With all the salacious allegations surrounding New York State Gov. Eliot Spitzer's resignation, it's easy to overlook the bland figures that reportedly triggered his downfall. Lost in all the chatter about high-priced hookers are the plain-vanilla bankers—at North Fork Bank, a unit of Capital One—who reportedly tipped off federal investigators to a suspicious bank transaction involving Spitzer's account. It was that transaction that eventually linked the now disgraced Spitzer to the prostitution ring that ended his high-profile political career.
That's right, private-sector bankers can and do work with the federal government to flag and, if necessary, investigate account holders who make certain transactions. And you don't have to be Eliot Spitzer to show up on their radar screen. Here's how it works.
$10,000 moves: All U.S. banks are required to file paperwork—known as currency transaction reports—with the Treasury Department anytime an account holder makes a cash deposit or withdrawal of $10,000 or more. But since banks oversee numerous transactions of this size every day, currency transaction reports are not particularly alarming. If you run a retail business that operates in cash—like a restaurant or a dry cleaner—or you've ever sold your car, it's possible the Treasury Department has a currency transaction report on file with your name on it.
Smurfing: But people intending to use their cash for illicit purposes—say, drug dealers—want to avoid drawing attention to their finances. So, they sometimes try to stay under the $10,000 trip wire by breaking up a large deposit into several smaller portions. That scheme is known as structuring, or smurfing (named after the tiny, blue 1980s cartoon characters). "Structuring itself is a crime because [it] is an effort to circumvent the currency transaction report," says Bruce Zagaris, partner with Berliner Corcoran & Rowe, a Washington, D.C., law firm.
But over the years, bank officials have enhanced their ability to sniff out structuring. "Banks are very sensitized to structuring activity—they have special [computer] programs that are designed to detect it," says Peter Djinis, a former head of regulatory programs at the Treasury Department's Financial Crimes Enforcement Network.
According to the Washington Post, bank officials first became suspicious of Spitzer because he appeared to be structuring his transactions to avoid the $10,000 tripwire. "The huge irony here is that probably if he had not engaged in structuring activity, the call-girl enterprise never would have been discovered or prosecuted," Djinis says.
Suspicious activity: When bank officials spot something fishy going on in an account, such as structuring, they are required to file a second report—known as a suspicious-activity report—with the Treasury Department. "The government is essentially telling the banks, 'If there is something odd about a transaction that you can't explain, we want you to report it,' " says Robert Rowe, a senior regulatory counsel at the trade group Independent Community Bankers of America.
Database: The suspicious-activity reports are then sent to the Internal Revenue Service's computing center in Detroit, where the information is entered into a database maintained by the Treasury Department. More than 40 percent of suspicious-activity reports are filed on account of structuring, according to Steve Hudak, a spokesman for the Treasury Department's Financial Crimes Enforcement Network.
The G-men: Once the information is entered in the database, it can be used by government investigators. "The information there is made available to federal and state law enforcement that have jurisdiction to investigate financial crime," Djinis says. "By rule they have to have an investigative purpose—they can't just go on a fishing expedition—but there is no need for a subpoena or anything of that nature."