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More U.S. banks are hesitating to freeze funds linked to fraud schemes for longer periods of time solely at the behest of federal investigators, sources told ACAMS moneylaundering.com.

Because sophisticated fraudsters take only hours, if not minutes, to move money that they bilked from victims permanently out of reach, asset recovery specialists for the FBI move quickly to flag domestic wires and accounts that appear illicit in nature to banks on the hope that they will freeze them voluntarily, under their own terms and conditions, while investigators work to secure a warrant or develop their case.

In a podcast with ACAMS on Tuesday, Oct. 31, James Barnacle, head of the FBI’s Financial Crimes Section, attributed 70 percent of the bureau’s recovery of hundreds of millions of dollars in proceeds from domestic fraud schemes last year to voluntary freezes.

Now, Barnacle said, banks tend to request that the FBI at least start the process of obtaining a warrant before they agree to voluntarily freeze an account or delay a transaction for longer than a week, or whatever maximum period of time they set in their service agreements with customers.

The change in policy now taking hold throughout the financial services industry puts the FBI’s efforts to recover fraudulent assets before they dissipate at risk, said Barnacle.

“We can send a freeze letter and we can intervene with asset forfeiture, but we do not have the resources to do that in every case,” Barnacle said during the podcast. “I don’t want banks to go away and think, ‘Hey, the FBI is going to intervene with a “hold harmless” or a freeze letter, or asset forfeiture and pursue this criminally,’ [because] that’s not [always] going to happen.”

“Hold harmless” letters and freeze letters shield financial institutions from any legal or regulatory fallout they may incur from voluntarily restraining funds by clarifying that they took those actions in response to a formal request from law enforcement.

When banks do agree to freeze funds voluntarily, they are now more likely to narrow down the previous “fairly large window” for agents to obtain a warrant to only seven days, Barnacle told attendees of an ACAMS-hosted conference in Las Vegas prior to the podcast.

Dilemma

Voluntary freezes may play a critical role in helping the FBI recover stolen assets and compensate victims of fraud.

But they can also place banks in the unenviable position of having voluntarily locked a legitimate customer out of his or her account for weeks, possibly months, without cause, if a federal judge rejects the FBI’s request for a warrant, or the bureau never seeks to obtain one.

Freezing without justification can be costly.

In December 2022, the Consumer Financial Protection Bureau ordered Wells Fargo to pay $3.7 billion in penalties after finding that the lender froze more than 1 million accounts for an average of two weeks without adequate cause.

Seven months earlier, in May 2022, Bank of America drew a $225 million fine from the Consumer Financial Protection Bureau for unlawfully freezing accounts. The bank reportedly told at least one impacted customer that the FBI had flagged his or her account as suspicious.

Securing a warrant within seven days is not always possible, said Stefan Cassella, former chief of the Justice Department’s Money Laundering and Asset Recovery Section.

Investigators are also often not at liberty to explain why they have targeted a certain transaction or account to a degree that would give banks comfort.

“It’s not as if investigators are just asking the banks to freeze money for no good reason,” said Cassella, now a consultant in Maryland. “But the good reason is often based on information they obtained through confidential sources, informants or electronic means, all of which are legal, but which they would rather not reveal.”

Ticking clock

Perpetrators of sophisticated, high-value fraud schemes often use networks of money mules and bank accounts in multiple jurisdictions to rapidly move their funds overseas and cover their tracks before investigators learn of their crime, request a voluntary freeze and seek a warrant.

Still, recent case law, including the 2nd U.S. Circuit Court of Appeals in New York’s 2015 ruling in U.S. v. Cosme, shows why banks “might be nervous” over long-term, voluntary freezes, a former federal prosecutor told moneylaundering.com on condition of anonymity.

On the same day that the appellant in the case, William Cosme was arrested and charged with wire fraud after stealing $5.5 million from an international school in South Korea, the government asked Sterling National Bank and Scottrade in letters to freeze his accounts on the basis that investigators had “probable cause to believe” they held proceeds from the crime.

“The letters also stated that the government was ‘in the process of obtaining a seizure warrant’ from the court for the accounts but that ‘exigent circumstances require that the Subject Property be frozen immediately to prevent it from being dissipated,’ ” the appeals court found.

But the government never sought a warrant to forfeit the funds in the two years that followed the initial freeze, and, in doing so, violated the Fourth Amendment’s prohibition against unreasonable searches and seizures.

Nothing prevents investigators from obtaining a warrant within seven days if they can show probable cause, the former federal prosecutor said.

For that reason, according to the former prosecutor, any attempt by law enforcement to persuade a bank to restrain an account for a longer period, or even indefinitely, without a warrant begins to “look an awful lot like a seizure that violates the Fourth Amendment” rather than a good-faith request for a voluntary freeze.

Contact Chelsea Carrick at ccarrick@acams.org