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U.S. Tells Plans to Crack Down on Bank Fraud

April 03, 1985|RONALDJ. OSTROW | Times Staff Writer

WASHINGTON — Moving to crack down on fraud by bank officials, the Justice Department, FBI and four federal banking regulatory agencies agreed Tuesday on cooperative steps to speed and sharpen detection, investigation and prosecution of such crimes.

Atty. Gen. Edwin Meese III, in announcing the agreement, pointed to the failure last year of 79 banks and 27 savings and loan associations and cited estimates that about half of them resulted from fraud or other criminal activity, most of it by insiders.

"Bank fraud perpetrated by insiders, even directed toward relatively small banks, seriously undermines the confidence and trust that individuals and businesses place in the banking industry as a whole," Meese said. "That confidence and trust will diminish all the more if the public fails to perceive a comprehensive and active law enforcement presence in the industry."

Backed by Industry

The plan, which would include allowing government agencies to share financial information about individuals obtained from banks, was generally supported by the banking industry but criticized by guardians of the privacy of personal financial records.

It was proposed in the wake of a guilty plea by the Bank of Boston Corp. to federal charges of failing to properly report to the government $1.22 billion in international cash transactions. Treasury Department officials said that the transactions followed the classic pattern of money laundering--the hiding of sources of illicit income.

In addition, the Irving Trust Co. and Manufacturers Hanover Trust Co. said last week that they had failed to report to federal authorities hundreds of millions of dollars in cash transactions, failures that they said represented oversights rather than any attempt by organized crime to launder illicit income.

Key provisions of the federal plan include:

--Developing a uniform means of reporting suspected criminal conduct to the Justice Department and the FBI, one that will emphasize major cases, particularly those involving criminal misconduct by bank officers.

Information on Customers

--Proposing laws to permit transferring financial information about individuals from federal bank regulators to prosecutors without notifying the customers, a step that can tip off customers about investigations and, according to the agreement, "be damaging to the conduct of criminal investigations." Under the legislation, the Justice Department could also give bank regulatory agencies information obtained from grand juries.

--Increasing and coordinating the training of bank examiners, prosecutors and FBI agents in the intricacies of bank fraud cases at the FBI academy in Quantico, Va.

--Providing for interagency use in "appropriate circumstances" of the FBI's closely held computer indexes, known as Field Office Information Management Systems.

--Establishing mechanisms to ensure that communication between the agencies is effective at the regional and district levels as well as in Washington.

Others Signing Accord

In addition to Meese, those signing the agreement were FBI Director William H. Webster; C. T. Conover, comptroller of the currency; Edwin J. Gray, chairman of the Federal Home Loan Bank Board; Preston Martin, vice chairman of the Federal Reserve Board, and Margaret L. Egginton, deputy to the chairman of the Federal Deposit Insurance Corp.

Reaction from the banking community was generally favorable.

The American Bankers Assn. "strongly supports the actions . . . to improve the detection, investigation and prosecution of bank fraud cases," spokesman Fritz Elmendorf said. But he expressed reservations about amending the Right to Financial Privacy Act to permit transferring financial information from one government agency to another without notifying the customer.

"The act was passed by Congress after extensive hearings to carefully balance the individual's right to privacy with the legitimate needs of law enforcement authorities," he said. "Because changes to this act would affect customers of financial institutions and the confidentiality of their bank records, Congress should consider this issue separately, and any changes in the act should come after careful congressional deliberation."

'Net' for Customers

Robert S. Schwartz, an attorney for the Independent Bankers Assn., said that his group supports "all reasonable activities" to curb insider bank fraud but questioned whether it is "necessary to cast a net to catch all bank customers."

A spokesman for the U.S. League of Savings Institutions had no comment.

An aide to Sen. Alan Cranston (D-Calif.), who introduced the Right to Financial Privacy Act, said she is certain that Cranston "would have very serious concerns" about the amendments backed by Meese and the interragency working group.

"It seems to me this is a tremendous overreaction to bank fraud," said Carolyn Jordan, Cranston's staff member on the Senate Banking Committee. "We are concerned about insider fraud, but it sounds to me as though (Meese) is gutting the act."

Damaging to Probes

According to the government agencies, the Justice Department has found that notifying customers that their financial information had been transferred from one government agency to another "can be damaging to the conduct of criminal investigations."

Meese said that the proposed change in the law, still to be worked out, would seek "not to go back to whatever evils that might have been remedied by the Right to Financial Privacy Act but rather to make sure that we are protecting the savings of the people who have invested in these institutions."

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