Bank Inquiry Uncovered Spitzer's Prostitution Link A routine financial inquiry led to the discovery of New York Gov. Eliot Spitzer's involvement in a high-priced prostitution ring. How do banks scrutinize the transactions of their customers, particularly "PEPs" — politically exposed people?
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Bank Inquiry Uncovered Spitzer's Prostitution Link

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Bank Inquiry Uncovered Spitzer's Prostitution Link

Bank Inquiry Uncovered Spitzer's Prostitution Link

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In a story like this, it would be natural to think investigators were going after the escort service when they stumbled across the governor's name. In fact, it appears to have been just the opposite. They were looking at Eliot Spitzer, and the trail led to an escort service.

To find out what might have initially tipped investigators off, we turn to NPR's Adam Davidson. And Adam, there are reports that Eliot Spitzer's troubles began with some bank transfers that didn't look right. What happened?

ADAM DAVIDSON: Well, I learned a lot in the last two days, I have to say. I did not realize that every transaction anybody in the U.S., and almost anybody in the world makes - everything from paying your rent to buying a sandwich with your ATM card to taking out some money, is - goes through these massive software programs that are doing risk assessment, that are evaluating how likely is this transaction to be either money laundering or terrorist financing, something like that.

Every transaction gets looked at. The vast majority, of course, are not flagged as risky. But Governor Spitzer, like any high-ranking elected official, is by definition - just because they are a powerful person - considered a politically exposed person. Banks call it a PEP. They're a PEP.

BLOCK: This is an actual term.

DAVIDSON: This is a term. They'll say, oh, he's a PEP, and therefore, the software is told to look extra diligently at everything a PEP does. That would be any governor, any senator, any congressman - even their children, their wives, even their brothers-in-law - will be considered PEPs not because they are likely to be corrupt or to be suspicious, but because they have the power to be suspicious.

So what seems to have happened is these software programs saw Eliot Spitzer doing something that they didn't like, and they flagged it.

BLOCK: How often do transactions like this get flagged?

DAVIDSON: There are thousands of transactions that are flagged every day - as I learned today, spending time at one of the software companies that designs this kind of software. Any large bank might pass a few hundred on to the IRS every month for further review. These would be large transfers from someone who's not commonly transferring large amounts of money, transfers to shell companies or companies that don't seem completely legit - that sort of thing. So each big bank - Bank of America, Citibank - that size, might be sending a few hundreds to the IRS every month and saying, these bear a little scrutiny. And then only a small handful of those will actually turn out to be an actual case of illegal activity. But every activity is at least looked at.

BLOCK: There is, I think, a certain dollar amount, a threshold that creates a red flag right away.

DAVIDSON: We've all heard, you know, on movies about the Mafia or on "The Sopranos" TV show - I've always thought that $10,000, that's the magic number, as long as you…

BLOCK: Mm-hmm.

DAVIDSON: …don't do anything above $10,000, nobody is looking at it. That used to be the case before 9/11.

BLOCK: Not true. All right.

DAVIDSON: Since 9/11, 2001, all transactions are flagged. And what they're particularly looking for are bundled payments. Money laundering is very sophisticated, so is terrorism financing. And what they might do is send a million $5 payments to someone halfway around the world, disguising it as lots and lots of small transactions. That seems to be what tripped up Governor Spitzer, that he sent a few $2,000-or-so payments thinking, well, that's below the threshold, it won't be flagged. But they're very good at bundling these and seeing, oh, wait, this pattern of behavior is way above that $10,000 threshold.

BLOCK: And again, it was the software program that you were talking about earlier that detected this suspicious activity that led to the investigation that led to where we are now.

DAVIDSON: And here is the biggest irony I heard today. Guess why that software is so powerful? In part, because the former New York Attorney General, Eliot Spitzer, insisted the banks have that kind of software program.

BLOCK: Okay, NPR's Adam Davidson. Adam, thanks a lot.

DAVIDSON: Thank you, Melissa.

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