ABA Horror Story

Once upon a time there was a small store in town that sold milk and bread and other convenience items. It had been there for a long time, and everyone in the banking office had been in the store at one time or another.

The store had its account at the branch office nearest it. The deposits were pretty regular, and usually in the same amount, a little less than $1,000 each day.

One Monday morning, the owner of the store came in with $2,000 in cash. The following morning it was $3,000. And so it continued, until each day there was a deposit of just under $5,000 in cash. The teller mentioned the unusual activity to the manager, who took a look at the deposits for the month, and found there was a second deposit being made each day in another branch of the bank-also for just under $5,000-also in cash.

The manager and compliance officer discussed the situation, and fully investigated both the account and the actual store. There were no improvements being made at the store, nor did there seem to be any special sales, or increase in trade.

SUSPICIOUS TRANSACTIONS
The decision was that there definitely was suspicious activity going on. But even aggregated, there was not over $10,000 each day in cash deposits. However, they both agreed, it was suspicious and had to be reported as required under the Bank Secrecy Act.

The compliance officer knew he had to file a Criminal Referral Form-which he did, sending a copy to each of the locations required. He also called the Internal Revenue Service, Criminal Investigation Division (IRS-CID), to inform them of the activity.

They thanked him for the call, and called him back a few days later when they got the Criminal Referral Form (CRF). At that time, they said they would investigate the matter, but that he should do nothing with the account. He also was not to alert the customer that the CRF had been filed, and was to continue filling out the Criminal Referral Form each time a deposit was made. The compliance officer agreed. He also made notes of everything that was said and the name of the agent to whom he spoke.

AND THEN?
Then the bank waited?
and waited?
and waited.
Each day the deposits kept coming in.
Each day the bank officers filled out a Criminal Referral Form and sent it along to IRS.
Three weeks later, the compliance officer called IRS again and asked what was happening with the investigation. The agent told him all officers were very busy, but they would get to it as soon as possible. In the meantime, they were to continue what they were doing. Again, the compliance officer made notes of his conversation.
Four months went by and there was still no action taken by the IRS, even though the compliance officer called regularly. There were still the deposits coming in every day, and by this time there was common knowledge in the town of the activity going on at the store. It was a known drug source.

The bank compliance officer called his regulator and explained the situation to them and asked for advice. Their command was immediate and definite.

"Close the account at once! You are a federally insured institution and as such you are forbidden to do business with a criminal!"

Unfortunately for the compliance officer, he picked up the telephone and called IRS-CID, telling them that he was closing the account on the instructions of his regulator.

NO WAY!
The IRS agent and his supervisor were absolutely livid! They told the compliance officer that if he closed the account the bank would be obstructing justice and impeding an investigation, and that they could be held in contempt.

WHAT TO DO?
After a few more phone calls back and forth, the regulator's office finally told the compliance officer that if IRS would give them a letter of instructions, taking the responsibility for the account being left open, the examiner would accept that documentation.

The agent from IRS agreed to supply such a letter. After ten days, when no such letter arrived, the bank closed the account.

Fortunately, the compliance officer had documented every call and each instruction, so when they are examined, he will be able to explain what happened.

Interestingly enough, almost a year has gone by. And the IRS agent still has not called nor contacted the bank. The store has opened an account with another financial institution and is still in business.

THE DANGER
In the case above, it is easy to see how a financial institution can be caught between two agencies in a "lose-lose" situation. This is one of the major reasons we are urging the government to provide "safe harbor" for financial institutions that must report suspicious activity, but put themselves in jeopardy when they do so.

THE MORAL
The moral of the story is, of course, to stop trouble before it starts. Know your customer-know the source of his funds. Difficult, but not impossible. And the banking industry has been doing the difficult for some time now. The impossible may take you a little longer!

Copyright © 1992 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 4, 8/92