As ABA Calls for Decriminalization of AML Deficiencies, Justice Gears Up for Subprime Investigations (10/17/2008)
Well, it’s already happening. The New York Post reported today that a dozen Lehman executives had been subpoenaed in conjunction with three grand jury hearings. They are likely to be “quizzed” – don’t think Jeopardy, think inquisition – about how they represented the health of the company and the value of its assets in the run-up to its demise. Washington Mutual is also spending time talking to prosecutors.
We’ve already reported that the Economic Emergency Act of 2008 contains provisions that encourage the involvement of FBI agents and prosecutorsin assigning criminal blame for the subprime meltdown. U.S. attorney’s offices throughout the country, state attorneys general and other prosecutors are gearing up to bring criminal and civil actions against banks and other financial institutions, DeMaurice Smith, a Patton Boggs partner, told a recent breakfast gathering at the Yale Club. The Lehman subpoenas suggest that law enforcement is already geared up and ready to go.
One irony for the anti-money laundering professionals in all this is that the criminalization of the subprime meltdown comes just as the American Bankers Association has released its plea for reform. One significant part of that reform, laid out in a 120-page document created by some of the leading lights of the AML community, is the recommendation that “the Department of Justice leave the oversight of BSA regulatory compliance by a bank to the bank regulatory agencies.”
And, the ABA report asks that limits be imposed on the powers of the U.S. Justice Department to regulate financial institutions for AML deficiencies, including a requirement that criminal action against a bank be prohibited unless bankers and financial regulators have first been consulted.
The irony is that, in the wake of the subprime crisis, prosecutors will get more power overseeing the financial system at a time when lawmakers and regulators aren’t focused on reforming or even refining the AML regulatory regime right now.
Expect Congress, the Department of Justice and teams of litigators to seek a pound of flesh over the collapse of financial institutions and not to worry about AML in the months ahead.
None of this is to say there aren’t legitimate concerns about the criminalization of AML violations. The rise in deferred prosecution agreements can be seen as a legitimate way to deal with regulatory lapses or as blackmail. The alternative to signing a DPA can be a perp walk for executives – so there is great incentive to sign.
But these concerns of the report aren’t likely to get a hearing as the country focuses on subprime and as the Department of Justice is tapped to bring prosecutions related to the meltdown.
I have not addressed any of the other recommendations of the ABA report, perhaps best saved for another column. Suffice it to say that the creation of an ombudsmen or gatekeeper position that will intercede with regulators seems to have even less chance of getting serious consideration than the push for a scaled back role for DOJ.
K.B.
Let’s Not Forgot Our Commitment to Main Street.(9/22/2008)
Overlooked in the bailout of Wall Street institutions proposed by Treasury Secretary Henry Paulson is concern about Main Street’s savers.
Despite having no statutory obligation to protect the likes of AIG, Bear Stearns, Fannie Mae or Freddie Mac, allowing them to fail is unimaginable because there was no way to anticipate how devastating the consequences might be.
As a result the Treasury, on the taxpayers’ behalf, has vowed to make $85 billion available to AIG, provide up to $30 billion in guarantees to Bear Stearns and to spend about $700 million to buy toxic mortgage obligations to “unclog” the entire financial system.
But there is little talk about the explicit commitment we have to protect tens of millions of depositors in banks and savings and loans to avoid financial panic on Main Street. That commitment is complicated by the fact that the Federal Deposit Insurance Corporation, having seized 12 failed banks year-to-date, has seen its insurance reserves fall below its legally mandated ratio of funds to insured assets.
The FDIC can count on an emergency line of credit from the U.S. Treasury in the event a big bank should fail, according to FDIC Chairman Sheila Bair, speaking earlier this month. Further, she added, the FDIC will develop a plan, to be announced in October, which will bring its insurance ratio to at least the minimum mandated by law over the next 5 years as required by statute. But what if there are a number of bank failures before then?
In June the FDIC named 117 institutions to its “Problem List” that collectively represent $78 billion in assets and conceded that the number of troubled banks on the list will rise.
Clearly there is a need to act now, and with real courage, to increase the insurance fund. Among the solutions floated by the FDIC is an increase in premiums paid by insured banks. However, the American Bankers Association (ABA) President Edward Yingling is already on record opposing any increase on his members on the grounds the FDIC fund is actually in good shape. In contrast, he asserts, banks are having a rough year and need to preserve capital.
Despite its resistance to increased premiums, the ABA wisely, if also self-interestedly, questioned the Treasury’s guarantee last week to bail out money market funds. It is a question of unintended consequences: such a guarantee could give savers further reason to withdraw money from their insured depository accounts.
Sadly, discussion about the health of our banking system scheduled for hearings in the Senate last week were cancelled. That’s because the larger problems of Wall Street are diverting attention from the potential problems of banks on Main Street.
This is not the time to risk a failure of confidence in our depository banking system because we are distracted by the crisis on Wall Street. It’s time for Congress to take up the urgent needs of the FDIC, increase the fund, and consider increasing the promise the fund makes to Middle America – for example, raising the amount insured from a maximum $100,000 to $150,000 for individual accounts and $300,000 for joint accounts. At least in this case, the average taxpayer would be the direct beneficiary of his or her own largess.
Founded 75 years ago in the wake of the Great Depression and country-wide runs on banks, the FDIC is a remarkable institution.
And, under Bair’s leadership, the FDIC acted quickly and quietly to avoid creating panic when it closed 12 banks this year. Beginning this spring and continuing into the fall, it has become a Friday routine: a bank is closed somewhere, its insured assets are generally bought by another bank and its liabilities are assumed by the FDIC. There is every reason to think this Friday ritual will continue and that makes it imperative that measures be taken now to shore up the fund so it can handle future bank closings.
It is an iconic scene from a classic American film. “Don’t look now George, but there’s something funny going on over there at the bank,” Ernie the cabdriver tells George Bailey in “It’s a Wonderful Life.” “I’ve never seen one, but that has all the earmarks of a run.”
It’s unacceptable that the scene should ever actually recur in the modern U.S. banking system.
K.B.
Kieran Beer is the editor-in-chief of Fortent Inform, and moneylaundering.com. The former is a legal data and news service focused on bank compliance. The views expressed are his own.
Hard Times, Come Again No More
It’s hard to be confident about the state of the economy, particularly the banking industry right now. Financial stocks seem to be the proverbial canary in the coalmine: dropping at the closing bell, signaling that there are systemic problems with the economy.
One sign of this is that bank stocks are not just falling. Many are down by more than 50% of their former market capitalization, and some banks are out-and-out failing.
A sad symptom of this is the need for someone here at Inform to keep watch on Friday evenings for bank closings. Yes, in the dog days of August, on those hot end-of-week evenings, when our legal team would like to head out to the beach or at least a get a beer and then go to a movie in a cool dark theater, it’s necessary to be keep someone on alert.
At about 6.10 p.m. on Friday, August 1, it was announced that First Priority Bank of Bradenton, Fla., was shut down by its state regulator. The Federal Deposit Insurance Corporation was named as receiver and SunTrust Bank in Atlanta, Georgia acquired all the insured non-brokered deposit accounts.
The week before, at 9.30 p.m. on Friday, July 25, the Office of the Comptroller of the Currency seized two banks and designated the FDIC as their receiver: First Heritage of Newport Beach, Cal., and First National Bank of Reno, Nevada. Deposits at the two banks were acquired by the Mutual of Omaha Bank.
These aren’t the only bank closures this year, just the most recent. The FDIC lists a total of eight bank failures for 2008 versus three for all of 2007 and none in 2006 or 2005.
These look to be hard times, not least of all because they are a little like Lake Superior – no one really knows what the bottom looks like. Without being Pollyanna, we can at least hope this is the bottom or pretty darn near. In the meantime, I’ve got that 1854 Stephen Foster song “Hard Times” ringing in my ears.
“'Tis the song, the sigh of the weary;
Hard Times, Hard Times, come again no more:
Many days you have lingered around my cabin door;
Oh! Hard Times, come again no more.”
K.B.
AML Regulations for Hedge Funds: Fuhgedaboutit!
A quick search on Fortent Inform or moneylaundering.com reveals that we have done a number of stories about hedge funds, including “Hedge Funds Operate Free of AML Programs Five Years After Rules Proposed.”
Now, months after this story ran, it could run again with few changes. In fact, although the U.S. Treasury’s Financial Crimes Enforcement Network proposed AML requirements in September 2002 for unregistered investment companies, including hedge funds, it has not finalized the rules.
The Bush administration isn’t moving to remedy this situation. A May 9 directive to all federal agencies to issue any new regulatory proposals by June 1 and any final regulations by Nov. 1 is probably a final blow to hedge fund AML regulation by this administration. While the memo allows the executive branch to make exceptions in cases of “extraordinary circumstances,” according to a The New York Times report, hedge funds rules aren’t likely to be fast tracked.
And, that’s not because hedge funds aren’t high risk when it comes to money laundering or fraud.
Just two week ago a former Atlanta hedge fund manager was convicted of running a scheme that took millions of dollars from investors to pay for luxury items, including a $500,000 wedding for himself. It was a horrible story the tabloids love: big-name NFL players were bilked and the fund manager, Kirk Wright, committed suicide just four days after he was found guilty.
But just because the feds haven’t acted, doesn’t mean banks shouldn’t. As Brian Orsak reports in his story “As Hedge Fund Fraud Rises, Need for Greater Institutional Diligence Follows,” banks that serve hedge funds need to take steps to protect themselves. His story suggests a few ways banks can do that. Among them, due diligence that includes:
· Checking civil litigation records and Financial Industry Regulatory Authority (Finra) central registration depository reports for information about the fund,
· Talking to clients of the fund,
· And, doing an internal controls analysis of the fund.
Financial institutions will additionally want to see that the hedge fund manager has hired quality auditors and lawyers and has functioning offices of a quality commensurate with the assets of the fund.
But of course, banks protecting themselves aren’t the same thing as greater hedge fund oversight, including finalization of AML rules for hedge funds. A lot is at stake. We’re not talking small potatoes here: two years ago the Securities and Exchange Commission estimated there were 8,800 hedge funds, with approximately $1.2 trillion of assets.
K.B.
War by Other Means (3/13/08)
“Freezing assets and denying a country access to international markets is war by other means,” wrote Prussian Major-General Carl von Clausewitz’s in his seminal work, “On War.”
Okay, what he actually wrote, albeit in German, is that “politics is war by other means,” (which is frequently rendered by pundits as “diplomacy is war by other means.”)
But it’s clear the Bush administration has built on to von Clausewitz’s concept in its effort to punish Iran for its once and possibly future pursuit of nuclear weapons.
One former government official told our reporter Brian Orsak that the Bush Administration has been investigating at least a half-dozen large foreign banks for Iranian sanctions violations.
Evidence of the investigations and the penalties that might follow wasn’t hard to find in the public record.
UK-based institutions Barclays PLC and Lloyds TSB Bank both said last month that they were being investigated by the U.S. Justice Department (DOJ) and the Treasury Department’s Office of Foreign Assets Control (OFAC) for possible violations of sanctions against state sponsors of terror. In filings with the Securities and Exchange Commission each institution reported that the probes involved dollar transactions cleared through New York branch offices and that they were cooperating with U.S. authorities.
Barclays said in its filing that it could not estimate the cost of resolving the investigation, but acknowledged that it “could be substantial.”
But it’s hard to conduct a war without allies. The effort to lean on foreign banks can alienate even the U.S.’s closest friends. The upshot is that the European Union tapped the same French judge who is credited with snaring Carlos the Jackal to determine if the U.S. was respecting privacy guarantees in its anti-terrorism financing fight. We will have to wait to see what Jean-Louis Bruguiere concludes after his inquiry, but there is plenty of resentment toward the U.S. within the E.U. That resentment will undoubtedly be reflected in Bruguiere’s analysis and recommendations.
K.B.
Lafayette, We Are Here (1/24/08)
Compliance costs grew faster than net income at 20 U.S. financial institutions surveyed for a Deloitte Center for Banking Solutions study released early this month. Actually, that finding could be shaped into a headline and put on top of a number of studies or news stories about compliance costs. By any number of measures, the cost of compliance has grown each year.
Part of the cost increases are associated with the fact banks had been adding staff to deal with their compliance burden, the study concludes. And, in addition to those staff increases, there are a lot of other costs. Ninety-five percent of those surveyed said senior executives had become much more involved in compliance issues than in past years. Forty percent said that time dedicated to compliance had risen by more than 25%.
A big problem associated with compliance is that there haven’t been any breakthroughs or advances in efficiently managing compliance information, according to the Deloitte study. The Deloitte survey found that only 10% of the institutions thought that compliance information was always effectively digested and disseminated and 15% that it was always timely "suggesting that there is still substantial progress to be made in compliance management information," according to the study. Presumably, that’s the reason that banks are throwing staff and senior managers’ time at compliance.
Well, it just goes to show that someone should invent a service that gathers all new regulations, alerts users of their advent and import, makes them easily searchable and perhaps summarizes them in whole or in part to make them more immediately accessible to compliance professionals. It would be good if that service also had professional news coverage trained on the compliance world. And, it would be great if that same service allowed banks to notify all pertinent individuals of new or changing regulations and track that they have read them.
K.B.
Nothing Suspicious About SOCA Report(12/05/07)
A significant feature of “The Suspicious Activity Reports Regime Annual Report 2007” is the clear “value equation” it lays out for filing SARs in the United Kingdom. Prepared by a committee comprised of representatives from the financial industry, law enforcement, and the Serious Organised Crime Agency, the report states at the beginning and then again at the end:
“The overall goal is a SARs regime which provides the best possible balance between:
• the costs to reporters and to other regime participants;
• addressing the threats to the U.K. from crime and terrorism; and
• the reward that the regime potentially offers through the reduction of harm and the recovery of the proceeds of crime.”
Mind you, I am not sure that the U.K. has it perfectly right when its regulators talk about principles-based regulation. A number of sobering Financial Times op-ed pieces on the matter give me pause, and principles-based regulation seems a little too touchy-feely a concept, one that leaves both the regulated and the public unaware of where the lines are.
But, even if it isn’t clear that the U.K. is doing any better with regard to making its SAR filings useful, the organizing principal in the report is worth emulating because it is dedicated to doing so. (See the report Original.)
And, the above principles echo a number of the questions I’ve raised in postings here, primarily about the costs and benefits of the U.S.’s SAR regime. Law enforcement just keeps asking for more information from institutions, but there are no measures as to how effective the information is in addressing crime and terror threats to the U.S. There are no metrics as to how well the information is being distributed and accessed.
In fact, in contrast to reports and other information from regulators in the U.S., the SOCA report is blunt about some of the shortcomings of the U.K. SARs system. It also contains specific benchmarks. Among other features of the report, there is a checklist of 24 recommendations made a year ago to improve U.K. SAR filings and facilitate their use. It is accompanied by a check off of how well they have been executed by British regulators.
The SOCA report doesn’t give the agency an “A.” The use of SARs “remains patchy, with significant areas of weakness,” the report concludes when talking about the use of SARs data by law enforcement and it cites understaffing at the Financial Intelligence Unit, a branch of SOCA, as part of the problem. See story.
In the U.S., we are awaiting the General Accounting Office (GAO) report on currency transaction reports due out in January. Congressman Barney Frank has also asked for a GAO report on the state of SARs filings and Bank Secrecy Act enforcement. Hopefully, both will match or exceed the standard set by the SOCA report.
K.B.
Light on SARs (11/8/2007)
In a report issued this week, the Financial Services Roundtable argues that compliance with anti-money laundering rules and regulations has become too burdensome for its members, the 100 largest financial institutions in the U.S. The report makes specific recommendations intended to relieve that burden, including the elimination of currency transaction report (CTR) filings in favor of suspicious activity report (SAR) filings on multiple transactions less than $10,000.
According to the report, financial institutions are being forced to put expensive compliance programs in place to deal with risks they don’t necessarily face. For instance, the report cites regulators requiring systems that monitor politically exposed persons (PEPs), even when they aren’t a part of an institution’s client-base.
And, as significantly, the report says that no metrics exist to determine the efficacy of CTR and SAR filings, the numbers of which climb each year and have evolved into a costly compliance exercise.
“The value of these filing requirements is clouded by the lack of data surrounding their use,” the trade group said in the report. “While law enforcement are able to cite examples of the value of CTR and SAR filings in individual cases, no aggregate data are available to measure the overall cost effectiveness of filing requirements.”
It is possible to dismiss this concern with an ad hominem attack – pretty popular in political “discourse” these days – that the Financial Services Roundtable is only looking out for its members.
But that wouldn’t be fair, because it’s a valid question: How effective are these numerous and voluminous filings?
Despite the slide shows and video presentations rolled out by law enforcement officials that highlighted successful investigations aided by SARs or CTRs at the American Bankers Association’s anti-money laundering conference in Washington, D.C., last month, bankers worry that they are feeding filings into a black hole. It is easy to wonder if the feds can really handle all that data.
And, there is the “fear card” played on banks. If they don’t do the filings, terrorists will be able to finance their operations with impunity.
However, as the FSR report points out, the 9/11 Commission found that SAR and CTR filing won’t help to identify the small amounts of money terrorists need to move to fund their activities.
And, here’s the most important point, one only implied by the FSR report: the lack of metrics, indeed the opacity of the entire process now required in the name of national security, may actually be distracting us from the real task of catching terrorists.
An honest examination of the reporting system is overdue.
KB
A Hush All Over the World (9/7/2007)
“There’s a kind of hush all over the world,” British pop group Herman’s Hermits sang in 1967. While they were singing about the sound of “lovers in love,” 40 years later there is a different kind of hush that’s hit the international banking community. It’s the silence that comes while an entire group holds its breath waiting for bad news.
U.S. regulators and criminal investigators have widened their probe of ABN Amro to include other banks, according to an Aug. 29 report in the Financial Times. U.S. authorities are examining “whether a handful of banks similarly violated laws by processing U.S. dollar payments through U.S. counterparts for clients in Iran, Cuba, Libya and Sudan,” the FT reported, citing people familiar with the matter.
That has to send a shiver up a few bankers’ spines. ABN Amro’s run in with U.S. regulators cost it $80 million in civil penalties in 2005 for violating sanctions against Libya and Iran. Turns out that is just the down payment. The bank has set aside an additional $500 million to settle potential criminal charges being pursued by the U.S. Justice Department.
The overseas push by U.S. regulators and the Justice Department follows on the Bush administration’s expressions of frustration with international regulatory regimes.
Truth is, much of what Treasury wants other nations to do is a matter for diplomats to work out. Using the U.S.’s financial might, which is based on the fact that most banks need to do business here, isn’t the equivalent of winning the cooperation of governments.
Tougher international standards would of course both relieve the U.S. of being the world’s policeman and be more effective in preventing the flow of money to terrorists because of the resultant greater vigilance and cooperation of each nation.
In the meantime, those European banks in the target of U.S. scrutiny are reportedly already beginning to negotiate, according to the FT. “One person familiar with the probes said some banks had started to discuss settlements with the authorities and could agree to financial penalties by the end of the year,” the FT reports.
KB
Good News, Bad News (8/11/2007)
This has been one of those good news, bad news weeks. No I’m not talking about the stock market, which continues to ricochet between sadness and euphoria as I write this.
On the good news front, I’m talking about the Financial Crimes Enforcement Network’s nod to financial institutions’ concerns. Mind you, it doesn’t begin to dig bankers and others out from under the mound of laws and regulations they find themselves buried under. But, allowing financial institutions to obtain “reasonably available” information about the anti-money laundering efforts of the foreign financial institutions with which they have correspondent relationships is an improvement over the standard set forth in an earlier version of the rules implementing Section 312 of the Patriot Act.
Under FinCEN’s original proposal, banks were to obtain and review documentation of a correspondent bank’s AML program. But, in a comment letter to FinCEN in March 2006, a group of financial industry organizations, including the American Bankers Association, and the Financial Services Roundtable, argued that banks would not be able to effectively review a foreign bank’s AML program. Among other things, they cited the difficulties financial institutions faced in dealing with different in language, terminology and procedures that they would encounter in doing detailed due diligence on foreign banks.
As for the bad news, it came in the form of a Harris Interactive poll of the public perception of 23 professions and occupations. The results, based on phone interviews conducted from July 10 to July 16, 2007, resulted in firefighters, scientists, teachers, doctors, military officers, and nurses being identified as the most respected.
Sadly, only 10 percent of those responding thought bankers had “very great prestige,” down from 17 percent. In fact, bankers did worse than stockbrokers in the survey: 12 percent of the respondents said stockbrokers had prestigious jobs. Actually, only actors and real estate brokers did worse than bankers.
By the way, 13 percent of those responding thought that journalists had prestigious jobs.
KB
Never Having to Say You're Sorry (7/24/2007)
In a defensive statement that argued its efforts were misunderstood and even misrepresented, the Securities and Exchange Commission announced late Friday that it was suspending its program to identify companies that do business with terrorist nations.
The SEC’s less than thoughtful contribution to the war on terror involved links on the agency’s website that identified companies that disclosed business dealings in the five countries on the U.S. State Department’s state sponsors of terrorism list in their annual reports.
The SEC’s initiative has been criticized since its June 25 inception by lawmakers on both sides of the aisle and industry representatives. U.S. Representative Barney Frank (D-Mass) sent a July 12 letter to SEC Chairman Christopher Cox complaining that the list unfairly includes companies that have divested, or have negligible business dealings, in the countries sponsoring terrorism.
According to the New York Times, the SEC list named 29 companies whose 2006 annual reports mentioned doing business in Cuba, 57 in Iran, 8 in North Korea, 35 in Sudan and 24 in Syria.
In a press release issued just before 5 p.m. under cover of the start of a midsummer weekend, SEC Chairman Chris Cox acknowledged the criticism and suspended the website. Because the web tool might not take into account that a company has terminated its dealings with a sanctioned country, the agency was “temporarily suspending” it, wrote Cox in the announcement.
Kudos to Cox for making the change. Backing off, even if it’s done in what passes for the dead of night in Washington, sometimes not only makes sense, but can be courageous.
Still, since the program is only suspended, will it be back? “We will work to improve the web tool so that it meets the various concerns that have been expressed. Alternatively, our staff is considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts and others to easily discover this disclosure without need of an SEC-provided web tool at all,” Cox writes in the press release.
Not only can investors find this information on their own, other agencies are better equipped to police corporate interactions with rogue states. As one former bank regulator told Fortent Inform’s Washington reporter Matt Squire, the SEC list pales in effectiveness with the screening process against sanctioned entities managed by the Office of Foreign Assets Control (OFAC).
So, it would be reassuring if in addition to suspending the program the agency admitted it had made a mistake. That would suggest that they had learned this particular task was best left to OFAC and others. Any new efforts to track corporate ties to terrorism should be the subject of much thought and debate.
KB
Ball of Confusion (6/11/2007)
The rise in suspicious activity report filings by banks might suggest that efforts to meet the Bank Secrecy Act requirements are going smoothly. The more than 1 million SARs filed in fiscal 2006 represent a 19 percent jump from 2005, a much smaller jump than the 32 and 61 percent increases in filings in fiscal 2005 and 2004, respectively. Regulators have argued that the leveling off reflects fewer defensive or CYA filings. Still, conversations with compliance professionals reveal a lot of confusion about what is expected of them from regulators, not only about when to file SARs, but how to handle the information in the SARs they generate.
Evidence that compliance professionals are overwhelmed isn’t hard to come by. Some 58 percent of 500 bankers who took part in a recent American Bankers Association survey said their BSA efforts are causing them to stumble in their overall compliance responsibilities.
One issue for bank compliance professionals is how constrained they are in sharing SARs filings within their own organizations. At an ABA conference in Atlanta, former Financial Crimes Enforcement Network director William Fox argued that a rule prohibiting financial institutions from sharing SAR information with nonbank affiliates hinders banks’ due diligence efforts. “When you have a company that has wholly owned subsidiaries – they may not even be financial institutions – there are certain restrictions on the ability to share information. I think we ought to break that down, I think the more we share information the better chance we have,” said Fox, now Bank of America’s anti-money laundering compliance chief.
Read Story
Adding insult to injury, at least from the point of view of the regulated, is some regulators’ almost cavalier handling of SARs filings. While banks are afraid to share the information internally, the Internal Revenue Service has forged its own path on the use of SARs as we reported in our May 2, 2007 story “Banks Agitated by IRS Letters Telling Customers Transactions May be Illegal.”
Read Story
That story brought to light the IRS criminal investigation division’s acknowledged use of suspicious activity reports to swoop in on banks’ customers and tell them they were under investigation. The practice came to light, in part, when the manager of a MidAmerica Bank branch in Chicago was confronted by an angry customer with a letter in hand from the IRS. Why, the customer demanded, did you report me to the government?
“Since he only banks with us, he knew we reported him,” Jack Oskvarek, vice president of anti-money laundering compliance at MidAmerica Bank, said. “Those reports are supposed to be kept confidential. The IRS is putting our bankers at risk by tipping off customers that we’re on to them because they know who reported them. Now our tellers are in the direct line of fire. This is wrong.”
The IRS didn’t see it that way at all. “Banks have a burden to file SARs and we have an obligation to investigate them,” IRS spokeswoman Patti Reid said. “This is a national procedure available to agents, like search and seizure warrants, and they determine what’s most appropriate. This is our least-intrusive investigative technique. We’ve been using it for 10 years.”
However, in the wake of a hue and cry from the banking industry, the IRS conceded that it had plans to sit down with the good folks at FinCEN to discuss how it would use SARs going forward, as we reported in our follow up story “IRS, FinCEN to Review Letters Sent to Targets of Suspicious Activity Reports.” There is at least some reason to think that the IRS’s willingness to talk will lead to a change that will make life better for banks while not undermining the efficacy of SARs.
Read Story
Democrats, Republicans Should Reach Consensus over Reach of Patriot Act, Sarbanes-Oxley (3/19/2007)
The old saw “hard cases make bad law” can, from a compliance officer’s point of view, be taken a step further. Hard cases make bad law resulting in bad regulation.
Over the past two weeks, the country has started to have second thoughts about two laws based on hard cases that rightly inflamed the passions of both politicians and the electorate: the Sarbanes-Oxley Act of 2002 and the Patriot Act of 2001.
Anyone who has read “The Smartest Guys in the Room,” or saw the movie with the same name, can’t help but want to ensure that the destruction reaped by Enron Corp.’s collapse never happens again. The movie version especially brings home the damage wrought upon employees who depended on Enron stock-laden 401(k) plans for their retirements.
The employees’ mistake – and that of many Enron shareholders - was to trust rosy financial reports issued by Enron management as they parked significant losses in off-the-books limited partnerships. Managers were also, in some cases, selling their own Enron shares while encouraging employees to hold onto theirs. In response to the Enron collapse and, lest it be forgot, the blowup of WorldCom, Congress passed Sarbanes-Oxley.
Last week, a number of titans of finance gathered in Washington, D.C., at the invitation of U.S. Treasury Secretary Henry Paulson to discuss the state of regulation. Former Federal Reserve Chairman Alan Greenspan and current New York Stock Exchange Chairman John Thane argued against Sarbanes-Oxley as it now stands, while former Securities and Exchange Commission Chairman Arthur Leavitt and Berkshire Hathaway Chairman Warren Buffet defended it.
There is no harder case than the collapse of the World Trade Center and the attack on the Pentagon on Sept. 11, 2001. The deaths of more than 3,000 and the ability of a handful of terrorists to make the entire nation feel under siege resulted in the hasty passage of the Patriot Act.
But doubts about the reach of the Patriot Act resulted in a 2005 reauthorization act that curtailed some provisions, such as law enforcement’s right to obtain library records and requiring that National Security Letters be tracked and their usage reported to Congress by the Office of the Inspector General (OIG) in the Justice Department.
On March 13 that report was released to Congress. In it, the OIG found that the letters were abused by agents of the Federal Bureau of Investigation. In a sampling of 293 National Security Letters the Justice Department’s OIG found 22 possible breaches of regulations, some of them potential violations of the law, according to a report in the Washington Post. There followed an outcry from both sides of the aisle.
Sen. Arlen Spector, a Pennsylvania Republican, said the FBI had badly misused the letters, according to a story in The Wall Street Journal. “This is, regrettably, part of an ongoing process where the federal authorities are not really sensitive to privacy,” he said.
“National Security Letters are a powerful tool, and when they are misused, they can do great harm to innocent people,” the New York Times quoted Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, as saying.
Both Sarbanes-Oxley and the Patriot Act represent major efforts to address serious issues: dishonest corporate governance not in shareholders’ best interest and the lack of coordination and efficacy of intelligence gathering in the wake of the Sept. 11 attacks. Not even Sarbanes-Oxley’s biggest critics argue for its total abandonment and the same is true for the voices that cried out in Congress about the use of National Security Letters under the Patriot Act. But debating how far these regulations go is healthy. And, that is especially true now when the country is in a much better position to think rationally about what constitutes good corporate governance and what police powers are best for interdicting terrorists without trampling our freedoms. Democrats and Republicans need to arrive at a consensus that reflects a greater perspective on the awful events that gave birth to Sarbanes-Oxley and the truly horrific events that resulted in the Patriot Act.
Kieran Beer
Editor-in-Chief
Fortent Inform