Understanding Eliot: Thank Goodness for Rule 3011!

...otherwise, you may not have understood how Eliot Spitzer got caught.

Hmmm, what am I talking about? I'll explain. FINRA (NASD) Rule 3011 is the rule that broker-dealers follow when ensuring anti-money laundering compliance. You BD's set up written programs, supervisory structures, recordkeeping procedures, risk assessment strategies, reporting requirements and red flag escalation practices so that you meet Rule 3011 and the various requirements under even more various rules, regulations, acts and official guidance (such as the Bank Secrecy Act, the Money Laundering Control Act, The Travel Rule and of course, the USA Patriot Act, to name a few). By virtue of this compliance, you're familiar with terms like 'structuring,' 'politically-exposed persons,' and ' suspicious activity reports.' These terms have now migrated all the way from the Federal Register to NY tabloid publications--who'd a thought? But only readers like you, who have been subjected to the recent, rather annoyingly, non-stop attention to the AML subject, can really visualize how Eliot's bust materialized. The going story: he structured payments by wiring funds under the $10,000 reporting threshold; the bank didn't have complete information on the recipient of the third party wires; and Eliot was subjected to heightened scrutiny as a politically-exposed person. Voila. Sounds familiar and justified, non? Not in my understanding...

First of all, structuring to avoid reporting: the BSA's requirement to file reports on transactions exceeding $10,000 refers to currency, not wire transfers. A Currency Transaction Report would not be required for wires over $10,000. It's the Travel Rule that dictates records requirements for wires over $3,000...which brings me to the second point: the bank investigating the recipient of his wire transfers. The Travel Rule requires only that the initiating institution identify the recipient of the wire if it's a third party wire (not going to the sender's other account): the rule doesn't require due diligence on the recipient. If, instead, the institution were receiving a wire for a non-customer (for whom the institution had never done its CIP work), then yes, the institution would have to perform CIP on the recipient to verify his/its identity. This wasn't the case. So Eliot's bank (from what I've read) looked deeper into the receiving party which is what led, ultimately, to the suspicion. Lastly, Eliot's bank applied a higher level of scrutiny than normal, due to his status as a politically-exposed person. The problem here: Section 312 of the Patriot Act requires enhanced scrutiny of senior foreign political figures. The rule says nothing about US political figures. Eliot's bank obviously had its own heightened scrutiny procedures, and they're allowed to do so--all financial institutions may adopt and implement custom, risk-based AML procedures.

So, the escalation of poor Eliot's financial transactions to the level of suspicious activity reporting was based--in part, and according only to my reading of media reports--on bank employees' mistaken or overzealous compliance with AML rules. He didn't avoid CTA reporting under BSA rules; his wire recipients did not require CIP due diligence under the Travel Rule or Section 326 of the Patriot Act; and he as Governor did not require heightened scrutiny under Section 312 of the Patriot Act. And he still got busted.

The questions this fly-smashed-in-the-typewriter trail of events raises are these: Is Spitzer's case indicative of the purpose of federal AML rules and regulations? Does the public think it is acceptable to rely on these anti-fraud/theft/money laundering mechanisms to interfere with someone's private (if pathetic) life? Should banks and broker-dealers really take to heart the current "we're all in law enforcement now" ethic? Is it too much to ask of you, the broker-dealer, to devote time and resources to this type of non-financial crime investigation? Lastly, and importantly for your AML staff: do you understand your true obligations under Rule 3011, the BSA, the Patriot Act and other guiding FinCEN/OFAC rules? If not, my advice is to brush up.

Now if only the federal government had enacted a one-word violation called "hypocrisy." Eliot is clearly guilty of that.