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Cliff Stephens and Tom Crook
Cliff Stephens and Tom Crook
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Pressure from All Sides

As check fraud, money laundering and kiting schemes grow more sophisticated, new laws ratchet up the pressure on banks to detect such crimes. Fortunately, new technology may help them do that better than ever.

As check fraud, money laundering and kiting schemes grow more sophisticated, new laws ratchet up the pressure on banks to detect such crimes. Fortunately, new technology may help them do that better than ever.

Banks have always exerted considerable effort in stemming check fraud and kiting schemes - after all, such activities can cost a bank millions of dollars. Today, money laundering is getting equal attention. New federal regulations intended to curb terrorist activities include anti-money laundering guidelines for banks, and considerable liabilities for those whose anti-money laundering efforts are deemed insufficient.

The latest on the PATRIOT Act.
The Department of the Treasury recently announced regulations implementing the anti-money laundering and anti-terrorism provisions of the USA PATRIOT Act. The regulations take advantage of the existing communication resources of the DOT's Financial Crimes Enforcement Network (FinCEN) to maintain communications between financial institutions, and between the institutions and federal law enforcement, on the subjects of accounts and transactions that may involve terrorist activity and/or money laundering. Another regulation states that certain financial institutions will be able to share information for the purpose of identifying and reporting suspected terrorism and money laundering, once they have notified FinCEN that they intend to share the information, and assuming they have taken adequate steps to maintain confidentiality.

"Banks and other financial institutions are facing an increasing need for better tools and technology to deter and detect check fraud and money laundering," said Breffni McGuire, Senior Analyst, Global Payments, for TowerGroup (a leading research and advisory firm specializing in the impact and direction of technology within the financial services industry). "Both the increasing sophistication of criminals, and regulations like the USA PATRIOT Act, have substantially increased the risks and financial impact for institutions of all sizes."

Two other pieces of federal legislation have had a major impact on the way banks conduct business and attempt to combat white collar crime. Under the Expedited Funds Availability Act, bank funds must be made available to account holders, before the bank knows whether the check which was deposited was good or not. Check fraud perpetrators have learned to make use of this time "window" to cash out on bad checks. And regulations which are part of the Bank Secrecy Act (BSA) require institutions to employ efforts to spot and deter money laundering. Penalties for violations of the BSA can be significant. This has led many banks to adopt a "know your customer" policy designed to help detect and prevent fraud losses, and guard against money laundering.

How the wash cycle works
Money laundering is the process by which illegally-obtained money (from drug trafficking, terrorist activity or other crimes) is given the appearance of having originated from a legitimate source. A 1993 United Nations report listed the significant characteristics of modern money laundering as its "global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal." In fact, some experts rank money laundering as the world's third largest industry by value. Obviously, such activities can be notoriously difficult for banks to get a handle on.

The Office of the Comptroller of the Currency (OCC) has identified three independent money laundering steps:

Placement: physically placing bulk cash proceeds from criminal activity in an account.

Layering: separating the proceeds from their origins in illegal activity through layers of complex financial transactions.

Integration: providing an apparently-legitimate explanation for the illicit proceeds.

Money laundering often occurs in new accounts (24 months old or less). Money launderers are continually opening accounts while they make others dormant. The perpetrators typically conduct normal transactions on a new account for 90 days to six months, then the transaction patterns (both cash in and cash out) change. Funds are usually withdrawn from the account in the form of money orders or cashier's checks. Funds are often then filtered to another account - called a "secondary wash instrument." In fact, three or four such levels may exist, making it very easy for banks and law enforcement to "lose the trail."

Recent lawsuit is a sobering development
If banks took their anti-money laundering efforts seriously before, they take on extreme significance now, in the wake of an astounding recent lawsuit.

The suit was filed July 31, 2002 in the Circuit Court of the First Judicial District, Hinds County, Mississippi. Insurance commissioners from five states (Arkansas, Mississippi, Missouri, Oklahoma and Tennessee) have joined together to sue two financial institutions. They are seeking to recover money damages and compensation for losses the commissioners allege were due to inadequate anti-money laundering procedures by the two banks. The insurance commissioners are acting as receivers of seven insurance companies whose assets were stolen.

The commissioners contend that the banks should be liable because the losses were caused by negligence and breach of contract. They aver that the banks failed to "know their customers" and, as a result, more than $228 million in assets were laundered through, and looted from, accounts at First Tennessee Bank National Association. In addition, the commissioners contend that more than $139 million of the insurance companies' assets were laundered through, and looted from, accounts at First American National Bank (now AmSouth Bank).

Because of its precedent-setting possibilities, and the staggering dollar amounts involved, the implications of this suit are vast. The potential liability makes the regulatory penalties typically assessed against banks "small change" in comparison.

The newest scam: identity fraud
Identity fraud is yet another new trend in white collar crime. In one scenario, fraud artists find out when a person will be gone on vacation, then "take over" their bank account. They may deposit bogus checks into the heretofore stable account, then withdraw the cash before the funds clear. Alternatively, they may cash checks drawn on bogus accounts, using the identity of the legitimate bank customer. In either case, when the chargeback return item arrives, the bank takes the loss - because of its failure to properly identify the person conducting the fraudulent activity.

In one recent identity fraud scheme, perpetrators used an e-mail scam to acquire the account numbers of established account holders. They then altered stolen checks to match the account holders' names, and wired the money from the accounts to parts unknown.

A new era of sophistication for check fraud
In recent years, a lot of talk has been generated about check fraud "gangs" - but that may not be the most accurate nomenclature for these new groups of criminals. While it's true that fraud is now often perpetrated by organized cadres, the word "gang" does not adequately describe their level of sophistication. In one operation which was reported on recently by the Dallas Morning News, a particularly well-organized ring defrauded Dallas-area banks and businesses of at least $50 million, according to local FBI agents and U.S postal inspectors. "Bank chains either had accounts opened or money run through them," said Reese Seabrooke, a special agent at the FBI Dallas office. Almost every major bank - including Bank of America, Bank One and Wells Fargo - and every major brokerage house in the area was victimized, according to investigators.

Over a three-year period, corporate checks ordered by Dallas companies were stolen and forged by couriers who were supposed to be delivering them. Prosecutors say the checks were counterfeited, deposited into accounts using fake identification, with the funds then being wired overseas. The ring used hundreds of accounts across the country to route the fraudulent checks, which ranged in amount from $10,000 to $2.5 million.

Check fraud specialists also frequently target payday locations. They may "borrow" legitimate paychecks from workers for $200-300. They then proceed to make copies of the paychecks, which become the basis for the creation of a new batch of bogus checks.

But check fraud can also be perpetrated with relative ease by the solitary person working out of an apartment. "For $29.99 plus tax - the price of a check printing kit - you can start your world of crime," said Charles Bruce, executive director of the National Check Fraud Center, a clearinghouse for financial fraud information. "Why rob a bank or business with a gun when you can do it with a pen?" he added.

In either case, the fraud artists learn to beat the system by thoroughly learning how it works, law enforcement officials say. They know that big dollar amounts raise suspicions - so they move the money out of accounts in small increments, usually ranging from $200 to $2,500.

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