First in a Two-Part Series on the Utility of BSA Filings
Yesterday we were very pleased to welcome guest blogger, Don Fort, who is the Director of Investigations at Kostelanetz LLP, and the past Chief of the Internal Revenue Service’s Criminal Investigation (CI) Division.
As Chief of IRS-CI from 2017 to 2020, Don led the sixth largest U.S. law enforcement agency, managing a budget of over $625 million and a worldwide staff of approximately 3,000, including 2,100 special agents in 21 IRS field offices and 11 foreign countries. Don’s time in law enforcement included overseeing investigations of some of the most significant financial crimes involving tax evasion, sanctions evasion, money laundering, bribery, international corruption, bank malfeasance, cyber and cryptocurrency crimes, and terrorist financing.
We reached out to Don because we were interested in his perspective on the 2023 Year-in-Review (YIR) published by the Financial Crimes Enforcement Network (FinCEN), on which we previously blogged. According to the YIR, there are about 294,000 financial institutions and other e-filers registered to file Bank Secrecy Act (BSA) reports with FinCEN. Collectively, they filed during FY 2023 a total of 4.6 million Suspicious Activity Reports (SARs) and 20.8 million Currency Transaction Reports (CTRs), as well as 1.6 million Reports of Foreign Bank and Financial Accounts (FBARs), 421,500 Forms 8300 regarding cash payments over $10,000 received in a trade or business, and 143,200 Reports of International Transportation of Currency or Monetary Instruments (CMIRs) for certain cross-border transactions exceeding $10,000. Although the YIR necessarily represents only a snapshot lacking full context, only a very small portion of those filings ever became relevant to actual federal criminal investigations. But, the YIR makes clear that one of the most, or the most, important consumers of BSA filings is IRS-CI.
In our next related blog, we will discuss the utility of filings in the global anti-money laundering/countering the financing of terrorism compliance regime, from the perspective of industry – specifically, recent publications by the Wolfsberg Group, and the Bank Policy Institute, the Financial Technology Association, the Independent Community Bankers of America, the American Gaming Association, and the Securities Industry and Financial Markets Association.
This blog post again takes the form of a Q&A session, in which Don responds to questions posed by Money Laundering Watch about the impact of BSA filings, from the perspective of IRS-CI. We hope you enjoy this discussion on this important topic. – Peter Hardy and Siana Danch
How are SARs important to IRS-CI, and how are SARs used? Please speak to the role of SAR review committees.
BSA filings are critically important to IRS-CI and other federal agencies that pursue financial investigations. SARs, in particular, typically have been the most valuable of the BSA filings. I applaud IRS-CI for publishing their BSA statistics over the past few years and those statistics confirm that SARs are the source of many criminal investigations that are initiated by IRS-CI. The FY 2023 IRS-CI statistics show that almost 88% of the investigations opened by IRS-CI had a BSA filing on the primary subject. Further, almost 14% of the cases opened by IRS-CI were as a direct result of a BSA filing. Those are striking numbers and as arguably the largest consumer of BSA data, it supports law enforcements assertion that the BSA data is critically important to their investigations. SARs are used by IRS-CI to initiate investigations as well as provide additional evidence in leads for investigations.
Although the identification of the primary subject in a SAR filing may not always lead to a criminal investigation, key financial information and other details in the narrative of the SAR still may provide additional evidence and leads for investigators. For example, an SAR or other BSA filing may contain a bank account number, IP Address, cryptocurrency wallet address of other key evidence that links it to another BSA filing or other evidence in law enforcement’s possession that enables them to connect the dots on potential criminal activity.
IRS-CI has published this infographic regarding its use of BSA filings during FY 2023, highlighting the key role of BSA data:
SAR review teams (now more commonly referred to as Financial Crime Task Forces, or FCTFs) or SAR review committees are another important aspect of effective BSA utilization. Typically spearheaded by an Assistant United States Attorney, these teams employ a multi-agency approach to SAR filings and are “force multiplier.” Generally speaking, SAR review teams exist in each Federal Judicial District and are comprised of federal, state and local law enforcement. The goal of SAR Teams is to employ a proven law enforcement approach to voluminous BSA data – task force investigations.
My personal experience is that some SAR Review Teams are more active and successful than others. The most successful SAR review teams not only review, analyze, deconflict and investigate the worthiest BSA leads at least on a monthly basis, but they also are active in outreach with the local financial community. I have found that investigators and financial institution professionals that live in the same community, who attend the same grocery stores and churches and whose children go to school together, share a common bond in wanting to deter financial crimes in their communities. Many of these successful SAR review teams hold regular meetings to interact with local financial crime professionals and are far more accessible to the community. This should be the standard for SAR review teams across the US. I believe in the task force approach to BSA data and I think one way to ensure its usefulness is to double down on the use of SAR review teams. It’s time for FinCEN, DOJ and the law enforcement community to revise and update the standards and protocols for these teams and ensure they are consistently and effectively deployed across all Judicial Districts.
Here is a question that financial institutions have raised repeatedly: what makes an effective SAR? Do you believe that law enforcement and regulators have done an adequate job informing the industry of what kind of SARs are effective, and why?
That’s a great question! This often falls to the old adage that “I’ll know it when I see it.” Financial crimes evolve rapidly and the techniques to evade detection are constantly changing. An effective SAR addresses the so-called Five Ws (who, what, where, when and why), and captures all key financial details in the narrative.
Agencies now often deploy sophisticated technology to aid in the review of an SAR, so small details can be captured and cross-referenced against large volumes of information very quickly. The minor details make a difference in a financial case. Sometimes, it’s a small nugget of information that is the lead that investigators need to break the case.
It is a challenge keeping industry informed on the effectiveness of SARs. Due to the privacy restrictions afforded to BSA data, real-time feedback is often not possible. It is logical and simple to connect the subject of an SAR filing who is under investigation as a result of the that SAR and provide general feedback to industry. However, it’s much more challenging to connect the “needle in the haystack” that is derived from a SAR filing back to industry as feedback. I turn back to my comments about SAR review teams. In areas where SAR review teams are conducting liaison meetings with their local financial institution professionals, this type of feedback is being shared and discussed regularly. The most common topic at SAR review team liaison meetings is “What makes an effective SAR?”
I can’t say whether regulators have done an adequate job in sharing feedback with industry, but I can say law enforcement is making progress on this front through the use of conferences, seminars, local outreach events and other liaison opportunities. IRS-CI leadership participates in most local BSA conferences that bring together law enforcement and financial institutions and they also participate at the national level. Financial Crime professionals often refer to the effective use and feedback on BSA data as involving a “three-legged stool.” The three legs are comprised of law enforcement (including DOJ), financial institutions and regulators. A common complaint is that while law enforcement and financial institutions are constantly striving to share information regarding BSA data, regulators are often not at the table. More work remains to be done in the area of feedback.
The FinCEN YIR indicates that there were approximately 4.6 million SARs and approximately 20.8 million CTRs filed in FY 2023. That’s a lot of filings and the numbers grow every year. Financial institutions and industry groups have raised serious questions for years about the utility of such a regime. Given the significant costs to industry, and the phenomenon of so-called “defensive filing,” is the current BSA filing regime truly effective? How might it be reformed? Should the current monetary filing thresholds (generally, $5K for SARs and $10K for CTRs) be reconsidered?
It is effective, and I believe the numbers support that. The other agencies should come in line with similar aggregated statistics on the use of BSA data. It is very reasonable for financial industry officials and industry groups to raise these questions and until full statistics are shared, these questions will continue to be rightfully asked of the law enforcement community. You can’t just say “it’s useful” and “I can’t share anymore details because it is law enforcement sensitive.” IRS-CI has shown that useful aggregated statistics are possible.
The issue of “defensive filing” is not a law enforcement issue, but a regulatory issue. Law enforcement typically supports a common-sense approach to dealing with these issues, but they are not the regulators, so they must continue to deal with this volume and work to “reduce the noise.” This gets back to my three-legged stool analogy – even though law enforcement may be able to identify a large pool of “defensive filing” BSA reports, they are not in a position, and it is not appropriate for them to advise a financial institution not to file a BSA report. That type of guidance would have to come from regulators.
The issue of “defensive filing” is not a law enforcement issue, but a regulatory issue.
I think there is an argument to be made on adjusting the thresholds for CTR filings. However, I feel strongly that SAR thresholds should not be adjusted. There is often no correlation between the dollar size of an SAR filing and the usefulness of that SAR. There are many cases in which a very small dollar amount SAR led to uncovering a massive financial fraud case. Therefore, the dollar amounts are not critical for SARs.
Section 314(a) of the Patriot Act allows for information sharing between law enforcement and financial institutions. It can be an effective tool for addressing ongoing schemes and illicit activity in real time, particularly because Section 314(a), unlike SARs, is not confined to the reporting of prior, historical conduct. But, based on the data in the FinCEN YIR – only 588 requests from law enforcement in 2023 – it seems like this is a tool that is under-utilized. Perhaps significantly so. What is your reaction to that? How could Section 314(a) be better utilized?
I agree that Section 314(a) information sharing is under-utilized by law enforcement. Many agents are not familiar with this practice and that needs to be improved. All agencies that investigate financial crimes should be highlighting Section 314(a) as an investigative tool from the training academies to on-the-job training and at regular intervals throughout their careers. This is a great example of a tool that has been given to law enforcement that is not being utilized to its full extent.
What opportunities are there for law enforcement and regulators to enhance feedback on BSA filing effectiveness, which is a goal laid out by the Anti-Money Laundering Act of 2020? How can enhanced feedback be accomplished while still honoring the confidentiality of specific SARs?
Law enforcement agencies need to do a better and more complete job in tracking the use of BSA data on investigations. With the state of current technology in each of the agencies, there is no excuse for insufficient or incomplete BSA usage tracking. This involves proper tracking and updating on the use of BSA data from the beginning of the investigation through the completion of the investigation. If the investigating agents are not updating their systems of record, there is very little hope that feedback on BSA filing effectiveness will be achieved. If accurate and complete information is input, then aggregated statistics and compelling facts can be articulated on the effectiveness of BSA filings, without violating the confidentiality of SARs. In short, the responsibility for tracking this information rests with the investigating agents – if they don’t input and regularly update this information in their case management systems, it is virtually impossible for other agency personnel to reconstruct the BSA usage on individual cases after the fact.
Crystal ball time: how do you envision the short- to medium-term future of BSA filings, particularly in regards to SARs?
SAR filings will continue to rise. While there is a lot of discussion about changes, I don’t anticipate major changes in the short to medium term.
On my wish list for the short- and medium-term future is using technology to further leverage the analysis of BSA filings. Although many agencies use technology to analyze BSA filings, technology is under-utilized in the analysis of BSA filings. We are now in the age of Artificial Intelligence, machine learning and other technological advances that must be deployed to the analysis and follow-up of BSA data. This needs to be done in a systemic, consistent and centralized manner – not 94 Judicial District teams trying to build their own systems. There is tremendous overlap and waste amongst the agencies in paying for duplicative technology to review the same BSA filings. I would love to see a more centralized effort among the agencies working together to efficiently review and investigate BSA filings, rather than the old-school decentralized methods.
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