How technology nabbed Eliot Spitzer

Disgraced New York Governor Eliot Spitzer may already have descended into the realm of cocktail party punchline, but there is a real story in how his escapades came to light. Specifically, it's a technology story, and you might be surprised to learn that the high-tech techniques used to discover his spending on high-dollar prostitutes is the same that's being used on all U.S. consumers every day.

The feds know that the biggest financial crimes don't involve suitcases full of cash like we see in the movies. Money moves from bank to bank, either by check or by wire transfer, without ever being turned into cash. How do you keep tabs on that?

Spitzer was done in by software from companies like Metavante and Fortent which scans bank transfers for suspicious behavior, to the tune of 50 million transactions a day. In the old days, only large transfers (typically above $10,000) would merit much attention. Crooks caught on, so software has become more sophisticated so that it now scans as well for series of smaller transactions (a scam called "structuring"). In this case, three $5,000 transfers were probably what triggered alarms to go off on Spitzer.

In many cases, scanning software can also watch for changes in what would normally be a stable pattern. As Technology Review notes, if you deposit two paychecks a month for two years, then suddenly deposit six big checks, a flag might be raised. Consumers can also be profiled based on the overall size of their account and even their occupation, so teachers are tracked against other teachers for suspicious activity or, specifically, breaks in the expected pattern.

Sound a little Big Brother? It might be, but "suspicious activity reports" are actually a federal requirement of banks dating back to 1970. They're just getting more help now in the Information Age. Still, the computer doesn't do all the work: SAR reports have to be analyzed by actual humans before being sent off to the feds for further research, so that if deviations are justified (like, say, a lot of income from selling your house) you don't end up getting a knock on the door from the IRS asking for its cut.

Such suspicious activity is going up, big time: Eight years ago, just 121,000 SARs were filed, while in 2006 that number was up to 567,000. Thinking about trying to pull a fast one on Uncle Sam by laundering some cash through your bank? Better think twice. His code is watching.