• Spitzer Case Highlights the Role of Suspicious Activity Reports
  • April 8, 2008 | Author: Travis P. Nelson
  • Law Firm: Pepper Hamilton LLP - Princeton Office
  • We have all read the headlines about the “Sheriff of Wall Street,” former New York Governor Eliot Spitzer, and the tawdry series of events that led to his resignation. Beyond the sensational headlines, this case illustrates the complex series of transactions and financial reporting that triggered the investigation into his alleged dalliances. Accord to news reports, Mr. Spitzer made a series of $5,000 wire transfer payments from his personal accounts to the account of a shell company called QAT International, the front for the “Emperors Club VIP” escort service.

    The investigation into Mr. Spitzer’s activities began when the banks he allegedly used to send funds to QAT filed a Suspicious Activity Report, or SAR. Under federal law, banks, bank holding companies, and their subsidiaries, are required to file SAR reports with respect to, among other things, (a) criminal violations involving insider abuse in any amount, (b) criminal violations aggregating $5,000 or more when a suspect can be identified, or (c) transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction: (i) may involve potential money laundering or other illegal activity, (ii) is designed to evade the Bank Secrecy Act (BSA) or its regulations, or (iii) has no business or apparent lawful purpose or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

    The reporting of Mr. Spitzer’s transactions was part of the banks’ enhanced due diligence in monitoring transactions of “politically exposed persons.” The BSA manual requires banks to identify, monitor, and design controls to review the transactions of politically exposed persons, and certain relatives and close associates.

    Pepper Points -  Assuming the truth of the alleged facts, the banks involved were prudent in filing a SAR report related to the transactions of Mr. Spitzer. One might argue that given Mr. Spitzer’s sizable family wealth, transactions in such large amounts should not have raised suspicion. Due to the heightened scrutiny of investigations and enforcement actions relating to banks’ SAR reporting deficiencies, banks are adopting the practice of “defensive SAR filing,” believing that they are better off over-filing.

    Financial institutions of all types should glean from this case that federal regulators and law enforcement take seriously SAR reporting activities, and that BSA compliance will continue to be a key focus of compliance and supervisory scrutiny. In order to reduce the likelihood of such scrutiny, financial institutions should conduct, with the assistance of counsel (to maintain the privileged nature of any reports resulting from such review), periodic self-assessments of the institution’s compliance status to identify weaknesses and implement remedial measures.