What is a Suspicious Activity Report and when to file one?

16 Jun What is a Suspicious Activity Report and when to file one?

Financial institutions today face scrutiny at an unparalleled level and may be subject to civil and criminal penalties for any involvement in money laundering and terrorist financing. As a result, FIs are continuously making efforts to ensure they don’t onboard clients with illegal monies or process transactions that intentionally try to evade or circumvent sanctions.

FIs have an obligation to file Suspicious Activity Reports (SARs) with the regulator or the Financial Intelligence Unit (FIU) whenever they encounter any red flags in relation to money laundering or terrorist financing. SARs are part of the anti-money laundering statutes and regulations which have become much stricter since 2001. Disclosure to the customer, or failure to file a Suspicious Activity Report, can result in very severe penalties for both individuals and the FIs.

Below are few guidelines for effective SAR filings that can be followed by individuals or by reporting entities:

1. Identification of Unusual Activity:

FIs should use a number of methods to identify the potentially suspicious activity, including but not limited to activity identified by employees during day-to-day operations, law enforcement inquiries, or requests by regulators.

2. Managing Alerts:

Alert management focuses on processes used to investigate and evaluate identified unusual activity. FIs should have policies, procedures, and processes in place for referring unusual activity from all areas of the FI or business lines to the personnel or department responsible for evaluating unusual activity. Within those procedures, management should establish a clear and defined escalation process from the point of initial detection to disposition of the investigation.

3. SAR Decision Making:

FIs are required to document SAR decisions, including the specific reason for filing or not filing a SAR. The decision to file a SAR is an intrinsically subjective judgment. SAR filing team which is normally headed by the Money Laundering Reporting Officer (MLRO), should focus on whether the FI has an effective SAR decision-making process, not individual SAR decisions.

4. SAR Completion & Filing:

SAR completion and filing are a critical part of the SAR monitoring and reporting process. FIs should provide the complete filing information available inline with existing regulatory expectations. Inaccurate information or an incomplete narrative may make further analysis difficult. SAR narrative section is “critical.” Thus, a failure to adequately describe the factors making a transaction or activity suspicious undermines the purpose of the SAR.

As far as timing for SAR filing is concerned, FinCEN has regularly provided guidance stating that the 30 or 60-day clock does not start until the financial institution determines that a transaction is suspicious. Initial detection does not start until an appropriate review has taken place and the transaction has been determined to be suspicious.

Example of a Suspicious Activity Report Situation:

Nicholas is an account holder at XYZ Financial Institution who has been a client for nearly 15 years and has an established account history and very predictable transactions. Every month, he deposits $8,000 into the account and buys equity shares of different companies. One day, he starts to receive weekly transfers of $18,000 into the account. Almost as quickly as the money hits the account the money is withdrawn from another jurisdiction. This is out of the ordinary for Nicholas account and unusual activity. The FI may consider this to be a red flag and perform an investigation to gather more information on the transactions and might file a SAR if the transactions are deem to be suspicious.

Given the importance of the SAR filing, it is mandatory for the data in the report to be of the utmost quality. Appropriate policies, procedures, and processes should be in place to ensure SARs are to be filed in a timely, complete and accurate manner. The narrative should a sufficient description of the activity reported as well as the basis for filing.

If you want to know more about SARs and the recent FinCEN file leaks please visit the ICJI website.