WASHINGTON - Bank of Boston knew it had a problem.
In April 1998 the bank disclosed that one of its private banking executives had channeled $73 million of fraudulent loans to a known criminal in Argentina. In December a branch employee was arrested and charged with helping to launder $2.7 million of drug money through accounts at the bank.
So in early 1999, after nearly a year of stinging newspaper headlines, management made a decision: It would develop an internal anti-laundering operation - to be called the Financial Intelligence Unit - that could track and root out suspicious activity before the bank suffered more public embarrassment.
The man hired to do it was James Richards, a transplanted Canadian who had served as a special constable in the Royal Canadian Mounted Police before becoming a lawyer and eventually an assistant district attorney in Boston.
Mr. Richards, who now serves as the unit's director, used in-house programmers and commonly available commercial software to build a system that allows his staff to slice and dice transaction data in ways that uncover previously undetected suspicious activity.
"When we were looking at the concept we realized that to do a good, proactive job, we had to have a better handle on the data the bank has," he said. "So what we wanted to do was build a system that could collect the data, mine it, manipulate it, and analyze it."
Mr. Richards was nine months into building the FIU when BankBoston Corp. bought by Fleet Financial Group, in October 1999.
At the time, top executives touted "cost cutting" and "revenue growth," but the combination had another, probably unintended benefit: It brought together two nascent anti-laundering programs.
On the Fleet side of the equation, Deborah Davis, now director of corporate compliance for the combined FleetBoston Financial Corp., was implementing a companywide program to teach front-line employees how to spot money launderers trying to open an account.
As the merger was being wrapped up, the rest of the banking industry was busy trying to deal with the fallout from the Bank of New York's Russian money-laundering scandal. After it was revealed that billions of dollars in dirty money had moved through the institution, banks around the country braced for increased regulatory oversight and possible congressional action, both of which would most likely increase banks' compliance burden.
When the merged FleetBoston took inventory, according to Ms. Davis, it found that "due to a little bit of foresight and a lot of luck" it already had two pieces of what would become the foundation of its anti-laundering efforts.
"You can't just have detection and monitoring," she said. "You have to start with the elements of a good risk management program. When we merged it was wonderful, because we had the front end and the back end."
At Fleet, Ms. Davis and others had already seen signs that regulators were beginning to pay closer attention to money-laundering enforcement. A controversial proposal by federal regulators, called "know your customer," had been killed less than a year before. But its provisions, which required bankers to identify their customers and to track deviations from normal transaction patterns, were beginning to seep into the routine of bank exams just the same.
"Even though the KYC rules not been officially invoked, we knew that they were going to apply them anyway," Ms. Davis said.
"The bar seemed to be rising, and we said we'd better make sure we keep up with it."
In some respects Ms. Davis had the simpler task. Neither institution had had significant problems complying with the Bank Secrecy Act, which requires banks to report suspicious activities, such as large cash transactions or a series of deposits structured so that no single one trips reporting limits. Her program combined the creation of anti-laundering policies and procedures with training and testing of bank employees to strengthen an already solid system.
The Financial Intelligence Unit, on the other hand, was started from scratch with the goal of rooting out money launderers sophisticated enough to have made it into the bank in the first place.
When the project was launched in early 1999, Mr. Richards said, there was no commercial software available to do the kind of analysis the bank wanted, and custom-designed systems were prohibitively expensive.
Mr. Richards decided to make do with what the bank already had. "We found that we had the ability and the technology to build a database, and we had the personnel to build the necessary query tools to manipulate the data," he said.
Over the next year, Mr. Richards worked with BankBoston's various business lines to arrange daily feeds of transactional and other data from the bank's mainframe computer into servers maintained by the unit.
Today, in a matter of minutes, the 14-member FIU staff can download transaction data and scan the bank's 50 million accounts for combinations of activities that may suggest criminal behavior. For instance, money laundering frequently involves receiving large cash deposits and subsequently wiring funds from one bank to another.
Roughly one million Fleet accounts send or receive a wire transfer in a given year.
Mr. Richards' staff can identify those accounts and cross-match them with a list of accounts that have received a significant number of large cash deposits. By introducing other criteria, such as minimum number of transactions of a certain size during a specified period, the one million accounts can be reduced to 3,000.
The list can be whittled down even further by eliminating accounts that fail to match other parameters, such as doing business with specific counterparties or in certain locations. Because the system is flexible, allowing users to construct any number of queries that mine the database, the bank can respond quickly to warnings from law enforcement officials and regulators about specific money laundering threats.
The FleetBoston FIU has begun to attract attention in the anti-laundering community as an effective yet relatively inexpensive way to reduce the risk that a bank's reputation will be stained by a money laundering investigation.
Mr. Richards "has become quite a pioneer," said Charles A. Intriago, the publisher of the newsletter Money Laundering Alert. "We view him as a great innovator in discovering a tool to detect and control money laundering that crosses [bank] department lines."
"They have done some innovative analysis," said Elise J. Bean, deputy chief counsel to the Democrats on the Senate's permanent subcommittee on investigations. Ms. Bean, who worked on the panel's two exhaustive reports on money laundering in private and correspondent banking, has called the FleetBoston system a "model" for other institutions.
"The most interesting thing about it is that it is very proactive and low cost," she said.
Staffing costs aside, FleetBoston has been able to implement both the training and investigative elements of its program for less than $1 million. Mr. Richards put the total price tag for the computer equipment used by the FIU at less than $150,000.
One of the greatest obstacles to anti-money-laundering efforts by banks has been the perception among customers that scrutiny of account activity is an invasion of privacy.
Mr. Richards said that because of the way it is set up, his system is sensitive to account holders' privacy. Only "a minuscule number" of accounts are subject to scrutiny, he said, "and we don't even look at their account activity per se until something egregious pops up."
When making the first several passes through the database, FIU staff are not looking at specific accounts or transactions so much as identifying patterns specific to a group of accounts. Only after a group that shares several unusual transaction patterns has been identified do FIU staff members start looking at individual wire transfers or deposits to see if the bank is being used to launder money.
Mr. Richards and Ms. Davis claim that it is impossible to quantify the benefit that their anti-laundering program brings to FleetBoston. They do not keep track of accounts that have been closed as a result of Mr. Richards' investigations, nor of account applicants denied by bank officers trained under Ms. Davis' staff.
In some respects, Ms. Davis argued, the value of a strong anti-laundering program is better quantified by looking forward rather than backward.
"The scariest part is that we are doing all of this as well as we can right now, but we're not perfect," she said. "But the hardest part is that you have to constantly be thinking ahead, because these types of people who launder money are often very clever. I am sure they are already starting to think of ways to get around what we do."
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