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Stopping Fraud and Securing Identities: It's Not Just a Good Idea. It's the Law.

Gary Satanovsky

In continuing our September Mortgage Fraud spotlight, this week we are talking about the government regulation of identity verification. We know already how unscrupulous fraudsters recruit straw buyers, forge identification documents and walk away with hundreds of thousands of dollars in proceeds. For the loaning institutions this, however, is just the beginning of their troubles. After reporting the loss, they have to face an investigation by the government's Financial Crimes Enforcement Network, as well as by various other federal and state financial regulators. Fines approaching $25,000 or more frequently await the institutions at the end of these investigations.


To combat the increase in financial fraud, FinCen has concurrently stepped up its enforcement operations. As an example, in late August the organization assessed a $50,000 Civil Money Penalty on the North Carolina-based Pinnacle Capital Markets, LLC. Pinnacle was found negligent in verifying customer identities (as part of the government-instituted Customer Identity Program). This $50,000 fine was levied on top of another $25,000 fine for the same violation issued by the SEC, and in addition to the fraud losses Pinnacle suffered as a result of its negligence.

According to the IRS website, in cases of negligence the Bank Security Act (which mandates the aforementioned Customer Identification Program) provides fines of up to $25,000 for a single violation or  $50,000 for what it calls “a pattern”. In the case of “willful” or “criminal” violations, where the institution is considered as deliberately and with full awareness breaking the law, the BSA also allows “forfeiture” of assets involved in the violation, which can easily add up to hundreds of millions of dollars. Case in point, the ABN Amro Bank N.V. agreed to give up $500 million to the U.S. treasury as a result of a finding they deliberately tried to go around the BSA and cover up their actions.

Of course penalties that large are an aberration, intended only to show that making money by knowingly breaking the BSA will never be profitable. Even in cases of negligence, $25,000 is a significant sum. Moreover, the cost of compliance will nearly always be less than the costs of failing to do so. So the issue is clear: risk fraud losses and regulatory fines, or for a small fraction of the cost invest in a smart identity-verification program that will reduce your losses and put you in compliance with the BSA.

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