Financial Industry To Serve a Watchdog Role In USA PATRIOT Act

In the ongoing war on terrorism, banks and their technology providers can best serve the government by acting as a tripwire for criminals attempting to infiltrate the world financial system, according to speakers at a recently held Bankers Association for Finance & Trade (BAFT) conference in Washington, D.C.

"The ultimate endgame is creating an overall picture, a mosaic, if you will, of the terrorist financing that exists," said Juan Zarate, deputy assistant secretary for Terrorism & Violent Crimes, U.S. Department of the Treasury. "Frankly, we need your help."

For its part, the Treasury has increased its ability to act upon the suspicious activity reports, or SARs, that banks have long been required to file. Now that broker-dealers and the approximately 150,000 money services businesses in the U.S. also must file SARs, streamlining the filing process has become an early and important priority.

"We are desperately trying to move from the paper-filing world to the Internet environment," said William Baity, deputy director of FinCEN. A division of the Treasury, FinCEN supports the financial aspects of investigations for law enforcement and regulatory agencies both at home and abroad.

Since FinCEN collects information from several law enforcement agencies both at home and abroad, merging and "scrubbing" these lists of suspected criminals poses an additional technology challenge. "There are more lists out there than you can imagine," said Baity. "We're trying to make it so that when these lists do hit the financial sector, there's been some effort to make sure that they are the ones that law enforcement's after."

However, even a well-targeted list of suspects can cause problems for banks. "Law enforcement is giving banks information which they may use to deny credit or close out deposit relationships," said Jeri Davis, senior vice president and assistant general counsel for First Union/Wachovia Corp., Charlotte, N.C., who noted that she was speaking her own personal opinions, not those of the bank. "Mere suspicion should not be enough for this."

Along with getting more solid information on their customers' known criminal activities, Davis' wish list includes getting an "up-or-down" ruling from FinCEN on whether or not to continue doing business with individuals or companies for whom SARs are filed. It's analogous to the proposed frequent flier fast lane in the airline industry, which would allow known customers to get through security faster. If a person or company checks out as OK, it would help banks if the SAR filing requirement were lifted for that customer over a period of time.

But when an entity remains under suspicion, the situation gets more complicated. "We are often asked to maintain the accounts open," said Davis. "That's law enforcement's best means of finding out what's going on."

That's not a costless request, especially if funds in the account are eventually frozen. "When the account is an individual account where there are not third parties involved, there is less stress on the institution to do that," said Davis. "Where it's a clearing account, or many wire transfers are going through, this is a difficult call for many financial institutions."

"To the extent that we can all work together to develop a means of giving some insulation to banks and other financial institutions who may be asked to maintain these accounts open for a period of time, that would be in the interest of all," said Davis. "It's a question of where does the buck stop and who bears the risk."

The USA PATRIOT Act has already increased the financial burden involved with simply managing all correspondent accounts, let alone those under suspicion. "For each of our foreign bank customers...we not only have to know the ownership of that institution, but know all of their customers and look at their due diligence, and/or conduct it ourselves," said Richard A. Small, director of global anti-money laundering at Citigroup.

Furthermore, turning down a client based on enhanced due diligence puts banks at a potential competitive disadvantage. "If we say no, that bank might become the client of some other bank, said Savario Mirarchi, director of global compliance for The Bank of New York. "We don't have anything in place to prevent that."

If U.S. banks simply lose customers to banks less dedicated to stopping the flow of dirty money, it could have "serious competitive disadvantages for U.S. financial institutions," said Mirarchi. "It could ultimately endanger the U.S. position as the leading financial center."