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Financial institutions reported more suspected fraud in 2008

FinCEN report shows the number of Suspicious Activity Report filings related to mortgage fraud and other types of fraud increased last year. However, experts say banks are cutting back on AML compliance programs this year.

The number of Suspicious Activity Reports filed by financial institutions to comply with the Bank Secrecy Act and anti-money laundering regulations went up last year, including a rise in the number of SAR filings related to fraud, according to a report released Tuesday by the Financial Crimes Enforcement Network (FinCEN).

All seven of the fraud categories tracked in SARs saw double-digit increases in percentage of filings in 2008, according to the Treasury Department's FinCEN: mortgage loan fraud, check fraud, consumer loan fraud, wire transfer fraud, commercial loan fraud, credit card fraud, and debit card fraud.

FinCEN officials attributed the increase in fraud-related reports to a number of factors, including fraud being a factor with other suspected crimes such as identity theft or a SAR reporting multiple types of fraud committed by the same person. They also cited institutions' heightened awareness of mortgage and other fraud.

"While increases in reporting of suspected fraudulent activity could mean that there is an increase in fraud, it also reflects an increase in awareness within financial institutions detecting such activity," FinCEN Director James H. Freis, Jr., said in a prepared statement.

The total number of SAR filings by depository institutions, securities and futures firms, money services businesses, and casinos increased 3% to 1.29 million in 2008, compared to a 16% increase in 2007, according to FinCEN's latest report,The SAR Activity Review – By the Numbers. FinCEN administers the BSA, which requires financial institutions to file reports of transactions related to potentially illegal activities.

The number of SAR reports filed by depository institutions such as banks and credit unions that cited mortgage loan fraud rose to 64,816 in 2008, up from 52,868 SARs in 2007, according to FinCEN. The increase represents an ongoing trend; SARs reporting mortgage loan fraud jumped to 52,868 in 2007, up from 37,313 in 2006.

Since April 1996 – when depository institutions were required to file SARs -- 53,590 SARs have been filed citing wire transfer fraud; nearly half of those reports were filed in the last two years, FinCEN said. And since January 2006, institutions filed 56,555 SARs citing consumer loan fraud, which accounts for nearly 60% of all such reports filed since 1996.

Gregory Calpakis, executive director of the Miami-based Association of Certified Anti-Money Laundering Specialists, said in an interview Monday that many institutions are trying to pull together their SAR activities across what can be siloed environments.

Oftentimes, he said, mortgage and credit fraud reports are handled by corporate fraud or security departments, which aren't necessarily joined with a company's anti-money laundering or compliance department. "So they're finding themselves in a new area where they have to work together," he said.

Overall, though, the recession is hitting institutions' anti-money laundering compliance efforts, Calpakis said. They've cut back on analysts to investigate unusual transactions and on training for analysts. At the same time, fraud is going up during the economic crisis, he said.

"A lot of these institutions are behind the eight ball with less money and less staff and more transactions to monitor," he said.

Ed Rodriguez, a former special agent with the IRS Criminal Investigation Division and now a manager in the forensic accounting group at Bethesda, Md.-based certified public accounting and consulting firm Watkins, Meegan, Drury & Company LLC, said he's heard that more banks are opting to review their AML procedures in-house instead of hiring an outside firm in order to save money. The chance they're taking, he said, is if regulators "go in and see discrepancies or vulnerabilities, they're subject to huge fines."

He added, "They need to cut costs from somewhere and the SAR filing is just a cost detriment to them."

SARs should be the underpinning of every Red Flags and incident response program in the financial industry, but generally they're not, said David Schneier, a compliance consultant. "Beyond that fact, I think SARs tend to be used more as an exercise in covering their bases than as an attempt to identify and investigate potentially fraudulent activity," he said.

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