How an information system helped nail Eliot Spitzer and a prostitution ring

How an information system helped nail Eliot Spitzer and a prostitution ring

Summary: Former New York Governor Eliot Spitzer's prostitute scandal is all the big news here in New York, but the lesser known tale is how an information system--the U.S.

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Former New York Governor Eliot Spitzer's prostitute scandal is all the big news here in New York, but the lesser known tale is how an information system--the U.S. Treasury's Financial Crimes Enforcement Network--played a role in his downfall.

On the surface, Spitzer's downfall is a New York tabloid's dream. Headlines like "Ho No!" scream on the New York Post. Wall Street is downright gleeful about Spitzer's downfall (although Henry Blodget has shown an amazing amount of restraint).

But what really snared Spitzer was a money laundering investigation that was flagged by suspicious activity reports (SARs) that banks have to file with the Treasury to surface everything from money laundering to terrorist activity. This network has been around for a while, but its importance escalated following the Sept. 11, 2001 terrorist attacks. According to the FBI's charges the prostitution ring that counted Spitzer as a customer was investigated due to some shady bank accounts, checks and wire transfers with big totals ($39,000, $400,000 and others).

According to the FBI's complaint :

In or about October 2007, the FBI and the United States Internal Revenue Service-Criminal Investigative Division ("IRS-CID") began an investigation focusing on an organization suspected of conducting prostitution and money-laundering crimes in the United States and Europe.

According to the Associated Press, this investigation began with a suspicious activity report on Spitzer. The Wall Street Journal reported that Spitzer's transactions looked like they were kept below $10,000 to avoid federal reporting rules. This behavior to avoid the $10,000 threshold also helps the Feds find strange behavior, say 150 transactions between $7,000 and $9,000. The Journal notes:

There has been a massive federal crackdown on money laundering in the wake of the 9/11 terrorist attacks, and banks have been extremely diligent in filing such reports. Those reports often include details of transactions done by innocent people.

Indeed, these reports are absorbed by the Treasury and crunched in a database to highlight potentially suspicious activity. According to the Financial Crimes Enforcement Network (FinCEN) there have been 4.7 million SARs filed as of June 30, 2007.

fincen.png

fincen1.png

In a report, FinCEN said:

Since January 1, 2003, filings by non-depository institutions, individually, and as a whole, continued increasing, and are encompassing a greater portion of the Suspicious Activity Reports within the Bank Secrecy Act (BSA) database. In 2001, ninety-six percent of the Suspicious Activity Report database consisted of depository institution Suspicious Activity Reports; presently the figure is sixty-four percent. From January 1, 2002 to June 30, 2007, non-depository institution Suspicious Activity Reports comprised roughly 42 percent of all Suspicious Activity Reports filed.

Spitzer, also known as Client-9, had his own share of financial dealings ($4,300 for future favors) with the prostitution ring, but would have never been caught (he shunned wire transfers) if the operation wasn't under investigation and his transactions weren't being monitored. ABC News reported that Spitzer was trying to hide transactions to QAT, the alias of the prostitution ring.

Here's what's known about the FinCEN system (BNET resources), which is enabled by the Bank Secrecy Act and to a lesser extent the Patriot Act.

The IRS collects the data used by FinCEN, which doesn't collect, process or store filed data.

FinCEN will be taking on more management of this data in a move that will "will challenge us to perfect a new array of skills, to upgrade our informational technology management capabilities, and to acquire and steward a significant increase in resources," according to FinCEN's strategic plan for 2006 to 2008.

Financial institutions are required to file transaction reports when a customer makes a cash transaction of more than $10,000.

The processes to get these transactions into the FinCEN network aren't completely automated. According to a February General Accountability Office report:

Institutions must have processes and trained staff in place to identify when and if a CTR (currency transaction report) is required, including the ability to aggregate same-day cash transactions made by or on behalf of the same person, and to file CTRs correctly. While automation has made these tasks less difficult, most institutions reported that their processes still include "manual" steps; for example, most institutions reported that their CTRs are reviewed by branch managers or compliance officers before being sent electronically to FinCEN or by mail to IRS. Institutions we contacted were generally unable to quantify their costs for meeting CTR requirements, in large part because they use the same personnel and processes for meeting other BSA requirements or for other purposes and do not separately account for CTR-related costs.

And.

Technology has helped some depository institutions expedite and streamline many or some parts of the CTR process. Overall, 78 percent of institutions responding to our survey reported that at least one part of their CTR filing process was mostly or fully automated. Many of the institutions we spoke with have software systems that prompt the teller when a CTR is necessary for a transaction, and some institutions have systems that allow tellers to electronically access the CTR form at their workstation and enter the necessary information. Additionally, some depository institutions reported that they had software systems that automatically fill in some parts of the form. Also, some banks have invested in software that processes CTRs for final reviews by their compliance office staff. However, the extent of automation varied widely among specific steps in the process, and no survey respondents reported a completely automated CTR process.

Data is delivered via paper and electronically. According to the GAO's report:

FinCEN, together with the IRS, is responsible for managing and storing the BSA data that financial institutions report. Financial institutions that submit CTRs in paper form mail them directly to IRS's Enterprise Computing Center in Detroit. Institutions that submit data electronically transmit them directly to FinCEN, which in turn transmits them to the center. The center collects and stores all BSA data in its Currency Banking and Retrieval System (CBRS).13 For fiscal year 2007, the IRS estimated the total cost of processing CTRs to be about $7 million, including about $3.5 million to convert CTRs submitted on paper to an electronic format. IRS examiners and investigators access BSA data directly through IRS's Intranet, while FinCEN has a direct connection to the Enterprise Computing Center.

Here's a look at how the data comes in.

fincen2.png

The FBI and other law enforcement agencies get this financial data in bulk. The GAO said:

In 2004, FinCEN first provided the FBI with bulk transfer of data, and during 2005 and 2006 FinCEN agreed to provide two federal agencies-the Secret Service and ICE-and a multiagency program established by the Department of Justice (the Organized Crime Drug Enforcement Task Force, or OCDETF Fusion Center) with access to a bulk data set.15 Receiving these data in bulk, rather than accessing the database remotely and querying it for specific records, allows agencies to conduct more sophisticated analyses.

This bulk data winds up in the FBI's Investigative Data Warehouse, a collection of more than 50 multisource data sets. Forty percent of all FBI terrorism subjects turned up in reports filed between Jan. 1, 2000 and June 30, 2006, according to the FBI.

FinCEN is providing better Internet access to this data. Law enforcement staff can access a FinCEN database dubbed WebCBRS, which allows users to download up to 20,000 CTR reports on a query. These can be exported to a spreadsheet.

In other words, some of these Spitzer transactions may have wound up in a spreadsheet somewhere.

Postscript: The Wall Street Journal in its Wednesday edition reports that Capital One's North Fork unit is at least one of the banks that flagged Spitzer's transactions. The Journal notes that banks monitor the financial transactions of politically connected people--legislators, judges and their relatives--to probe for ill-gotten gains.

Topics: Data Centers, Banking, Government, Government US

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116 comments
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  • big brother is watching us

    If a governor was watched for suspicious terrorist activities just imagine those with weird names and no fame being checked every day, or worse, detained at undisclosed facilities.
    Linux Geek
    • Yeah really

      I'm sure some of those home equity line to credit cards to savings account to checking transfers are in this database too. After all, no one saves in the U.S. anymore--we just transfer money around.
      Larry Dignan
    • I find it an invasion of privacy to have my money tracked and reported on

      This is one of the things the founders were worried about.

      Will violations of our liberties continue or will you people get off your butts and actually vote for people who want to stop these kinds of intrusions?

      As for prostitution, its been around since before this country was even an idea. The fact we prosecute people over it is just sad. Same with drugs. Why not just regulate it, rather than make it illegal. Your morals are not my morals... sorta what this country was founded on.
      Been_Done_Before
      • Message has been deleted.

        Techboy_z
        • uh,oh.....

          [i]It was founded on a moral framework and a basis of God-given rights [/i]
          Can you enumerate for us those [b]God-given rights[/b]?
          Is the 'right' to be monitored one of them?
          Linux Geek
          • It's kind of ironic though

            When you consider that Spitzer and his party celebrate the Warren court finding a right to privacy in Constitution. Yet he was part of the same group that felt there was nothing wrong with monitoring private citizen's transactions. So I find it kind of amusing that Spitzer has been hoist by his own petard using a law he, until recently, probably loved because of the power it afforded the government over the private citizen.
            maldain
          • No, but neither is...

            ... a right to privacy.
            ShadeTree
        • Your Right!

          Eliot Spitzer just had a need that his wife could not satisfy.
          He should have dumped her so he could run free.
          Date who he wants when he wants.
          Or not.
          I guess that things are not always black or white.
          You cannot legislate morality.
          Save it for church and tax the rest.
          PghNative
          • But you can legislate...

            ...that public officials cannot engage in illegal transaction with organized crime - which is just what the governor did.
            cornpie
          • your misuse of you're

            completely changed the meaning of your post. Maybe if he had spent more on education and less on hookers, people would have better grammar and spelling skills!
            Paul Fletcher
          • Education is futile

            Grammar and spelling skills? Hoo nds dem? L u gta do prs ON/OFF! <BR><BR>

            So why should kids bother to study? Metallica, Shaq O'Neil, Ansel Adams--even Grizzly Adams--didn't need decades of school. If one cannot be one of them, then, well who cares? <BR><BR>

            Most folks--and kids--are aware that engineers' salaries are below 100k per year. Doctors likewise. Teachers much less. <BR><BR>

            Greed-head CEOs and the like take in millions of dollars every year. If the CEO is crooked, even better! <BR><BR>

            Studying to be at the bottom of the heap seems stupid. Since Our society places cash ahead of every thing else, with Values coming in dead last, the kids know they will be unimportant at best. <BR><BR>

            One should learn because learning is interesting. Television, movies, two-thirds of the internet, etc. say money, Money, MONEY!! Does one believe the flashy commercials on TV? Or the underpaid teacher who has to purchase her own school supplies? <BR><BR>

            So no one learns, and no one teaches. Reality isn't QUITE that bad, but it will be soon. <BR><BR>

            I had teachers who cared, but I am fifty-three. Teachers were allowed to teach back when I was a kid. <BR><BR><BR><BR>


            And I am damn glad I had them!
            Master Dave
          • Youse!

            I see you're vs. your all the time, ditto the possessive apostrophe s when the word is merely plural. This is hardly the stupidest writing on the net. Wanna see some big stupid? Read the posts on Oprah's book club message board. Lots of grade school dropouts, to be sure.
            ds.gordon
      • Also founded on slavery

        [i]As for prostitution, its been around since before this country was even an idea. The fact we prosecute people over it is just sad. Same with drugs. Why not just regulate it, rather than make it illegal[/i]

        As was slavery. Just becuase something had been around at the begining should not make it morally acceptable today.
        GuidingLight
        • I agree

          I agree with your post. Just because it's history, doesn't make it right. Prostitution has been around for years, but the U.S. wasn't found on those dark principles. Don't get me wrong, not everything was perfect either... i.e. slavery. Sometimes it takes time and a real moral movement for change.
          Melannk24
        • No one vlounteered for Slavery

          Slavery was was involuntary. Prostitution could be considered a choice, an exchange between two consenting adults.
          The Cranky Bear Reader
          • Involuntary

            I believe the issue with prostitution is if you make it legal, finding the sex slaves would be impossible.

            The reality is that not all prostitutes are hot 5th Avenue types. Many have been kidnapped or forced into it by threatening their families.
            Regulator1956
          • And, by keeping it illegal...

            ...we are certain to keep it the profitable mess it is for organized crime, ensuring the continued behavior you decry.
            Dr. John
          • So, boths cases suck? If so leave it as it is now ...

            ... illegal.
            markbn
          • sex slaves are prevalent in countries where prostitution is legal so that

            sex slaves are prevalent in countries where prostitution is legal so that argument does not hold water. as a matter of fact it is worse and harder to prove.
            SO.CAL Guy
      • Wow

        That doesn't sound like any morals I have ever heard of... regulate illegal drugs and prostitution?! That's a great way to promote our country, let's put random sex and drugs on the list of things "OK" to do. That is not what this country was founded on. Read your history!
        The problem of today is liberal thinking, it's a road where everybody wants to make their own rules without restraints.

        As for intrusion, the way I look it, if you don't have anything to hide, then what's the issue? Invasion of privacy for them to look at bank records? If somebody wants to know what I bought at the grocery store on my checkcard, go ahead... I really don't care. Same with electronic eavesdropping, I think if it's being done for the security of the country, so-be-it. I have nothing to hide.
        Melannk24