 per CTR filing.

Expanding Surveillance
Slowly but surely, FinCEN's surveillance is expanding. FinCEN now requires nonbank financial organizations-such as check cashers, money transmitters and currency dealers-to file SARs and to register with the agency. Such businesses have until Dec. 31, 2001, to sign up. Casinos will be required to file SARs beginning next year and eventually so will security brokers.

Sloan says the need for these alternative prevention systems is a reflection of FinCEN's success. The agency has added nonbank firms to its surveillance as criminals have been forced to turn to them to launder funds. FinCEN now is examining the role financial gatekeepers such as accountants and lawyers play in money laundering.

SARs have other purposes besides tracking money laundering, FinCEN's Sloan asserts. The FBI uses SARs in 98 percent of its bank fraud cases and has recovered $61.5 million dollars in defrauded monies with the reports. TRAC data reveal prosecutions and convictions by all agencies for bank fraud have increased about 12 percent between 1995 and 1998.

SARs also help decipher trends and geographic threats. For example, SAR analysis recently delineated how launderers use ATMs. FinCEN used SARs to identify three regions at high risk for money laundering-New York-New Jersey, Los Angeles and San Juan, Puerto Rico-that had been targeted by the administration's National Money Laundering Strategy for 2000. "FinCEN is an integral component of the administration's strategy," Sloan says. Unveiled in March, the sweeping plan to curb money laundering at home and abroad calls for tougher tools and provides a road map for future initiatives, including boosting SAR reporting and the flow of information based on SARs.

Critics, however, quickly point out that serious violations can slip under the SAR radar. In the Bank of New York case, for example, billions of dollars in Russian deposits were laundered through the bank without triggering a single report of suspicious activity, bank officials admitted publicly last year. And SARs filed when convicted spy Aldridge Ames deposited payoffs from former Soviet Union officials failed to elicit an investigation.

Critical Mass
Of course, federal law enforcement agencies don't have the resources to investigate every SAR. And SARs are only one of many tools FinCEN employs. Anecdotal evidence suggests FinCEN is making life difficult for launderers in other ways. For example, after a 1996 crackdown on wire transfers that lowered the reporting limit to $750 in the New York-New Jersey area, Customs officers saw a 400 percent boost in movement of bulk cash.

When the heat is on, launderers often revert to cruder techniques, Sloan explains. In addition to forcing criminals to deal in harder-to-conceal cash, anti-money laundering strategies have driven up the fee extracted by money launderers. Experts estimate the fee rose from roughly 6 percent to 25 percent since money laundering was first criminalized in 1986 in the United States. FinCEN's surveillance has also pushed money-laundering activities outside American borders, making increasing international awareness critical to FinCEN's strength. "The Internet drives the final nail in the coffin of the value or validity of national boundaries," Morris says. When it comes to money laundering, borders are irrelevant, he adds.

In addition, he notes, "We pushed the world view of the issue of money laundering beyond drugs to all serious crimes." For example, take public corruption. "Whether you're selling your office or selling drugs you still have the same problem: You have to conceal the source of your proceeds and legitimize it in some way."

At age 10, FinCEN seems to have gained critical mass in the anti-money laundering world. And while the financial industry overall gives the agency fairly good grades for the way it has evolved, critics reserve judgment. "It risks becoming a precocious teen-ager," says the ACLU's Nojeim. "It needs to start appreciating the financial privacy of citizens."

FinCEN may have succeeded in penetrating the money laundering world, but "they need to do more PR," the ABA's Byrne says. "There are still people who see them as a Big Brother outfit designed to gather data on private citizens." Sloan remains ever optimistic of winning the war of sentiments. "The public is beginning to have a greater realization that when illegal cash gets into the system, it isn't just a law enforcement problem, it hurts the financial system," he says. "And if it hurts the financial system, it hurts everybody."

High-Tech Sleuthing

Technology is key to FinCEN's success. The network started with a technology advantage over most federal agencies: Launching in the 1990s, it wasn't saddled with archaic computing systems and altogether escaped installing a mainframe. Yet just like Silicon Valley startups, FinCEN has to struggle to keep top-notch analysts on board to keep pace with innovation.

Lately, FinCEN has been refining the Suspicious Activity Report Query System (SQS), a unique software package that allows analysts to create parameters to search SAR database fields, including the narrative section, for specific information to link and identify sets of like records from within the universe of the entire SAR database. Advanced technology to understand core meaning of paragraphs is also in the works, says David Gilles, who served as FinCEN's chief information officer in the 1990s and now heads regulatory compliance. Hopefully, the new data-mining techniques will soften criticism that the agency hasn't done enough with SAR data.

Tackling e-money is another looming technological challenge. Smart cards or digital wallet devices, which computer industry leaders predict will someday replace cash, could drastically set back federal efforts to thwart money laundering. The technology could allow high volumes of cyberpayments to pass from person to person without a trace. FinCEN hopes to get in on the front end of the e-money infrastructure without stifling innovation. Although FinCEN is evaluating smart cards with respect to money laundering, for now it has delayed registration of providers.

States Get a Gateway to Dirty Dough

Roughly 40 percent of FinCEN's activities entail providing technical support to other agencies, and state law enforcement agencies give the network rave reviews. Thanks to FinCEN, New Jersey uncovered several new criminal enterprises, according to Paul Zoubek, the state's first assistant attorney general. He estimates the FinCEN database generated 75 leads for state investigators last year. In 1999, New Jersey, which has a reputation as a dirty money haven, queried FinCEN's Gateway program 653 times a month on average. Since 1994, Gateway has provided state and local law enforcement agencies direct electronic access to more than 140 million Bank Secrecy Act records online.

Gateway's increasing popularity signals its success, according to FinCEN Director James Sloan. By end of 1999, Gateway granted password access to more than 600 users who filed nearly 85,000 queries, an increase of 18 percent from the year before. In 1999, Gateway also issued 1,580 alerts notifying agents that another law enforcement party had queried on the same subject.

But Gateway's popularity concerns privacy experts. Despite efforts to build up a series of firewalls, they worry there is little protection of the data once it is downloaded by registered users. As FinCEN's user list continues to grow, so does the risk of breaches of privacy, they contend. Gateway's security is tight. Only six people per state have passwords and a security ID card is also needed for entry. FinCEN conducts weekly audits through keystrokes and data inquiries and conducts site visits. "If you come to us via cyberspace you're going to come to us in a secure environment that we control," Sloan says. "It's not like a police officer on the streets of Detroit can walk in to a computer and type in a name to get this data. That's not possible."

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