Quietly, Private Bankers Enlist Detectives
Meet Daniel E. Karson. If you're wealthy and plan a new private banking relationship, he's likely to know a lot about you.
Mr. Karson is a managing director and general counsel of Kroll Associates, a private investigation firm specializing in business matters.
From Duvalier to Marcos
Kroll has made headlines in the stealth business by tracking down hidden assets of deposed Haitian dictator Jean-Claude Duvalier, Iraqi leader Saddam Hussein, and Ferdinand Marcos, the former leader of the Philippines.
But lately Kroll and a handful of other detective firms - which spend most of their time doing routine searches for corporate lawyers and bankers involved in bankruptcies and workouts - have found lucrative niches in the discreet world of private banking.
The gumshoes are being hired to do background checks on prospective clients and - especially - to track down assets of clients who walk away from their loans through bankruptcy or illegal means.
"Two years ago we began marketing to the private banking sector, and there was not an unfriendly reception," said David Armistead, a managing partner with Claims and Assets Research Services Inc., a private investigations firm in Chicago.
Today, he said, up to 15% of his company's assignments come from bankers to the rich.
Behind the Need
The newfound need for truly private eyes has three chief causes: Private bankers are more aggressive in marketing their lending services, they are expanding outside of their home territories, and they are doing it in recessionary times. As a result, loan delinquencies and workouts are rising quickly.
"We're trying to be very careful and learn from the mistakes we've made and other people have made," said Wilma Smelcer, head of private banking at Continental Bank Corp. "The biggest risk to our private banking effort is to make a big, bad loan."
The Chicago bank, like most of its competitors, keeps a running file with financial information about its clients and also the names of their attorneys and philanthropic affiliations. It's also been hiring former FBI agents to conduct credit checks.
|Various Banks Got Caught'
But now the bank is considering hiring detectives to probe clients outside the Chicago area.
"Private banking units in various banks got caught by not fully checking into people," said Sandra L. Williams, a senior credit officer at Continental.
That acknowledgment is unusual. Many bankers privately admit to shadowing potential clients, but few are willing to say so publicly.
"The last thing you want is to insult a client who's worth a couple of million dollars," said Steven Blumenfield, director of marketing for Bishops, a New York-based business investigations company.
In a marketing brochure, Bishops lists several big banks among its customers, including Bankers Trust Co., Citibank, and Security Pacific National Bank. The pamphlet does not say that the agency has been hired specifically for private banking purposes.
"This is touchy stuff," said Maribeth S. Rahe, department executive for private banking at Chicago's Harris Bank and Trust Co.
Harris recently starting using outside detectives to conduct due diligence and asset searches. It claims that devoting full-time staff to such projects is too expensive.
Fraud also plays a part.
A private banker who insisted on anonymity related a case in which a new customer passed the bank's traditional credit checks after submitting a fraudulent income statement. He also turned out to be defrauding some business associates.
"Now we use credit investigations firms routinely," said the banker, whose bank has a well-known private banking practice.
Kroll's Mr. Karson said he tends to get called by bankers "when it's a significant enough facility and they smell trouble."
When bankers get that nervous, they are willing to pay. Kroll officials said banks pay as much as $15,000 for a due diligence investigation and about $25,000 for an asset search.
Sitting in his midtown Manhattan office, surrounded by books about electronic surveillance and the law, Mr. Karson can almost instantly call up reams of financial data on thousands of individuals.
By typing into a computer a name that Kroll has already investigated, he can scour details of business holdings, personal property, and legal wranglings. Kroll also has 200 employees, including lawyers, researchers, and investigators in the United States, Europe, and Asia who can be put on a case.
Mr. Karson is not shy about advertising the firm's abilities. He and his competitors are showing up at watering holes and spas frequented by private bankers and their clients.
At an American Bankers Association's private banking conference in New Orleans this year, Mr. Karson made a presentation outlining a typical asset search. A favorite trap, he said, is to send out a check and then follow the trail when it is cashed to find hidden accounts.
PHOTO : DANIEL E. KARSON says when private bankers are nervous about a client, they sometimes call him to do a background check.
PHOTO : AN ASSET SEARCH by Daniel Karson's firm costs up to $25,000.