Smurf-Buster Role Makes Banks Edgy : In Conflict Over Campaign to Stop Money Laundering

The Internal Revenue Service got on the case after a tip from an officer of the First Interstate Bank branch at Sunset and Alvarado boulevards. It looked as though money was being “smurfed” at the bank.

The police brought in Charger of the K-9 corps who confirmed their suspicions with his well-trained nose: The money reeked of cocaine.

The bank tip and Charger’s sense of smell led to the conviction of seven Colombians in Los Angeles federal court in March on charges that they laundered $9.1 million in drug money through more than 500 area bank branches by a simple but effective ploy known as smurfing.

A smurf--named for the hyperactive little blue toy and cartoon character--launders illicit money by taking amounts just below federal reporting limits to one bank after another and having them changed into cashier’s checks.

Banks must report all cash transactions of more than $10,000 to the IRS under a 1970 law aimed at stopping organized crime’s use of legitimate financial institutions to launder money.

Need Bankers’ Help

Prosecutors nationwide are increasingly focusing their anti-drug efforts on smurf-busting, hoping to work up from the low-level couriers to major dealers. To get to the smurfs, however, authorities need help from cooperative bankers.

The result is a collision of two basic societal interests, the desire to combat drugs and the need to protect financial privacy. The issue has brought bankers and civil libertarians together in an unusual alliance, while sparking angry charges from federal officials that banks are more interested in profits than in cracking down on dope.

“We’re not a nation of snitches,” said Walt Fisher, chief auditor for Security Pacific National Bank in Los Angeles. “I know it’s all in a good cause, but I’m concerned about the tendency to ignore other rights because of this present problem with drugs. They’re going after the banks because their efforts to go directly at the problem have not been very successful.”

Bank officers cannot become law officers, he added. “We’re going to start affecting innocent people.”

Does Help Authorities

Despite Fisher’s comments, Security Pacific has a record of helping authorities in money-laundering cases. The bank has tipped the IRS to several instances of suspected smurfing and allowed an undercover agent to operate out of a Hollywood branch to help break up the $25-million “Grandma Mafia” cash-cleaning ring run by a group of smartly dressed, middle-aged grandmothers.

“Without the banks, we wouldn’t be making these cases,” said Assistant U.S. Atty. Brian Sun, who oversees the multi-agency S.W.A.T. (Smurf Watch Alert Team) squad in Los Angeles. Sun, who keeps a little Smurf toy on his desk, prosecutes cases for a task force combining the IRS, the Customs Service, the Drug Enforcement Agency and the Justice Department. The squad is modelled on the successful Operation Greenback anti-money-laundering force set up in Miami in 1980.

Banks across the country are under intense pressure to bend financial privacy laws to help stamp out money laundering through U.S. financial institutions, estimated to be a $60-billion-a-year industry. The Bank of Boston pleaded guilty in February to a felony charge that it failed to report $1.22 billion of cash transactions with foreign banks and paid a record $500,000 fine.

Bank Chairman William L. Brown admitted that the bank had made $1 million on the transactions, touching off angry charges by lawmakers and regulators that banks would continue to assist money launderers as long as there remain financial incentives to do so. Bills now before Congress would increase fines to the amount of the illegal transactions.

Organized Crime Link

The Bank of Boston investigation also revealed that the bank had improperly exempted from reporting rules the real estate business of the reputed Boston organized crime family of Gennaro Angiulo.

Businesses that regularly deal in large amounts of cash--supermarkets and theaters, for example--are allowed exemption from the requirement. But car and boat dealerships and real estate brokerages are almost never legitimately exempted.

The Bank of Boston scandal unleashed a torrent of admissions of laxity in reporting cash transactions by banks hoping to duck big fines by stepping forward voluntarily. Bank of America, Chemical Bank, Irving Trust, Manufacturers Hanover, First National Bank of Chicago, Wells Fargo Bank and Shawmut Bank of Boston in recent weeks all have admitted failure to file required reports on millions of dollars of cash transactions.

Federal auditors have fanned out across the country to inspect the books of at least 40 big banks for violations. They’ll find that “everybody’s got some,” one major bank executive said, citing confusion over the law and the huge daily volume of transactions. Currency exchange houses, brokerages and casinos are coming under increasing scrutiny for the way they handle cash, too.

“The banks are just now beginning to realize the impact of money laundering on their institutions. It is a black mark on the integrity of the financial system,” said John M. Walker Jr., chief of enforcement for the Treasury Department. “This has a bottom-line effect. People do not want to do business with banks that are assisting drug traffickers.”

Confidentiality Concern

But, bankers and civil libertarians say, neither do people want to do business with bankers who, in their zeal to help the cops bust dope dealers, trample on the confidentiality of their customers’ transactions.

Suburban Trust Co. of Bethesda, Md., recently lost a state court case after a branch security officer called local police about a customer who came in with $800 in sequentially numbered $50 and $100 bills. Maurice Waller was arrested on suspicion of robbery for trying to deposit what turned out to be the proceeds of his income tax refund check, cashed at the Treasury Department in Washington. Waller successfully sued the bank for invasion of privacy and breach of confidentiality.

An appeals court judge, in upholding the Waller verdict, characterized the case as “The Bank That Talked Too Much.”

With the increasing pressure on banks to report suspicious transactions, more such cases are inevitable, spokesmen for the banking industry and civil liberties groups say.

“The bank snitch is very different from the street snitch of old detective movies,” said Jerry Berman, legislative counsel for the American Civil Liberties Union and a privacy advocate. “Today you’re talking about the ability to turn over computerized data of enormous confidentiality. Not only your banking transactions, but through your bank credit card records your travel, your purchases, where you’ve stayed, what you’ve done.”

Conflicting Laws

The clash of interests stems in part from two well-intended but conflicting federal laws--the Bank Secrecy Act of 1970 and the Financial Right to Privacy Act.

The Bank Secrecy Act, passed as part of the Nixon Administration’s war on organized crime, requires banks to report to the IRS all cash transactions involving more than $10,000. Bank of Boston was nailed for hundreds of violations of the Bank Secrecy Act.

The Currency Transaction Report, IRS form 4789, demands the reporting of information that handlers of dirty money generally would prefer not to provide: name, address, Social Security number, occupation.

Smurfing was the launderers’ response to the law. By splitting deposits or cashier’s check purchases into amounts less than $10,000, money launderers evade these embarrassing questions and turn dirty cash into clean, easily negotiated instruments that can be transferred to numbered accounts abroad or channeled into apparently legitimate businesses.

A good smurf, law enforcement officials say, can hit 20 banks and wash $150,000 a day. Smurfing organizations are often composed of family members because of the degree of trust required in handling large amounts of ill-gotten cash, police say. Smurfs usually receive a 3% commission.

Evidence of Intent

Doing business in cash is perfectly legal, unless the government can establish intent to evade the Bank Secrecy Act. In one recent Los Angeles case, intent was proved when a smurf objected to the filing of the IRS report, saying the transaction was less than $10,000. Demonstration of such familiarity with the law, prosecutors said, was evidence of intent to evade it. Buying multiple cashier’s checks in amounts between $5,000 and $9,000 in a single day also helps establish a pattern of smurfing.

The misnamed Bank Secrecy Act--it’s really a disclosure law--was complicated in 1978 by passage of the Financial Right to Privacy Act. That law says that no federal agency can have access to a person’s bank records without a subpoena or search warrant. It also demands that a bank notify a customer whenever it receives such a government request and gives the customer the right to challenge it.

The privacy statute frustrates law enforcers.

In October, 1982, the big New York securities firm E. F. Hutton was subpoenaed to provide the records of Franco Della Torre, an alleged launderer for a Mafia heroin ring who deposited more than $13 million in cash in a trading account at the firm. Hutton promptly told an associate of Della Torre about the subpoena, despite government requests that he not be tipped. A firm working with the courier promptly moved and Della Torre made no further deposits.

A ‘Misunderstanding’

Hutton later said the disclosure resulted from a “misunderstanding” between the brokerage and the FBI.

The case was cited by the President’s Commission on Organized Crime as an example of weakness of federal tools against money laundering. The commission recommended a series of legislative steps to address the problem, including:

- New criminal laws to make money laundering itself a crime and eliminate the contortions prosecutors must go through to build a case proving intent to evade the Bank Secrecy Act.

- An amendment to the privacy law to make financial institutions liable to obstruction of justice charges if they notify a customer of a police agency’s request for information.

- A measure to nullify state financial privacy laws--such as California’s--that are stronger than federal statutes.

- Permission to use wiretaps in money laundering cases.

- An amendment to the secrecy law to protect bankers from civil damage suits if they “in good faith” report customers who appear to be money launderers but later prove to be legitimate.

- Authority for the IRS to use an administrative summons to gain access to bank records, rather than having to wait for a search warrant from a judge or grand jury.

Rep. Bill McCollum (R-Fla.) in February introduced a package of bills in the House paralleling the crime commission’s recommendations. He said he was aware of the possible constitutional and civil liberties problems of the bills, but said public interest outweighed privacy in this instance.

“It’s a question of balancing interests. I want to protect as much privacy as we can, but we’re not getting enough voluntary information. It would be worth the balancing going in the favor of law enforcement, to give protection to banks to encourage them to give this information to investigators,” McCollum said.

ACLU Opposes Bills

The ACLU, not surprisingly, doesn’t buy the congressman’s argument and opposes the bills. Bankers, however, are of two minds on the issue. They endorse protection from lawsuits if they in good faith but mistakenly tip the police to a legitimate customer. But they resist pressure to become agencies of the law.

“We’d like to be good citizens in this regard, but it’s not easy to figure out how to do this without infringing privacy, and that’s a very important concern that derives from the Constitution’s guarantees of liberty,” said Fisher, the Security Pacific executive.

“They’re doing this out of good intentions, but the long-range implications bother me. We’re not in a position to cross-examine people about the source of their funds.”

Walker, the IRS’ top cop, dismisses the bankers’ concerns as based more on desire to protect their clients and their profits than on devotion to the Constitution.

“We’re not talking about a wholesale dismantling of the right to privacy. We’re talking about limited changes to provide protection for individuals who work for banks and who wish to disclose activities that are suspicious and possibly criminal.

“If a bank officer sees drug dealing in the lobby, he should report that. It’s criminal, suspicious activity. If he can report that, he should be able to report possible money laundering operations.”