All of us live in networks - systems of relationships at work, in communities, and with our families. We create networks because we're social animals and because without them, miscommunication will foil our goals.
|Photo: David S. Holloway
|James H. Freis Jr., director of the U.S. Financial Crimes Network, says his agency depends on intel provided by law enforcement and financial institutions to stop fraudsters in their tracks. He is hoping to soon have many global entities sharing this mission to cut down on fraud and reduce its incidence worldwide.
James H. Freis Jr., director of the U.S. Financial Crimes Enforcement Network (FinCEN), said it's no mistake that "network" is in the agency's name. "First and foremost, FinCEN is a network," he said. "We bring together data and reports from across geographic lines, dozens of law enforcement agencies, and from many financial institutions. This enables FinCEN to see the big picture of possible crime."
FinCEN has only been in existence since 1990. The U.S. Department of the Treasury established it to provide a governmentwide, multi-source, financial intelligence and analysis network. Its operation was broadened in 1994 to include regulatory responsibilities for administering the Bank Secrecy Act (BSA), one of the nation's most potent weapons for deterring corruption within the U.S. financial system.
BSA (also known as the Currency and Foreign Transactions Reporting Act) requires U.S. financial institutions to assist law enforcement agencies, both domestic and international, in detecting and preventing money laundering.
The act requires financial institutions to keep records of cash purchases of negotiable instruments; file reports of cash transactions exceeding $10,000 (daily aggregate amount); and to file Suspicious Activity Reports (SARs) on possible money laundering, tax evasion, terrorism, or other criminal activities.
FinCEN uses these SARs and other reports to analyze possible fraud. "A scammer might go into three or four separate financial institutions that may be located within a block or two of each other," said Freis. "But only FinCEN will 'see' the forest of suspicious activity of this individual because we're receiving reports from all the institutions. On a larger scale, FinCEN can see trends emerging from the thousands of SARs sent to us. This is why FinCEN began to see activity in the mortgage fraud area, for instance, as a type of leading indicator well before it became a national story."
Freis, a keynoter at the 20th Annual ACFE Fraud Conference & Exhibition, recently spoke to Fraud Magazine from his office in Washington, D.C.
When you joined FinCEN as its director in 2007, you said you wanted to "take a fresh look" at the way the agency carries out its mission as administrator of the BSA. What are some of the ways you're carrying out your goals?
First, let me point out that FinCEN's success in pursuing our mission of fighting money laundering, terrorist financing, and uncovering fraud depends on the dedicated men and women of FinCEN and our ability to listen to our customers in law enforcement and our industry partners. We could not wholly perform our mission without strong partnerships with the industries that fall under the Bank Secrecy Act as well as with our colleagues in the federal banking regulatory agencies.
That being said, since I came to FinCEN in 2007, I've worked to focus on taking a holistic approach to fighting fraud. FinCEN involves not only the front-line people who work in financial institutions and have day-to-day contact with their customers but also the leadership of an organization. Further, FinCEN has an increased emphasis on industry outreach. We've taken steps to reach out to the various industries that must comply with the BSA. We've held and attended meetings around the country and visited many financial institutions to better understand their business models and concerns and needs as they work to ensure that legitimate business flourishes, while not inadvertently facilitating financial crime and terrorist financing. FinCEN then seeks to take this detailed knowledge and step back to look at the issues that transcend individual institutions and even industry sectors.
Lastly, FinCEN has put a spotlight on coordination in a global environment. While we work to clarify the framework for SAR confidentiality and SAR sharing in the United States, FinCEN is also promoting global efforts to provide a better framework for detecting globally active criminals and promoting enterprisewide risk management and information sharing within a financial services group operating in multiple countries. FinCEN's most recent SAR-sharing plan seeks to promote sharing information within a corporate structure so that fraud can be more readily detected while maintaining a focus on cost effectiveness.
Why is it important for fraud examiners to know about the mission and efforts of FinCEN? What can fraud examiners do to help FinCEN?
In many respects, financial professionals are the eyes and ears of FinCEN. They know their businesses and what activities are considered normal and regular business practices in their industries and among their customers. Certainly one of the ways fraud examiners can help FinCEN is to know their customers. Who better to identify suspicious activity when extraordinary activities occur than a financial professional, particularly when they know their customers' business, habits, and routines? And the interests of any individual institution are directly aligned with FinCEN in deterring, detecting, holding accountable, and seeking restitution from those who perpetrate fraud.
What do you see as some of the greatest aids and obstacles in fulfilling FinCEN's mission "to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems"?
Among the greatest aids is our position as the bridge between law enforcement and the financial community. One example is that FinCEN can facilitate requests from law enforcement through our BSA Section 314(a) information-sharing program in which law enforcement makes requests related to their criminal investigations. This unique authority provided by Congress allows FinCEN, for instance, to identify previously unknown activities and transactions and to work to provide law enforcement with lead information. New leads often advance law enforcement investigations including, for the purpose of seizing and forfeiting criminal proceeds, some of which might be available for restitution for victims.
One of the greatest obstacles FinCEN faces is that there is always a new scam, a new angle, or new opportunities for criminal actors to insert themselves. Mortgage loan fraud and loan modification fraud are prime examples of fraud opportunities in all economic weather. When times are good, mortgage loan fraud emerges as an issue because there is a lot of money changing hands. When times turn bad, fraudsters can prey upon innocent citizens who are doing everything they can just to keep their homes through loan modification and foreclosure rescue scams.
On April 6, the Obama Administration announced a new coordinated effort across federal and state governments and the private sector to target mortgage-loan modification fraud and foreclosure rescue scams. How will FinCEN be involved in the effort?
As the lead agency for this effort, FinCEN has an advanced targeting effort underway to combat fraudulent loan modification schemes and coordinate ongoing efforts across a range of federal, state, civil, and criminal enforcement agencies to investigate fraud and assist with enforcement and prosecutions.
FinCEN's targeting effort is producing leads that have helped various agencies to halt the illegal practices of those offering loan modification or foreclosure scams. Also, FinCEN will marshal information about possible fraudulent actors - drawing upon a variety of data available to law enforcement, regulatory agencies, and the consumer protection community - for the purpose of identifying and proactively referring potential criminal targets to participating law enforcement authorities.
Through FinCEN, the U.S. Treasury Department has issued an advisory to alert financial institutions to the risks of emerging schemes related to loan modifications. The advisory identifies red flags that may indicate a loan modification or foreclosure rescue scam and warrant the filing of an SAR by a financial institution. A key request in the advisory is that financial institutions include the term "foreclosure rescue scam" in the narrative sections of all relevant SARs.
FinCEN is also providing regular training to the Special Inspector General for the Troubled Asset Relief Program [SIGTARP] staff on money flows and on how to effectively use BSA data for its analytical purposes. We're working with the SIGTARP's investigations division and counsel to develop a joint advisory to send to financial institutions on reporting suspicious activity related to criminal use of TARP funds.
In addition, FinCEN is providing technical training and support to the inspector general's office of the Department of Housing and Urban Development for using BSA data in mortgage fraud cases. We're also assisting it in a strategic effort to proactively identify mortgage fraud in FHA loans by generating leads and potential investigative subjects through SAR analysis.
What are the general (and some specific) responsibilities of U.S. financial institutions in deterring and reporting financial irregularities?
All financial institutions operating in the United States, including insured banks, savings associations, service corporations, credit unions, bank holding companies, non-bank subsidiaries of bank holding companies, Edge and Agreement corporations [organizations chartered by the U.S. Federal Reserve to engage in international banking and financial operations], and U.S. branches and agencies of foreign banks, casinos, and money services businesses are required to file a SAR following the discovery of:
- Insider abuse in banks involving any amount
- Violations aggregating $5,000 or more in which a suspect can be identified
- Violations aggregating $25,000 or more regardless of a potential suspect
- Transactions aggregating $5,000 or more that involve potential money laundering or violations of the Bank Secrecy Act
- Computer intrusion
If a transaction in excess of $10,000 in currency occurs then financial institutions must file a currency transaction report or CTR.
Financial institutions (and other groups bound by the BSA) say it's expensive to comply with AML/CFT (anti-money laundering/combating the financing of terrorism) regulations especially if they don't have automated monitoring systems. How do you encourage them to bolster their efforts and be diligent in filing CTRs, SARs, and other forms?
BSA reports filed by financial institutions are the cornerstone of the U.S. government's efforts to disrupt illicit financial activity. FinCEN recognizes the significant costs and resources financial institutions invest in complying with these responsibilities; we understand how seriously they take their BSA and anti-money laundering compliance responsibilities and greatly appreciate the work they do on the front lines of our collective efforts to protect the financial system and root out financial crime. IT systems are only one part; qualified compliance professionals must complement the systems.
FinCEN continually works with industry through the Bank Secrecy Act Advisory Group [BSAAG]. BSAAG serves as the principal forum in which issues relating to the BSA are discussed. The group is comprised of high-level representatives from financial institutions, federal law enforcement, regulatory authorities, and others from the private and public sectors.
FinCEN has also carried out site visits and has ongoing communications with industry to gain insight into - among many topics and issues - the cost of complying with BSA requirements. An effective enforcement program, applied justly and consistently, will deter actions or omissions in contravention of law, and thereby promote more consistent compliance - across financial institutions - necessary to safeguard the integrity of the financial system as a whole.
The banking industry has consistently responded and adapted to both long-standing and recently promulgated rules issued under the BSA. We hope to continue to facilitate the trend toward improved BSA compliance with guidance, outreach, and educational efforts. By way of example, FinCEN is simplifying its rules and regulations by centralizing them in its own new chapter of the Code of Federal Regulations. This change will streamline BSA regulations into general and industry-specific parts, ensuring that a financial institution will be able to identify its obligations under the BSA in a more organized and understandable manner. Making the rules more accessible and easier to understand facilitates compliance.
I understand that FinCEN has proposed amendments to SAR regulations that expand the confidentiality of SAR information, along with guidance to ensure that the appropriate parties, but only those parties, have access to SARs. Can you talk a bit about that?
It is of utmost importance that the public knows that FinCEN and its government partners, as well as industry actors, will maintain the confidentiality of the sensitive personal and financial information reported in SARs. That confidentiality must be balanced with proper utilization by those who need the information to do their jobs. In these times of financial volatility, it is as important as ever to focus on ensuring that there are no holes in the net designed to prevent criminal actors from abusing the financial system. Affiliated financial institutions under common ownership should be able to leverage insights and information for the detection of crime, but this is not necessarily occurring today.
Corporate structures, which have developed for a variety of business reasons - but not likely for greater efficiency in detecting crime - may inadvertently have created barriers to the ability of affiliated institutions to detect and provide law enforcement with information regarding criminal activity crossing various business lines. For example, if a criminal conducted suspicious transactions at a bank branch on Monday and suspicious transactions with the bank's affiliated broker-dealer on Tuesday, these two affiliates may be limited in their ability to share that information even though they are within the same corporate structure.
This dynamic has created a situation potentially exposing the overall corporate structure to the risk of criminal abuse, while also missing the opportunity to provide law enforcement valuable information about potentially complex money laundering cases.
As a result, FinCEN took these recent steps to affirm and clarify the confidentiality of SARs while at the same time permitting common-sense sharing of SARs within a corporate structure.
FinCEN conducted studies on mortgage fraud that found that between July 2002 and June 2008, depository institutions filed nearly 180,000 mortgage fraud SARs. Do you see the number of SARs increasing in 2009 and 2010? Are financial institutions getting better at submitting SARs? What other mortgage fraud statistics would you like to emphasize?
I think there are two factors at play. First, I think a lot of the fraudulent practices that were occurring during the housing boom only started to get uncovered in recent years so we are getting more filings. But because they are a lagging indicator of the activity it doesn't necessarily mean that the activity is still increasing at that rate. Incidentally, I think the type of activity in the mortgage market we see today is different because getting a mortgage is harder today than it was five years ago and the fraudsters are moving into the loan modification and foreclosure rescue markets.
Second, institutions that file SARs are getting much better at spotting potential fraud, are more aware today of the types of mortgage fraud being perpetrated, and are more likely to file SARs. On the other hand, the federal government, through the combined efforts of local, state, and federal law enforcement, is cracking down on scammers, which makes it harder for criminal elements to commit fraud. Criminal actors look for opportunity and increased vigilance reduces opportunity.
That notwithstanding, there also was an increase in the percentage of SARs filed prior to granting the loan - 34 percent compared with 31 percent in the prior one-year period. FinCEN's April 2008 report showed the increase was 21 percent over the preceding decade. Once again, this reaffirmed the trends we had been seeing since we began providing feedback to industry on this issue: institutions are becoming more adept at spotting fraud before the money goes out the door.
A February FinCEN report looked at 62,084 SARs reporting mortgage fraud. Filings have increased 44 percent from 43,000 in 2008. New trends include suspected fraud identified when mortgage purchasers exercise rights to send mortgages back to originators and in the context of foreclosures. Can you elaborate on those trends and others?
With the challenges we face in the mortgage industry, opportunities for fraud are ever present. "False statement" was the most reported activity in conjunction with mortgage fraud, while identity theft was the fastest-growing secondary characterization reported. Reports of identity theft in conjunction with mortgage fraud SARs increased 96 percent from the previous study.
We also see instances of "flipping," defined as "the buying and selling of the same property within a short period of time with the intention of making a quick profit," warning that flipping activity is often coupled with mortgage fraud and other forms of fraud.
FinCEN also found that filing institutions referenced foreclosures in 13 percent of their SAR filings, insurers in 8 percent, and early default payments in 2 percent of filings as indications of suspected fraud. These patterns of filings generally involved the detection of suspected fraud after the mortgage had been granted.
Other typical fraudulent activities associated with this category in the SAR filing sampling are: appraisal fraud, fraudulent flipping, and straw buyers. In SAR filings describing fraud for property, fraudulent activities observed include: asset fraud, occupancy fraud, employment and income fraud, debt elimination fraud, identity theft, and straw buyers. Filing institutions often referenced repurchase requirements and buy-back demands in SAR narratives. Some of these narratives stated directly that the filing institution had received a demand from the buyer of a mortgage that the filing institution repurchase the mortgage on grounds of suspected fraud or misrepresentations.
In a March FinCEN study, the agency found that although the number of newly filed SARs reporting mortgage fraud has increased substantially between July 2006 and June 2008, the proportion of those SARs reporting current mortgage fraud activity has decreased by more than 28 percent. How do you explain that?
A key finding of this study was a decrease in the proportion of mortgage fraud SARs that reported current mortgage fraud activity. When looking at the date that a SAR filer reported a mortgage fraud began, rather than just the date the report was filed, we found that the percentage of SARs filed between July 2007 and June 2008 that reported mortgage fraud occurring in the same 12-month period was 37 percent, compared to 49 percent in the previous 12-month period and 51 percent in the 12-month period before that.
In other words, although the number of newly filed SARs reporting mortgage fraud has increased substantially between July 2006 and June 2008, the proportion of those SARs reporting current mortgage fraud activity has decreased by more than 28 percent. Put slightly differently, the fraudulent practices that were occurring during the housing boom only started to get uncovered when the loans started to go bad in recent years. So while we are getting more filings, they are a lagging indicator of the activity that may have occurred several years before.
Can you describe the close interconnection of mortgage fraud to money laundering?
The premise is quite simple: the motivation behind fraud is profit. Laundering is the process of taking illegally gained profits and finding a way to be able to use them. The only aspect that makes mortgage fraud distinct from other fraud in this regard is that because a house is a big-ticket item, a single fraudulent transaction can reap significant criminal gain.
For a more technical answer, money laundering, prosecuted under 18 U.S.C. § 1956 and 1957, is defined with respect to the proceeds of specific unlawful activities including the proceeds of numerous types of fraud such as bank fraud, wire fraud, and mail fraud. Fraud often involves falsification of documents, and if the falsified documents are bank entries - including applications for mortgage loans that include material falsehoods - that fraud itself is also a federal crime under 18 U.S.C. § 1005, which deals with bank entries, reports, and transactions or 18 U.S.C. § 1344, bank fraud. Thus, in a situation involving mortgage fraud, both the fraud itself and the laundering of the proceeds of the fraud are crimes. The structure of the law makes it possible to tackle the problem from both sides.
In the first part of this century, why were casinos, brokers and dealers in securities, currency dealers and exchangers, jewelers, dealers in precious metals and stones, and mutual funds added to the list of those required to submit SARs?
These industries were added to BSA requirements in October 2001 as part of the USA PATRIOT Act [Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism]. We believe that Congress required regulation of these industries because they are vulnerable to abuse in some of the same and some different ways than the traditional banking sector is. The premise is that any way that you can move money - any means of financial intermediation - can be abused by criminals, so we should take appropriate steps to mitigate those risks across these different industry sectors.
Does FinCEN have plans to apply its AML program and SAR requirements to independent, non-bank mortgage companies?
Congress has considered licensing mortgage brokers under the Secure and Fair Enforcement for Mortgage Licensing Act. As such, FinCEN has undertaken several strategic, outreach, and law enforcement initiatives focused on residential mortgage lending and is reviewing this issue. Moreover, FinCEN is gathering information to determine whether new regulations requiring non-bank mortgage lenders and originators to adopt AML programs and report suspicious activity would augment FinCEN's initiatives in mortgage lending and strengthen existing compliance and anti-fraud programs.
What are FinCEN's steps to further improve its information security systems?
Our efforts to maintain strong security systems and constantly keep up with evolving threats are extensive and collaborative. Security requirements are being driven by our stakeholders in the law enforcement, regulatory, and industry communities through the Bank Secrecy Act Advisory Committee's IT subcommittee. We have also partnered with the IRS on modernizing our entire IT infrastructure; we're still in the early going, but the end result will be a 21st century IT system that is not only secure but a force multiplier, which will allow more than 200 law enforcement and regulatory agencies to have a more robust ability to utilize BSA information to accomplish their critical missions. The Obama Administration has requested initial funding from Congress to start this process in the coming fiscal year.
Are there plans in the future to require AML regulations for unregistered investment companies (UICs), commodities trading advisers, and investment advisers?
FinCEN will continue to consider the extent to which it should impose requirements on UICs, investment advisers, and commodity trading advisors. Notably, however, the financial transactions of these entities and their clients must be conducted through, and their assets carried by, other financial institutions - like banks, broker-dealers, and futures commission merchants that are subject to BSA requirements. So the activity of these entities is not entirely outside the current BSA regulatory regime.
What are some emerging risks, red flags, and schemes related to mortgage loan modifications?
As a general rule, consumers should be aware that if it sounds too good to be true, it probably is. For instance:
- A homeowner tells the mortgage servicer, perhaps upon receiving an overdue notice, that he or she has been making payments to a party other than the mortgage holder or servicer. The homeowner may have been tricked into signing a "quit claim deed" for the benefit of the perpetrator of a scam or told to make payments to a third party (in actuality, a con artist), who will allegedly forward them to the lender.
- A homeowner says that he or she has hired a third party, perhaps advertised as or alleged to be a "foreclosure specialist" or "mortgage specialist," to help him or her avoid foreclosure or help renegotiate the terms of his or her mortgage with the lender.
- A homeowner says he or she paid someone to assist in getting help from the right federal affordable housing program.
- A homeowner maintains that he or she does not need to pay a mortgage because the loan contract is invalid, or the customer attempts to pay with a bogus sight draft, Federal Reserve Bank/Treasury letter, or check that accesses a "Treasury Direct Account." Such homeowners may be committing fraud or may have been duped by individuals who claim government-related contracts are illegitimate. Other homeowners may have unsuspectingly paid for illegitimate or bogus pay-off documents.
How has the mortgage crisis changed FinCEN? What will the agency look like after the crisis abates and the economy eventually recovers?
FinCEN first focused on analyzing trends and patterns related to mortgage fraud back in 2002 in the context of an effort to identify areas of potential concern in the sales and management of real estate. Since that time, still within a robust housing market, it became apparent that our SAR data was a leading indicator that mortgage loan fraud was a serious, escalating problem.
FinCEN's efforts in this area remain a priority, and we are harnessing all our authorities to support the mortgage finance industry in this fight. We are engaging with our regulatory partners at the federal and state level; working closely with federal, state and local law enforcement; and communicating directly with international partners to coordinate activities to combat this crime. These combined efforts to root out illicit financial activity increase confidence in and promote the integrity and stability of the financial system. These are critical contributions to helping the banking system return to what it does best: promoting legitimate economic activity and growth. Although the analytical focus on fighting mortgage fraud might lessen (and we hope to significantly lessen the potential for future new fraud), as we approach future criminal trends, we will be able to leverage the experience and recognition that FinCEN has gained with the proven way of fighting fraud through financial analysis.
How has the Internet and related technology affected the rate of mortgage fraud?
The use of the Internet and related technology to receive and process loan applications is increasing. The growing faceless nature of these transactions increases the opportunities for fraud (especially identity fraud) and, coupled with "low-document" or "no-document" loans, creates a condition vulnerable to fraudulent activity.
You've had quite a bit of global financial investigative experience. What kinds of efforts are you working on with your international counterparts? What are some ways FinCEN is working globally to fight money laundering?
FinCEN is one of more than 100 recognized national financial intelligence units [FIUs] - a central government agency like FinCEN that collects, analyzes, and disseminates financial information to investigate and prosecute criminal activity. The most exciting new field of cooperation is supplementing cooperation on individual cases involving criminal funds crossing borders, to broader strategic studies working together with other countries to flesh out trends and patterns in international criminal activity.
We coordinate activities with our FIU partners around the globe largely through a formal organization known as the Egmont Group with an essential focus on sharing lead information involving criminal activity that crosses national borders. In this way, FinCEN can "follow the money" even when the criminal tries to hide it overseas, and our foreign counterparts can do the same. International criminals don't respect borders and because of that, our efforts to catch them can't stop at the water's edge.
Through the Egmont process, FinCEN plays a lead role in fostering international efforts to combat money laundering and terrorist financing among these FIUs, focusing our efforts on intensifying international cooperation and collaboration, and promoting international best practices to maximize information sharing.
What are some ways FinCEN is working with other U.S. agencies to combat fraud?
Our efforts in close cooperation with criminal investigators and prosecutors hold accountable those persons engaged in criminal activity. On an interagency basis, FinCEN is actively involved with a number of initiatives that focus on combating fraud: the Bank Fraud Working Group and the Mortgage Fraud Working Group, jointly sponsored by the Departments of the Treasury and Justice, respectively, and the President's Corporate Fraud Task Force, which is run out of the Department of Justice.
FinCEN staff regularly briefs the Mortgage Fraud Working Group on our latest mortgage fraud trends and patterns, and we have hosted the Bank Fraud Working Group for discussions on the issue. FinCEN also provides technical advice and analytical support to prosecutors at the federal and state levels. In addition, we work regularly with law enforcement liaisons who are located onsite at FinCEN.
Can you describe the formal training events FinCEN holds to educate financial, regulatory, and law enforcement communities? What are the main points you try to drive home?
FinCEN participates in more than 100 conferences and events per year. We work with our regulatory colleagues and rely on the existing expertise and examination functions of the regulators who know their industries best, the banking regulators and the Internal Revenue Service among them. FinCEN also regularly participates in the Federal Financial Institutions Examination Council Bank Secrecy Act/anti-money laundering workshops.
At each of these, FinCEN works with our partners to communicate the importance of BSA requirements in fighting financial crime and keeping the nation secure. FinCEN strives to fulfill its mission in a way that ensures that financial institutions have appropriate controls in place to protect themselves from those seeking to abuse the financial system. It's also our job to work with the financial institutions as they strive to comply with their responsibilities to report certain financial information and suspicious activities so that we can make that useful information available to law enforcement.
Meaningful cooperation between the public and private sectors is a vital component in our collective efforts to ensure the strength, safety, and integrity of the global financial system.
What other tasks are on your to-do list every morning? Do you see new financial crimes appearing on the horizon?
The Southwest border is a big priority of mine every day as the situation in Mexico is so volatile right now. As far as emerging issues, FinCEN is currently reviewing stored-value cards that actually contain funds and data. These products may represent vulnerabilities in the U.S. financial system. Currently, issuers, sellers, and redeemers of stored-value cards are not required to file SARs or register as MSBs [money services businesses] with FinCEN. The lack of financial transparency inherent in the stored-value products makes it difficult to assess the money laundering risks and abuses. Law enforcement has seen abuses of these products and anticipates further misuse as the industry grows.
Global solutions also must be pursued. Domestic action alone will not be sufficient to solve the vulnerabilities because many problematic products are issued by offshore financial institutions, which can then be obtained and used domestically.
Despite the prevalence of electronic banking, check fraud still seems to be a booming business. Why do you think that is? What does FinCEN do to combat it?
Overall, check fraud accounted for about 445,000 SARs, or about 10 percent of all SARs filed with FinCEN between April 1996 and June 2008. During this 12-year period, the number of check fraud SARs filed with FinCEN has increased every year. If check fraud seems to be a booming business, one reason may be that it is committed in association with many other crimes. Moreover, check fraud occurs more frequently because of the relative ease with which scammers use technology to alter checks.
As we do with other suspicious activity reports, FinCEN works closely with law enforcement to provide lead information that covers check fraud, which sometimes is part of a larger case involving other crimes.
Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, began the association in 1988 to train fraud examiners to not just investigate fraud but to help deter it. What advice and encouragement can you give fraud examiners as they work every day to deter financial fraud?
Take a look at the wealth of public information available about money laundering trends and patterns and become familiar with the power of the BSA and financial intelligence. We also publish geographical information so examiners can see what's going on in their regions. For those who work in law enforcement, be sure to make full use of the BSA database and let us know how we can be helpful to you; you are our customers and our job is to make your job easier.
Certified Fraud Examiners receive extensive multi-disciplinary training. Do you see using the CFE credential as a possible hiring benchmark? What kinds of career opportunities are open for our readers - fraud examiners - at FinCEN?
The skill sets seem very appropriate for the work that we do and we're always looking for highly qualified people who want to be part of the team and contribute to the mission. Go to www.fincen.gov or USAJobs.gov. Recent postings are written to reach a broad audience of applicants.
Dick Carozza is editor-in-chief of Fraud Magazine.
Freis Brings to FinCEN Experience in Global and Domestic Arenas
James H. Freis Jr., director of the Financial Crimes Enforcement Network (FinCEN), previously served in the U.S. Treasury Department as deputy assistant general counsel for enforcement and intelligence, where he provided legal support to the office of terrorism and financial intelligence including supervising legal counsel to FinCEN, the office of foreign assets control, and the treasury executive office for asset forfeiture. He was also responsible for developing international financial measures against rogue states.
Before coming to the Treasury Department, Freis served as senior counsel in the legal service of the Bank for International Settlements (BIS) in Basel, Switzerland, where he supported the banking, risk control, and compliance departments in providing financial services to central banks and international organizations for management of monetary reserves. He also had regular interaction with the Basel-based committees of experts setting international financial standards.
Freis previously served in the Federal Reserve Bank of New York's (FRBNY) legal department, where he advised on payment and settlement systems issues at wholesale and retail levels, administration of foreign government and central bank accounts, and legislative and regulatory reform. he was part of the successful defense of the bank before the Iran-U.S. Claims Tribunal in the Hague about management of Iranian funds during the hostage crisis.
Freis also spent one year working in Germany with the federal banking supervisory authority and in a commercial bank.
He earned his Juris Doctorate from Harvard Law School and his bachelor's degree from Georgetown University, graduating with honors from each institution. Freis has authored several law review articles on international financial issues and has taken graduate coursework in economics at New York University.
He's an attorney and a Chartered Financial Analyst charter holder. Freis is a member of the American Bar Association and a member of, and former secretary to, the Committee on International Monetary Law of the International Law Association. He received the Treasury Secretary's Honor Award, was recognized for outstanding service to the BIS, and was the recipient of the FRBNY President's Awards for Excellence.
Suspicious Activity Reports Drive Resolution of Major Cases
FinCEN regularly reports cases in which investigators used Suspicious Activity Reports, submitted by financial institutions, to prosecute fraudsters. Here are two of those case histories.
Fraudsters Tout Bogus Life Insurance Investment Vehicles
The two defendants in this case first settled a civil suit with the government about the sale of $7 million worth of fraudulent "prime-bank" note investments to investors nationwide. In the scheme, investigators found that less than half the money was used to pay fictitious investment returns to existing investors. The defendants used the rest for personal expenditures.
The defendants then orchestrated a Ponzi scheme in which they solicited more than $60 million from dozens of investors, according to court documents. The pair told investors that their money would be used to purchase pools of life insurance policies on behalf of an organization. In return, a small portion of the death benefit would go to the family of the insured, but the majority of the money would be paid back to the defendants' company. Investors were promised they would receive a high annual return and were told their "risk-free" investments would eventually yield a five-to-one return.
Prosecutors charged that only a fraction of the funds were used to purchase two pools of life insurance policies, and the defendants used approximately $60 million to purchase houses, cars, boats, and jewelry. One defendant also transferred approximately $10 million in investor funds to an unrelated business venture.
The investigation into the Ponzi scheme began with an SAR filed by a depository institution. The SAR narrative described how, during routine due diligence in the wake of press reports about the original government action on the prime-bank guarantees, the filing institution realized that the defendants had a number of accounts at the institution. One account had more than $15 million in unusual transactions credited to it in a three-month period.
An agent investigating the case noted that the SAR proved "absolutely crucial" to the success of the case. Because of the filing, law enforcement was able to unravel the scheme quickly. In less than a year, agents uncovered the $60 million in fraudulent transactions, which resulted in the indictment and arrests of the subjects. Additional BSA filings on the subjects helped agents find assets that were seized for restitution.
SARs Jump-start Investigation of Ponzi Scheme
A purported entrepreneur convinced scores of individuals to invest in ventures and businesses supposedly related to the extraction of natural resources that were, in reality, part of a sophisticated Ponzi scheme. The defendant followed a familiar Ponzi pattern: paying earlier investors with funds from new investors but keeping a substantial amount for himself. When victims first complained about the defendant, law enforcement had little information on him and few leads. About that same time, a financial institution also filed an SAR on a suspect transaction. Agents located the SAR and launched a full-scale investigation that resulted in an arrest within a few months.
The scheme ran for about five to six years. The defendant, who generally promised to double investors' money within one year, raised about $10 million from about 100 investors. The defendant memorialized the investors' loans in a series of promissory notes and security agreements. He pledged as collateral various natural resources to be extracted from property that he leased. But he flagrantly overstated the value of the collateral as he tried to induce prospective investors.
The defendant was arrested and charged in the scheme. Unbelievably, he couldn't stop himself and continued to improperly solicit more money from investors while on pre-trial release. Three banks in which the defendant held accounts filed SARs on his suspicious transactions.
Many of the transactions listed in the SARs directly led to the charges included in the complaint and indictment. The SARs describe how the defendant frequently asked his investors to write checks to third parties, claiming that they were only to show new investors that the ventures had financial backing. However, the defendant frequently cashed or deposited these checks.
A federal judge sentenced the defendant to more than 10 years in prison following his guilty plea to counts of mail fraud, wire fraud, bank fraud, and money laundering. The presiding judge ordered that he serve five years of supervised release following completion of his prison term and pay restitution totaling almost $10 million.
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