Some may not be aware that Spitzer was an important catalyst in developing the market for robust transactional monitoring technologies that the financial services industry today uses to uncover money laundering, fraud and market manipulation.
Eliot Spitzer as Attorney General was a major proponent for the use of transactional monitoring technologies within the securities industry. As such, he was intimately aware of the types of sophisticated ‘suspicious’ scenarios analytics can uncover from mountains of data. Data mining and advanced analytics accurately distinguish one or two market manipulating trades from hundreds-of-millions of legitimate trades. The same goes for uncovering suspicious money transfers and fraud within the billions of transactions performed every day in the global marketplace.
Several factors probably contributed to the filing of the SARs (Suspicious Activity Report) that fueled the Spitzer’s investigation. To understand why his banks are required to file SARs with the US federal government, you have to understand what goes into uncovering ‘suspicious activities’. The US BSA (Bank Secrecy Act) and the Patriot Act define banks’ responsibilities around uncovering and reporting money-laundering activities. To do so, each bank account holder and entity a bank deals with is AML (anti-money laundering) risk profiled and ultimately given a numerical score. This score measures one’s potential to launder money. The three leading variables in Spitzer’s case that likely increased his AML risk score include:
1. PEP list – As a ‘Politically Exposed Person’, Spitzer is almost certainly on PEP lists used by the banks he holds accounts with. Banks cross check these lists and score PEPs a bit higher than the general population.
2. Structuring – A common money-laundering strategy is to break a large transaction into smaller transactions below the well known must report $10,000 threshold. Spitzer’s multiple wire transactions to one entity totaled around $19,000. The group of transactions would have scored higher in any AML monitoring system.
3. Shell Companies – The business entities used by Spitzer had many characteristics of what banks would label a ‘shell company’. This would include entities that do not have complete filings, confirmed addresses, our unclear business models. Simply put, many launders set up entities distance the money source from the recipient. Banks have models to look for this type of movement and score transactions that flow through suspected shell companies as higher risk.
While there are dozens, if not hundreds of other variables that go into creating a risk score for a single or set of financial transactions, these are likely the top three that moved Spitzer’s Emperor’s Club transactions to the top of his bank’s list of possible suspicious activities. Once his bank’s system raised the red flag, they were obligated to report it to FinCEN (Financial Crimes Enforcement Network). This database is then accessible to many levels of federal, state and local investigative agencies.
The real questions mark in this case is why where these particular SARs investigated? The overwhelming majority of SARs in the FinCEN database go uninvestigated, and yet Spitzer’s seemed to pop up immediately. That should lead us to believe that someone had an ongoing investigation into Spitzer or the entities he was wiring money to, or Spitzer’s political enemies were on the prowl for dirt on New York’s Steamroller Governor.
Spitzer pursued investment banks and brokerages after the tech bubble, and extracted $1.4 billion in fines and payments for pumping up stock prices. Additionally he went after mutual fund brokers for giving preferential treatment to hedge funds and key clients. This resulted in new regulations around separation of research and banking in investment banks and ‘late trades’ and market timing trade monitoring. In the process, Spitzer insulted, defaced and pissed off a good percentage of Manhattan’s business leaders.
What can we learn from the Spitzer story? If you have powerful enemies and know that all your financial transactions will be examined under a microscope, you shouldn’t document your shady and/or illegal activities. And at a minimum if you can’t control yourself, at least explore the option of paying in cash…
Eliot Spitzer as Attorney General was a major proponent for the use of transactional monitoring technologies within the securities industry. As such, he was intimately aware of the types of sophisticated ‘suspicious’ scenarios analytics can uncover from mountains of data. Data mining and advanced analytics accurately distinguish one or two market manipulating trades from hundreds-of-millions of legitimate trades. The same goes for uncovering suspicious money transfers and fraud within the billions of transactions performed every day in the global marketplace.
Several factors probably contributed to the filing of the SARs (Suspicious Activity Report) that fueled the Spitzer’s investigation. To understand why his banks are required to file SARs with the US federal government, you have to understand what goes into uncovering ‘suspicious activities’. The US BSA (Bank Secrecy Act) and the Patriot Act define banks’ responsibilities around uncovering and reporting money-laundering activities. To do so, each bank account holder and entity a bank deals with is AML (anti-money laundering) risk profiled and ultimately given a numerical score. This score measures one’s potential to launder money. The three leading variables in Spitzer’s case that likely increased his AML risk score include:
1. PEP list – As a ‘Politically Exposed Person’, Spitzer is almost certainly on PEP lists used by the banks he holds accounts with. Banks cross check these lists and score PEPs a bit higher than the general population.
2. Structuring – A common money-laundering strategy is to break a large transaction into smaller transactions below the well known must report $10,000 threshold. Spitzer’s multiple wire transactions to one entity totaled around $19,000. The group of transactions would have scored higher in any AML monitoring system.
3. Shell Companies – The business entities used by Spitzer had many characteristics of what banks would label a ‘shell company’. This would include entities that do not have complete filings, confirmed addresses, our unclear business models. Simply put, many launders set up entities distance the money source from the recipient. Banks have models to look for this type of movement and score transactions that flow through suspected shell companies as higher risk.
While there are dozens, if not hundreds of other variables that go into creating a risk score for a single or set of financial transactions, these are likely the top three that moved Spitzer’s Emperor’s Club transactions to the top of his bank’s list of possible suspicious activities. Once his bank’s system raised the red flag, they were obligated to report it to FinCEN (Financial Crimes Enforcement Network). This database is then accessible to many levels of federal, state and local investigative agencies.
The real questions mark in this case is why where these particular SARs investigated? The overwhelming majority of SARs in the FinCEN database go uninvestigated, and yet Spitzer’s seemed to pop up immediately. That should lead us to believe that someone had an ongoing investigation into Spitzer or the entities he was wiring money to, or Spitzer’s political enemies were on the prowl for dirt on New York’s Steamroller Governor.
Spitzer pursued investment banks and brokerages after the tech bubble, and extracted $1.4 billion in fines and payments for pumping up stock prices. Additionally he went after mutual fund brokers for giving preferential treatment to hedge funds and key clients. This resulted in new regulations around separation of research and banking in investment banks and ‘late trades’ and market timing trade monitoring. In the process, Spitzer insulted, defaced and pissed off a good percentage of Manhattan’s business leaders.
What can we learn from the Spitzer story? If you have powerful enemies and know that all your financial transactions will be examined under a microscope, you shouldn’t document your shady and/or illegal activities. And at a minimum if you can’t control yourself, at least explore the option of paying in cash…
