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The Duty of Financial Institutions to Investigate and Report Suspicions of Fraud, Financial Crime, and Corruption

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Financial Crimes: Psychological, Technological, and Ethical Issues

Part of the book series: International Library of Ethics, Law, and the New Medicine ((LIME,volume 68))

Abstract

This chapter provides an intensive look at the history and present status of money laundering and terrorist financing. It points out the negative impact and the ambiguity of the present focus both national and global. The chapter reviews aggressive measures to defeat terrorist financing and money laundering and recommends consideration of alternative measures including the resurrection of privatization actions. Included in the privatization is the resurrection and utilization of letters of marque and reprisal found in Article I, Section 8, Clause 11 of the United States Constitution. The chapter provides an insightful national and international history of letters of marque and reprisal.

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Notes

  1. 1.

    http://www.indcb/org/e/conv/1988.

  2. 2.

    http://www.undcp.org/adhoc/palermo/convmain.html.

  3. 3.

    See Vienna Convention, articles 3(b) and (c) 1; and Palermo Convention, article 6 (i).

  4. 4.

    See Chris Mathers, Crime School: Money Laundering, Firefly Books, 2004, p. 21.

  5. 5.

    Id., p. 22.

  6. 6.

    Lucy Komisar, “Tracking Terrorist Money—Too Hot for US to Handle”, Pacific News Service, October 4th, 2001.

  7. 7.

    FinCEN Advisory, Report on Money Laundering Topologies, vol. 1, no 4, 2006, p. 3.

  8. 8.

    See The World Bank, Reference Guide to Anti-Money Laundering and Combating the Financial of Terrorism, II-I (2nd edition, 2006).

  9. 9.

    Pub. L. 107–56, Title III, Section 302, October 26th, 2011. But see United States versus Union Bank for Savings and Loan (Jordan) 487, f.3d 8 (1st Cir. 2007).

  10. 10.

    See supra, note 8, II-3.

  11. 11.

    The term “predicate crime” refers to the underlying crime that makes it necessary to launder proceeds. These proceeds are divided generally into five categories: drug trafficking, other “blue collar” crimes, white-collar crimes, bribery and corruption, and terrorism.

  12. 12.

    See Sarah Jane Hughes, “Cyberlaundering Poses Threats to Controls”, Money Laundering Alert, vol. 6, no 7, 1995, p. 1.

  13. 13.

    See Gerald Wyrsch, “Treasury Regulation of International Wire Transfer and Money Laundering: A Case for a Permanent Moratorium”, 20 Denv. J. In’1 L. and Pol’y, 1992, p. 515.

  14. 14.

    Id., p. 523.

  15. 15.

    United States Dept. of State, International Narcotics Control Strategy Report, vol. II, March 2003, p. 3.

  16. 16.

    See Peter Reuter and Edwin Truman, Chasing Dirty Money, Institute for International Economics, 2004, p. 45.

  17. 17.

    Barry Rider, Director of the Institute for Advanced Legal Studies, ICC Commercial Crime Services Annual Lecture, “Organized Crime and Terrorism” (June 20th, 2002).

  18. 18.

    Id., p. 46–47.

  19. 19.

    Annunzio-Wylie Anti-Money Laundering Act, Pub. L. No. 102–550, Title XV, 106 Stat. 4044 (1992) (codified at 31 C.F.R., Section 103.81 (a)). An affirmative duty to report criminal activity is a marked change from the general rule that American law imposes no duty to report crimes. Matthew R. Hall, “An Emerging Duty to Report Criminal Conduct: Banks, Money Laundering, and the Suspicious Activity Report”, KYL.J., vol. 84, 1996, p. 643, 679. Banks are not alone; there is a growing trend that private actors must report crimes in specific instances. Id., p. 644.

  20. 20.

    31 C.F.R. Section 103.18 (f). FinCEN also serves as the United States’ Financial Intelligence Unit. Financial Crimes Enforcement Network, FinCEN BSA Direct Retrieval and Sharing Assessment Report, 3, July 10th, 2006. (available at: http://www.fincen.gov/bsa_direct_report_071306.pdf). FinCEN is responsible for “Managing, analyzing safeguarding, and appropriately sharing financial transaction information collected under the BSA and other authorities”. Id., p. 6.

  21. 21.

    Matthew R. Hall, “An Emerging Duty to Report Criminal Conduct: Banks, Money Laundering, and the Suspicious Activity Report”, 84 KY L.J., 1996, p. 643, 679.

  22. 22.

    31 C.F.R. Section 103.15–22.

  23. 23.

    Id.

  24. 24.

    Financial Crimes Enforcement Network, Guidance Preparing a Complete & Sufficient Suspicious Activity Report Narrative, November 2003, p. 1 (available at http://www.fincen.gov/sarnarrompleteguidfinal_11203.pdf). Information collected by FinCEN “not only provides law enforcement, intelligence, and regulatory agencies with leads indicative of illegal activity, it also provides the data for identifying trends and patterns, vulnerabilities and compliance-related deficiencies”. Financial Crimes Enforcement Network, The SAR Activity Review: Trends, Tips & Issues Issue, 10, 3, May 2006 (available at http://www.fincen.gov/sarreviewissue10.pd).

  25. 25.

    Using the financial system to track al-Quaeda “has proven a very effective way to locate terrorist operatives and supporters and disrupt terrorist plots”. Roth et al., supra note 7, p. 2. Blocking and seizing terrorist finds is not the only goal, “following the money to identify terrorist operatives and sympathizers provides a particularly powerful tool in the fight against terrorist groups”. Id. Much of the success of tracking terrorist assets remains outside the public view which may distort the effectiveness of counter-terrorist programs. Id.

  26. 26.

    Financial institutions must file a currency transaction report for any receipt of cash that exceeds $10,000. 31 C.F.R. Section 103.22.

  27. 27.

    According to John Hall, spokesman of the American Bankers Association, one of the primary reasons that suspicious activity reporting is so controversial is the subjective nature of the inquiry. Andrea Maria Cecil, SARs causing big headaches, York Daily Record, July 13th, 2006.

  28. 28.

    31 C.F.R. Section 103.18 (a) (2) (iii).

  29. 29.

    Basel Committee on Banking Supervision, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative: http://www.bis.org.

  30. 30.

    Michael Morehart, Section Chief, Terrorist Financing Operations Section, Counterterrorism Division, Federal Bureau of Investigation, quoted in Financial Times Enforcement Network, FinCEN 2005 Annual Report, 10, 2006 (available at http://www.fincen.gov/fincenannualreport2005.pdf).

  31. 31.

    The SAR Activity Review, Trends, Tips & Issues Issue, 10, supra, note 24, p. 18.

  32. 32.

    See Department of Justice, Press Release, Money Laundering Threat Assessment Released, January 11th, 2006, available at 2006 WL 52785.

  33. 33.

    See generally: United States Government, Money Laundering Threat Assessment (December 2005) (available at http://www.ustreas.gov/offices/enforcement/pdf/mlta.pdf) (designating nine primary vehicles for money laundering: (1) Banking, (2) Money Service Businesses, (3) Online Payment Systems, (4) Informal Value Transfer Systems, (5) Bulk Cash Smuggling, (6) Trade-Based Money Laundering, (7) Insurance Companies, (8) Shell Companies and Trusts, (9) Casinos).

  34. 34.

    Money service business are defined as 31 C.F.R. Section 103, p. 29–32.

  35. 35.

    While this paper cannot begin to scratch the surface of the complexities of informal ethnic financial systems, the Money Laundering Threat Assessment devotes substantial effort to break down some of the more prominent points of Hawala. See Money Laundering Threat Assessment, supra, note 33, p. 29–32. See Tech. Defensive Filings Cause Vulnerabilities, Credit Union J., 21, January 16th, 2006 (2006 WL 848456). “But the rapid increase in reports is a double-edged sword. While many of these reports are the result of greater vigilance, some are considered to be “defensive filings” by financial institutions, in which SARs are filed on nonsuspicious transactions out of concern about regulatory and criminal scrutiny”. Id.

  36. 36.

    “The problem with disruption is that it often involves actions that may not always be sanctioned by the law, thereby imposing upon the business community exposure to serious risks of legal liability”. Rider, supra, note 17, p. 2. Each year in excess of 14 million BSA forms or reports are filed by more than 200,000 financial institutions. FinCEN BSA Direct Retrieval and Sharing Assessment Report, supra, note 29, p. 3. Adding to the sheer number of filings, 62 % of SARs revealed problems in data quality and contained incomplete, inconsistent and inappropriate information. “Starving Terrorists of Money: The Role of Middle Eastern Financial Institutions”, Joint Congress Hearing, 109th Congress 4 (May 4th, 2005) (statement of Rep. Luis Gutierrez).

  37. 37.

    Even if terrorist assets only comprise 1/10 of the total laundered money, the effective rate would only range from 0.02–5 %.

  38. 38.

    Financial Crimes Enforcement Network, The SAR Activity Review, Trends, Tips & Issues Issue, 8, 3, April 2005 (available at http://www.fincen.gov/sarreviewissue8.pdf).

  39. 39.

    See Tech. Defensive Filings Cause Vulnerabilities, Credit Union J., 21, January 16th, 2006 (2006 WL 848456). “But the rapid increase in reports is a double-edged sword. While many of these reports are the result of greater vigilance, some are considered to be “defensive filings” by financial institutions, in which SARs are filed on nonsuspicious transactions out of concern about regulatory and criminal scrutiny”. Id.

  40. 40.

    Each year in excess of 14 million BSA forms or reports are filed by more than 200,000 financial institutions. FinCEN BSA Direct Retrieval and Sharing Assessment Report, supra, note 29, p. 3. Adding to the sheer number of filings, 62 % of SARs revealed problems in data quality and contained incomplete, inconsistent and inappropriate information. “Starving Terrorists of Money: The Role of Middle Eastern Financial Institutions”, Joint Congress Hearing, 109th Congress 4 (May 4th, 2005) (statement of Rep. Luis Gutierrez).

  41. 41.

    Financial Crimes Enforcement Network, The SAR Activity Review: By the Numbers, no. 73 (November 2006) (available at http://www.fincen.gov/sar_review_by_the_numbers_issue6.pdf).

  42. 42.

    Id.

  43. 43.

    Id.

  44. 44.

    See Financial Crimes Enforcement Network Suspicious Activity Report, filings in 2nd Quarter 2001, p. 2 (September 2011).

  45. 45.

    Supra, note 41.

  46. 46.

    Id. Comparing SARs filed from April 1996 to March 1997 to the number of SARs filed from July 2005 to June 2006. See also supra, note 44.

  47. 47.

    See FinCEN Proposes Mandatory E-Filing of BSA Reports, September 27th, 2011.

  48. 48.

    Supra, note 46.

  49. 49.

    Id.

  50. 50.

    The rise of SAR reports may be a function of at least three factors. The least promising, although most plausible, explanation is that the filings are merely submitted to protect an institution from potential civil and criminal liability, regardless of the true suspicion level. The rise could also be contributed to effective compliance programs which have taught front line employees of financial institutions what red flags to look for and employees are detecting suspicious activity that was previously overlooked. The leasts probable explanation is that there is an actual exponential increase in suspicious activity.

  51. 51.

    The SAR Activity Review, Trends, Tips & Issues Issue, 8, supra, note 38, p. 3.

  52. 52.

    Id.

  53. 53.

    Increased compliance costs for ineffective programs decreases profits, increases consumer costs, consumes employee teime and leads to generally inefficient cost outlays. See generally: Philip Wellmer, “Effective Compliance Programs and Corporate Criminal Prosecutions”, 27, Cardozo Law Review, 2005, p. 497.

  54. 54.

    Defensive filings consume valuable and limited resources from attacking actionable terrorist information to sifting through superfluous data. Millions more CTRs are filed than SARs, but by applying the same time frame more than 250,000 work hours are needed to adequately assess these reports. Mallory Factor stated that, “I cannot imagine how we could follow up on 288,000 SARs”, Factor, supra, note 21, p. 21.

  55. 55.

    The SAR Activity Review: Trends, Tips & Issues Issue, 8, supra, note 38.

  56. 56.

    http://www.worldpress.org/specials/euro/1119web_Helsinki.htm.

  57. 57.

    KPMG International, Global Anti-Money Laundering Survey, 14, 2007.

  58. 58.

    See also The Washington Economics Group, The Economics Impacts of International Banking in Florida, June 5th 2006, p. 23; prepared to the Florida International Bankers Association (FIBA) Inc.

  59. 59.

    FATF/GAFT, Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing, June 2007, p. 2.

  60. 60.

    See supra, note 33, p. 27.

  61. 61.

    See supra, note 17.

  62. 62.

    Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Examination Manual 13, 2006.

  63. 63.

    Terence O’Hara, “Riggs Bank Agrees to Guilty Plea and Fine”, Washington Post, January 28, 2005, p. A01. The fine consisted of $25 million in civil liability for “numerous violations of the Bank Secrecy Act”. See also Office of the Comptroller of the Currency, OCC News Release 2004–34, “OCC Access $25 Million Penalty Against Riggs Bank N.A.”, May 13th, 2004 (available at http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=5AOFP8K.xml). And a $16 million criminal fine. O’Hara. See also, 31 U.S.C.A. Section 5318 (g)(3); Annunzio-Wylie Abti-Money Laundering Act.

  64. 64.

    129 F. 2d 1186, 1193 (11th Cir. 1997).

  65. 65.

    Id., p. 1193.

  66. 66.

    Coronado versus BankAtlantic Bancorp Inc., 129 F.3d 1186 (11th Cir. 1997): This case was consolidate on appeal with Lopez versus First Union Bank of Florida.

  67. 67.

    Party that willfully blinds itself to a fact can be charged with constructive notice of that fact. U.S. versus Baxter Intern. Inc., 3445 F.3d 866 (11th Cir.2003) cert. denied 542 U.S. 946 (2004). See also United States vs. Heredia, 483 F.3d 913, cert. denied 76 U.S. L.W. 3303.

  68. 68.

    821 F.2d 844 (1st Cir.), cert. denied, 484 U.S. 943 (1987).

  69. 69.

    See 31 U.S.C. Section 5311–22.

  70. 70.

    821 F.2d 855.

  71. 71.

    See 31 C.F.R. Section 5318 (g) (1); 12 C.F.R. Section 21.11 (pertaining to national banks); 12 C.F.R. Section 208.62 (pertaining to state chartered banks that are members of the Federal Reserve System); 12 C.F.R. Section 353 (pertaining to state chartered banks that are not members of the Federal Reserve System); 12C.F.R. Section 563.108(d) (pertaining to Federal thrifts and savings associations).

  72. 72.

    See supra, note 8. 1–7.

  73. 73.

    FATF/GAFI, FATF-VII Report on Monay Laundering Typologies 2 (28 June 1996).

  74. 74.

    See supra, note 33, p. 19.

  75. 75.

    See supra, note 58, p. 2.

  76. 76.

    See Pub. L. 91–508, 84 Stat.1118 Section 221(a)(2) amended 31 U.S.C. Section 5313(a); see also U.S. Money Laundering Typologies 2 (28 June 1996).

  77. 77.

    FinCEN, SAR Activity Review (January 2008), http://www.fincen.org.

  78. 78.

    Id.

  79. 79.

    Statement of William Fox, former director of FinCEN, http://www.fincen.org; Director’s Forum.

  80. 80.

    FATF/GAFI, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism, 298, 23 June 2006.

  81. 81.

    Mark Yeandle et al., “Anti-Money Laundering Requirements: Costs, Benefits and Perceptions”, 8, City Research Series 6 (June 2005).

  82. 82.

    Id., p. 32.

  83. 83.

    Id., p. 4.

  84. 84.

    Professor Barry Rider, “The Financial War Against Crime and Terror”, 21, Queen’s College, Cambridge (June 2005).

  85. 85.

    See supra, note 66, p. 26.

  86. 86.

    Id., p. 50.

  87. 87.

    See supra, note 80, p. 301.

  88. 88.

    See supra, note 81, p. 50.

  89. 89.

    See supra, note 80, p. 301.

  90. 90.

    See supra, note 81, p. 34.

  91. 91.

    See Larry J. Sechrest, Privateering and National Defense: Naval Warfare for Private Profit, 7–9 Indep. Inst., 2001: available at http://www.independent.org/pdf/working_papers/41_privateering.pdf.

  92. 92.

    FATF-GAFI, Methodology for Assessing Compliance with the FATF 40 Recommendations and FATF 9 Special Recommendations, 15, February 2008; available at http://www.fatf-gafi.org/dataoecd/16/54/40339628.pdf.

  93. 93.

    FATF-GAFI, Interpretative Notes to the FATF 40 Recommendations and FATF 9 Special Recommendations, 4; available at http://www.fatf-gafi.org/dataoecd/53/32/34262136.pdf.

  94. 94.

    Id., p. 2.

  95. 95.

    See Stefan Cassella, U.S. DOJ, address Georgetown University: “Forfeiture Assets Under the USA Patriot Act, 2001” (March 18, 2002) and address 25th Cambridge International Symposium on Economic Crime: “The Case of Civil Forfeiture: Why in Rem Proceedings are an Essential Tool for Recovering the Proceeds of Crime”, September 7th, 2007. See p. 136.

  96. 96.

    See Civil Asset Forfeiture Reform Act of 2000, Pub. L. No. 106–185, 114 Stat. 2000; as amending 18 U.S.C. 981.

  97. 97.

    The term “qui tam” is derived from the Latin phrase “qui tam pro domino rege quam pro seipse”, which means “he who sues for the king as for himself”.

  98. 98.

    31 U.S.C. 13729–3733.

  99. 99.

    See 31 U.S.C. Section 3730 (d).

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Authors and Affiliations

  1. Center for International Financial Crimes Studies, University of Florida, Gainesville, FL, USA

    F. N. Baldwin

  2. Centre for International Financial Crimes Studies, Levin College of Law, University of Florida, Gainesville, FL, USA

    Jeffrey A. Gadboys

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Correspondence to F. N. Baldwin .

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Editors and Affiliations

  1. Faculté d'administration, Chairholder of CIBC Res.Chair in Fin.Int, Sherbrooke, Québec, Canada

    Michel Dion

  2. Faculte de Medicine, Universite de Montreal, Montreal, Québec, Canada

    David Weisstub

  3. ESSEC, Institute for Strategic Innovation & Ser, Suresnes, France

    Jean-Loup Richet

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Baldwin, F.N., Gadboys, J.A. (2016). The Duty of Financial Institutions to Investigate and Report Suspicions of Fraud, Financial Crime, and Corruption. In: Dion, M., Weisstub, D., Richet, JL. (eds) Financial Crimes: Psychological, Technological, and Ethical Issues. International Library of Ethics, Law, and the New Medicine, vol 68. Springer, Cham. https://doi.org/10.1007/978-3-319-32419-7_4

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