Private bankers and trust officers need to step up efforts to protect their banks against fraud, according to Louis J. Sozio, a vice president at PNC Bank Corp.
Mr. Sozio, director of asset management and fiduciary compliance for Pittsburgh-based PNC, told attendees at an American Bankers Association- sponsored conference here this week that money launderers are increasingly eyeing private banks as potential victims of financial fraud. Their schemes range from "free-riding" stock transactions, where they ask brokers to buy stock today with a promise to pay tomorrow, to asking for the assets in a funeral trust when the client is still alive.
"Know-your-customer doesn't mean 'we know Joe Doe and his family. And he lives on the Main Line,'" Mr. Sozio said. "We have to know Joe Doe has the financial wherewithal" he says he does." Know-your-customer rules are guidelines to help bankers ensure money was procured legitimately.
Mr. Sozio's remarks were backed up by Daniel D. Soto, a senior special examiner with the Federal Reserve Board. "You have done such a good job in the retail area of the bank, that the money launderers are looking at other parts of your bank," Mr. Soto said.
"These people are just sitting around for hours and hours and hours, trying to think of a way to get into the financial system."
To keep them out, the Fed plans to propose within the next two months refinements in guidelines for compliance with know-your-customer and the Bank Secrecy Act rules.
Concern about suspicious activity comes at a time when new-business development is a top priority for trust and private banking divisions. They are seeking to regain market share from brokerage firms, mutual fund companies, and independent investment managers.
In addition, many trust bankers worry that they could libel clients by suggesting they may not be on the up-and-up. That is why some are hesitant to file a suspicious activity report to the Treasury Department's Financial Crimes Enforcement Network.
Indeed, accusing clients directly, or tipping them off that they have raised the bank's suspicions, is a "big, big no-no," Mr. Soto said. "You can never, ever disclose to a customer the bank filed an SAR," Mr. Soto added.
The reports are considered confidential and offer "blanket protection" against a libel suit, said John Byrne, the ABA's senior counsel. They can be made public only during criminal proceedings.
On the whole, Mr. Sozio said, common sense can keep bankers out of trouble. About a year ago, PNC was asked to open an account for a $20 million revocable trust in one of its most remote locations.
The prospect produced a letter of introduction from the prime minister of Nigeria. But PNC officials found it odd he would want to open a large account in a region where the bank does little trust business. Also, the prospect did not want to negotiate management fees.
"Twenty million-dollar clients don't pay scheduled rates," Mr. Sozio said. "If it's too good to be true, it's too good to be true."
