U.S. data spying extends to mutual funds

December 03, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

Mutual funds are now the latest front in the war on terror.

Five years after passage of the Patriot Act in response to the Sept. 11 attacks, the mutual fund industry was required by federal law to begin reporting the suspicious activities of customers last month.

The information can then be used by a broad range of law enforcement agencies for tracking down mobsters, tax scofflaws, drug dealers and terrorists.

Banks have been required to file the confidential suspicious activity reports, or SARs in regulatory shorthand, since the mid-1990s. More recently, casinos, brokers, money transmitters and insurance companies also have been charged with keeping an eye out for dubious transactions.

As a result, the number of these reports rose by a third in each of the past two years to nearly 1 million in 2005. In the first six months of this year, more than 550,000 reports were filed, according to the Treasury Department's Financial Crimes Enforcement Network, or FinCEN.

Federal investigators say the reports, filed on transactions of several thousand dollars when customer behavior seems amiss, are invaluable. The information has been instrumental in recent cases exposing investment and real estate fraud and in busting an under-the-table payroll scheme and a sports-gambling ring.

But the reports also have fostered concerns about invasions of privacy and increased compliance expenses being passed on to consumers, who are not told if a company files a suspicious activity report about them.

And there are worries about businesses being deputized as "citizen cops" and filing more reports, possibly in situations that turn out to be innocent, to avoid liability. So-called defensive filing, industry officials contend, likely inundates investigators with useless information.

"The American people do not want gratuitous fishing expeditions into their financial records," said former Georgia Rep. Bob Barr, who is chairman of Patriots to Restore Checks and Balances. The group was formed last year to seek changes in the Patriot Act.

These reports "are costing banks and taxpayers billions of dollars so that the government can collect data that they don't have the capability to efficiently process," Barr added.

The widening universe of companies filing the reports has transformed a program that was used primarily as a way for investigators to construct a paper trail in money-laundering cases after the crime. The reports took on a new significance after revelations that all of the 9/11 hijackers had opened bank accounts in their own names and received thousands of dollars in wire transfers.

"There was a huge shift after 9/11 in the focus of money-laundering investigations," said Thomas P. Vartanian, a Washington lawyer and former federal bank regulator.

"Now they are trying to find a way to stop the flow of money to terrorist organizations before it gets there," Vartanian said.

Steve Hudak, chief of public affairs at FinCEN, said that with all of the banking and law enforcement officials looking at the reports, "most of them are read or at least have a cursory review." Reports of suspected terrorist financing are "absolutely read," he said.

"We don't think there's a problem of superfluous SARs; the ones we get are of good quality and address significant issues," Hudak said. "Even if we were to collect 2 million SARs a year, with our technology, it wouldn't make a difference. Think of Google and how quickly it's able to process through millions of records."

In fact, the suspicious activity report regime might be expanded again. The Treasury Department is considering a requirement that travel agencies, car dealers, and real estate professionals have anti-money laundering programs in place. Those rules were proposed more than three years ago, and final rules could require they also file the reports.

"We have not moved forward on those industries, and I can't give a timeline," Hudak said, adding that the agency is researching those businesses and assessing the risks.

The terrorist attacks changed the dialogue in Washington. Just two years earlier, federal regulators had withdrawn a proposal that banks keep closer tabs on customers and more routinely report financial activity to authorities.

The idea drew protests from civil liberties and privacy advocates, and regulators received more than 250,000 letters, mostly negative, from the public.

In contrast, the proposal that mutual funds file suspicious activity reports got five comment letters. One from the Investment Company Institute, the industry's trade group, expressed support for the rule and suggested only a few technical changes.

The three-page SAR forms includes the subject's name, address and other identifying information as well as the suspected wrongdoing, such as fraud, market manipulation, theft and terrorist financing. It also has a section for a narrative to describe the suspicious activity.

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