During a House Financial Services Committee hearing last week, Rep. Warren Davidson (R-OH) questioned Darrin McLaughlin, the Executive Vice President and Chief BSA/AML & Sanctions Officer at Flagstar Bank, about the evolution of identifying financial fraud.
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NewsTranscript
00:00Mr. McLaughlin, based on your 27 years of experience, have you seen an expansion of the efforts to stop fraud?
00:12Thank you for your question, Chairman.
00:14Over 27 years, yes, there's been a huge, huge emphasis on protecting our customers in the industry.
00:22We have tackled this via enhancing our education programs, via workshops in our branches, educational material posted on our websites.
00:35So your own efforts in the industry, but also you've seen more regulatory pressure to disclose and report, correct?
00:43Correct, yes.
00:44The increased significance or pressure placed on financial institutions to identify and report suspicious activity and fraud has grown over the course of the last 27 years.
00:55So has the number of fraud cases and the size and scope of the fraud also increased?
01:05Yes, sir.
01:06So in a way, it's like, well, in spite of our effort, we haven't really stopped it.
01:10We haven't necessarily shrunk it either.
01:11And some would say, well, gosh, imagine how bad it would be if we hadn't been doing these things.
01:16But on the other hand, maybe the way we're going about it isn't working.
01:22So could you highlight what you think works and what maybe could be done more effectively from your experience?
01:29Thank you again.
01:30From my experience, what has been working is the increased investment within the public sector on education, on advanced technologies to catch the fraud at the front door, as we call it, before they're able to transact with the institutions.
01:47Also, advancements in the models and scenarios for which we monitor customer behavior once that account is established.
01:55What we could be doing better, I would say, is establishing that relationship, that public-private relationship, where there's a flow of information back and forth between the government and the regulated financial institutions that I represent.
02:12The government sits on a mountain of data from the hundreds of thousands of SARs that are filed and CTRs that are filed, as well as the prosecutions that law enforcement...
02:28Working on a weaponization committee last Congress, one bank was asked by the FBI to report on their customers, and the bank said, we need a warrant or a subpoena.
02:39Then the FBI came back and said, well, why don't you generate a suspicious activity report where none had previously existed?
02:44Is that kind of interaction with law enforcement normal?
02:48Yes.
02:49The financial services and the financial institutions that I've had the honor of working for do have good relationships with law enforcement.
02:56However, to protect the laws and the regulations that the financial institutions fall under, we do often, after conversations with law enforcement, request the subpoena to turn over information.
03:10Now, it's unusual to receive that type of conversation where a SAR wasn't filed, but usually once the SAR is filed, outreach begins and conversations and flow of data starts happening.
03:22Well, thank you for that, and I look forward to working with you all and colleagues to make our system more effective.
03:27And I just want to highlight, you know, Mr. Brabent, I appreciate your testimony because not only are individuals being scammed, but businesses are, and especially small businesses.
03:36You referenced a bill, the repealing big brother overreach act.
03:41It's got 133 house co-sponsors and identical legislation sponsored by Senator Tubleville in the Senate.
03:48You know, in the change that you referenced that the Trump administration has done by focusing beneficial ownership reporting requirements on foreign entities, is that an improvement for American citizens?
04:01I think absolutely, an improvement for American citizens and an improvement for American small businesses.
04:07When you're looking at 32.6 million reports, FinStam is expecting in year one, that is not a risk-based approach.
04:15That is a needle in a haystack approach, and when you refine it down to a smaller, more risk-based approach, it should be a win.
04:23Yeah, I appreciate you also referencing what we need to do with the existing data, so thank you for that.
04:27And look, you know, Ms. Stokes, I really appreciate your emphasis on seniors and the great work you've done to educate seniors.
04:34Working with our county prosecutors, do you have a way to roll that toolkit out through member offices so we make sure that our county prosecutors are on the front lines?
04:41They often feel unsupported by federal resources, so in your experience, you know, what you're seeing, are these like lone actors trying to scam people,
04:49or is it sort of an organized crime effort that's hitting, you know, individuals and businesses?
04:54Thank you for that question, Representative.
04:57You know, for a long time we've all held this assumption that the fraudster is some guy in his mom's basement making phone calls
05:05and lurking on social media, and I'm sure those guys are still out there, but they're not the ones that are causing the majority of the problem.
05:12This is transnational.
05:13I wish I had longer, but my time has expired, and I hope you can respond in writing.
05:18I'm sorry I didn't leave you enough time there.
05:19My time has expired, and I now...