How Federal Banking Laws Brought Down Eliot Spitzer

By Andrew Cochran

"But Spitzer had the money broken down into several smaller amounts of under $10,000 each, apparently to avoid getting around federal regulations requiring the reporting of the transfer of $10,000 or more, the sources said. The regulations are aimed at helping spot possible illegal business activities, such as frauds or drug deals. Apparently, having second thoughts about even sending the total amount in this manner because it still might reveal what he was doing, Spitzer then asked that the bank to take his name off the wires, the sources said. Bank officials declined, however, saying that it was improper to do so and in any event, it was too late to do so, because the money already had been sent, the sources said. The bank then, as is required by law, filed an SAR, or Suspicious Activity Report, with the Internal Revenue Service, reporting the transfer of the money that exceeded $10,000, but had been broken down into smaller amounts, the sources said."

And so began the federal investigation that resulted in the resignation of the Governor of New York, Eliot Spitzer (updated). Let's quickly run through the federal laws involved, for they are among the most important tools used to prevent, detect, and catch money laundering and terrorist financing. My sources are Congressional testimony in 2004 by a senior official of the Federal Reserve System, Jeffrey Breinholt's "The Bank Secrecy Act for Beginners," posted on February 14 on this year, and selected federal regulations.

These federal laws and regulations were added in layers as new transactions arose which exposed loopholes in existing law. In 1970, Congress passed the first such law, the Currency and Foreign Transactions Reporting Act, also known as the "Bank Secrecy Act" (BSA), with requirements for recordkeeping and reporting by banks and other financial institutions to identify the source, volume, and movement of funds for investigatory purposes. The BSA implemented the filing of Currency Transaction Reports, or CTRs, for currency transactions in excess of $10,000. The Money Laundering Control Act of 1986 imposed criminal liability for any person knowingly assisting in money laundering or structuring transactions to avoid reporting under the BSA. It also directed banks to establish and maintain BSA compliance procedures. In January 1987, all federal banking agencies issued regulations requiring banks to develop procedures for complying with the BSA and other AML requirements. By 1996, the federal financial regulators mandated that all banking organizations report any instances of known or suspected criminal or suspicious activity to the Treasury Department by filing a Suspicious Activity Report, or SAR (see this IRS website for more details). Unlike the CTR, there is no threshold dollar amount for filing a SAR. It was this form, filed by Spitzer's bank, which triggered the investigation.

After the terrorist attacks of September 11, 2001, Congress passed the USA Patriot Act, of which Title III was directed at mandating more anti-money laundering and terrorist financing mechanisms. Title III criminalized terrorist financing, for banks and other financial institutions, expanded the reach of the BSA filing requirements to all financial institutions (including broker-dealers and casinos), toughened customer identification requirements for those institutions, and greatly raised the awareness in the banking community of the need to watch for suspicious transactions and report them to law enforcement.

Would Spitzer had been discovered if he had engaged in his activity before the passage of the Patriot Act? Personally, I doubt it. But heightened awareness among bank employees, tougher bank examination procedures, numerous stiff penalties for BSA noncompliance, and extra press coverage all came in the past six years. These combined forces make it almost impossible for a highly public figure, such as a state Governor, to successfully structure transactions to avoid the BSA requirements. Financial institutions face even more regulatory requirements for "politically exposed persons" of Spitzer's rank.

These anti-money laundering and terrorist financing laws and regulations have been the subject of numerous other posts here since we opened, including the following:

Victor Comras, "Terrorism Financing: A New Emphasis on Tracking. But Will It Be Effective?" (typographical anomalies are due to the transfer of the post from our original site)

Andrew Cochran, "Highlights of First "U.S. Money Laundering Threat Assessment"" and "Bank Secrecy Act Compliance Not Getting Easier, But Not Broadening Either"

Dennis Lormel, "Bank Secrecy Act and National Security" and "Looking Back and Forward at Terrorist Financing and Money Laundering Highlights"

Jeffrey Breinholt, "The Holy Grail of Public-Private Counterterrorism Cooperation"

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