WASHINGTON — After claiming for years that bankers were filing ever more suspicious activity reports in response to regulatory pressure, experts are attributing the latest spike to a dramatic rise in actual financial crime.
The number of reports filed by depository institutions last year rose nearly 13% from a year earlier — the largest increase in three years — to 733,529, according to a report to be released next month by the Financial Crimes Enforcement Network.
It also was the 12th consecutive year, since Fincen started keeping records in 1996, that SARs hit a new high.
"When there are difficult economic times, financial fraud becomes the growth industry," said Peter Djinis, a lawyer in Sarasota, Fla., and a former Fincen official. "Financial institutions are clearly paying more attention there. … They are now being more liberal in reporting not just active fraud but attempted fraud."
Until the financial crisis hit, suspicious activity reports were a top source of complaint from bankers, who called them overly burdensome and of little value to law enforcement officials. After lawmakers criticized regulators in 2004 for failure to enforce anti-laundering laws, the agencies put a new emphasis on SAR reporting. The result was a huge increase in filings.
But observers said the latest jump demonstrates a rise in mortgage fraud.
A report by the Federal Bureau of Investigation found that 63,173 SARs related to mortgage fraud were filed in the fiscal year that ended Sept. 30, and another were 28,873 filed from October to February of this year.
Observers said that as more loans default and go into workouts, bankers are re-examining them for fraud.
"As they do reviews of their loans, for instance, if a customer is having trouble with their loan, they start looking around [to determine] why this loan was made in the first place," said Bob Serino, a partner at BuckleySandler LLP and a former anti-laundering official at the Office of the Comptroller of the Currency.
Jean Veta, a partner in Covington & Burling LLP, said: "In a down economy it's sometimes easier to detect unlawful activity, because in a downturn they can't hide their results."
The issue of defensive filing is not gone for good, however.
Though a Government Accountability Office report issued late last month said no evidence exists of defensive filing, several observers said bankers are still probably filing borderline reports for fear of regulatory criticism later.
"There's an additional pressure for depository institutions to respond to everyone's concern on fraud," said Serena Wille, a counsel in the financial institutions department of Wilmer Cutler Pickering Hale and Dorr LLP. "That increases the pressure on financial institutions, but it comes at exactly a time when they are less able to cope with the additional pressure because they are strapped for resources and stretched thin."
The federal government began a program last week to bring even more attention to the issue. The Treasury Department, the Federal Trade Commission, the Department of Housing and Urban Development, the Justice Department, state officials and Fincen announced a coordinated plan to thwart loan modification fraud.
The agencies said they would prosecute or disable businesses that claim to be able to secure modifications from lenders for up-front fees.
David Caruso, the chief executive officer and managing director of Dominion Advisory Group LLC in Centreville, Va., said the new program is likely to spook bankers into reporting borderline cases related to modifications or potential fraud.
"It's fair to say, in response to the Patriot Act, there was a lot of overfiling," he said. "So the question becomes, is the same thing going to happen with mortgage fraud? Are banks going to overfile in response to the government emphasis on mortgage fraud? I think the government would be fine with that. … The question for the industry is, what additional implications is that placing on them?"
Caruso suggested that overall, SAR filings are becoming increasingly focused on fraud, rather than other types of financial crimes, such as money laundering.
"The industry is leaning to more of an equal emphasis on more traditional fraud schemes and AML, and I think Fincen has had a lot more emphasis on fraud," he said.
Fincen Director Jim Freis told American Banker echoed that assessment.
"The information SARs provide may now be more important than ever before to help fight against urgent concerns like mortgage fraud, consumer loan fraud and identity theft," Freis said. "I think that more bankers are realizing that the same due diligence required for AML compliance is also a powerful weapon against fraud."
Observers said high-profile cases such as the Bernard Madoff Ponzi scheme have also put more pressure on bankers to detect fraud.
"It's pretty clear to me now that institutions are paying a lot more attention, particularly when they are housing accounts for investment clients," Djinis said. "They are making sure the accounts are in line with the business of the customers."
Carmina Hughes, executive director at Daylight Forensic and Advisory LLC, said the Madoff scandal has heightened scrutiny.
Bankers "are all looking at whether there was anything in some of their investment accounts they need to alert authorities on," she said. "When there are media events and schemes in the media, they do take a look to make sure they don't have anything to report or account schemes that may be vulnerable."
This time bankers may see more prosecutions as a result of their reports, some said.
"We will see an increase in investigations in not just mortgage loans, but also criminal investigations against fraudulent investment schemes." Djinis said.
As long as the economy continues to deteriorate, observers said they expect the increase in filings to continue.
"At some point we'll plateau, but given the state of the economy, I think we will see an immediate increase," said Robert Rowe, regulatory counsel at the Independent Community Bankers of America.
Hughes said that as attempts to modify loans increase, more reports will result.
"If banks are required to review loans in a workout — they are going to take a closer look at the loan," she said.
