The Journey from Writing to Exiting: The Importance of Suspicious Activity Reporting (SAR)

Are you looking to learn more about Suspicious Activity Reporting? From writing reports to exiting, I've got you covered! Let's dive in and explore the world of Suspicious Activity Reporting together.

Filing Suspicious Activity Reports (SARs) is a critical process that facilitates financial institutions in their efforts to combat money laundering, fraud, and other illicit activities. SARs are typically filed by financial institutions, such as banks and credit unions, but can be filed by any organisation that has reason to believe that suspicious activity is taking place. The submission of SARs enables these institutions to cooperate with law enforcement agencies, providing them with essential information that could assist in detecting and investigating suspicious activities. In the United States alone, over 3.5 million SARs were submitted in 2022, while the United Kingdom saw nearly 1 million SARs submitted. The submission of SARs is not limited to these countries, as financial institutions across the globe rely on this tool to maintain the integrity and security of the global financial system. The use of SARs is an essential practice that supports the financial industry's efforts to promote transparency, accountability, and the prevention of financial crimes.

What is a SAR?

The term "Suspicious Activity Report" refers to a report that identifies potential suspicious activity. In the UK, under Part 7 of The Proceeds of Crime Act 2002 (POCA) and Terrorism Act 2000 to:

‘submit a SAR in respect of information that comes to them in the course of their business if they know, or suspect or have reasonable grounds for knowing or suspecting, that a person is engaged in, or attempting, money laundering or terrorist financing.’

In the world of money laundering, suspicion is not clearly defined. However, to form a suspicion, we can begin by looking for red flags, such as i) unusual transactions among certain business types, for example; a fruit and vegetable dealing with an auto part dealer, ii) significant cash volumes being transferred without an evident business purpose, iii) an individual opening multiple bank accounts in quick succession and using them to transfer funds on behalf of others, iv) transactions below the threshold value such as £99, £499, £4999 etc. to avoid flagging up on the systems, v) sudden cash deposits/transactional activity in dormant accounts, vi) large international payments that do not match the customer’s profile and are received in someone else’s name and many more.

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On the other hand, it is important to note that having red flags does not necessarily indicate suspicious activity. To determine whether something is suspicious, you must consider how well you know your customer. Do you have all the necessary KYC/KYB details in place when the account is flagged? Have you conducted a customer contact to obtain more information to see if the risk can be mitigated? It's important to review both the crediting and debiting sides of the account and not just focus on the crediting side when panic sets in.

Chapter 10 of the book "The War on Dirty Money," emphasizes that ‘SARs do not directly contribute to the battle against financial crime, but they capture as much as fifty percent of the valuable information. SARs become more powerful when combined with data regarding the crime or the criminal. It should be noted that the culprit of money laundering has already accomplished their task, but as diligent investigators, it is our responsibility to determine the origin of the disguised funds'. For instance; if a restaurant deposits a fixed amount of cash on a weekly or monthly basis, it is worth checking if there are any abnormal spikes in certain months. This could raise suspicions of whether the cash can be accounted for or not. In case of any such anomalies, it is advisable to investigate whether the restaurant is being used as a front by Organized Crime Gangs (OCG).

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Why do you need to file good-quality SARs?

A SAR must be written in a precise and concise manner, with no use of jargon or acronyms that could be complicated. It is crucial to write SARs from the perspective of law enforcement and to follow a predetermined sequence in your report by focusing on the specific underlying crime that is generating illicit finance. Start by explaining the reason for the alert/transaction flagging, and gradually build up your report from there. Follow this pattern – Who – What – When – Where - Why and How. National Crime Agency (NCA) has published guidance on submitting better quality SARs.

It is crucial to always keep in mind that any suspicion must be justified and confidently defended. Suspicions must be reported and documented appropriately, as risks are subject to change and require our continued attention. Being knowledgeable and confident is essential when reporting any suspicions.

How do SARs impact your business?

Training: SARs are usually received by different departments of the bank. However, there seems to be a specific concern regarding the 1LOD. The question that arises is whether the bank's staff in this area needs further training to detect and report suspicious activities. It is essential to investigate whether they are over-raising SARs or neglecting to raise them at all.

Quality Assurance (QA): Let's consider an example. A bank received multiple requests from law enforcement regarding a particular customer. During the review of the account, it was discovered that the customer's wages and benefits were the primary sources of funding. However, the QA team later observed that the investigator had neglected to review the card activity. This resulted in the overlooking of crucial information required by law enforcement. It is pertinent to know if the investigator received feedback regarding this issue and if the QA team maintains a record of common mistakes while conducting feedback sessions for the investigators.

Complaints: In the event that an account has been frozen, it is important to ask open-ended questions to compare and contrast data and responses, thereby ensuring accuracy and thoroughness, keeping in line with Consumer Duty. When a customer is exited and files a complaint, the same scenario will occur. However, banks are striving to do what they deem necessary under the risk-based approach to AML and countering the financing of terrorism (CFT).

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Under-reporting: For example; fraud is a predicate crime for money laundering, however, I have come across a few places where the fraud is reported to the fraud team but a SAR is not logged with the AML team to report the proceeds of crime. Has it been documented anywhere?

Defensive reporting: There is an argument that the increase in SARs is due to banks filing them defensively, which means that they file them even when they don't believe that the flagged activity is linked to any crime. Do you add these examples to your training document and encourage further discussions?

New typologies – Are you currently keeping a record of the glossary codes used in the SAR filing process? Additionally, are you properly categorizing the various typologies and red flag hits that are identified, and using this information to fine-tune your Transaction Monitoring (TM) systems accordingly? Furthermore, when reviewing the alerts generated by the TM systems, are you taking the time to carefully manage any false positives that may have been identified? What specific steps are being taken to minimize the risk of these false positives, and ensure that only legitimate alerts are being acted upon?

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De-risking – It's important to document the reasons behind a customer's exit from your business. This documentation should be reviewed to ensure that it aligns with your organization's risk appetite and makes sense from a Customer Due Diligence (CDD) perspective. Failure to properly document and review these exits could result in legal issues down the line. So, take the time to carefully examine the reasons behind a customer's exit and ensure that everything is in place to avoid any potential legal troubles.

Conclusion

In summary, SARs are an integral tool in combating financial crimes, and their importance cannot be overemphasized. By scrutinizing the data provided in the SARs, banks can identify patterns of suspicious activity and take appropriate measures to mitigate the risk of criminal activity. A well-written SAR could be of tremendous value to law enforcement, assisting them in identifying and preventing illicit finance. Remember that good SARS do save lives.

References

National Crime Agency, Guidance on submitting better quality SARs https://www.nationalcrimeagency.gov.uk/who-we-are/publications/650-guidance-on-submitting-better-quality-suspicious-activity-reports-sars-v9-0/file

Disclaimer – The views expressed in the content are my own and do not necessarily reflect the views of my employer or other associated parties.