Key authorities like FinCEN and the IRS have created a wide range of measures for financial institutions to use in response to money laundering (and other challenges) that are present all over the world. The requirement for American financial institutions to submit a suspicious activity report (SAR) whenever there is potential evidence of money laundering or other suspicious conduct is perhaps the most notable.
Although money laundering is still common, SARs have been utilized to stop illegal conduct in some reported cases. The most crucial SAR-related information, including the best practices financial institutions ought to follow, will be covered in this guide.
What is a Suspicious Activity Report (SAR)?
A suspicious activity report (SAR) is a tool that financial institutions can use to monitor, record, and control nearly any type of suspicious activity. One common application of SARs is to alert authorities to possible cases of money laundering and other forms of unlawful financial activity.
Almost any unusual activity can be covered by SARs. Activities that raise the possibility that the account holder is trying to conceal anything or carrying out an unlawful transaction may be included in the SAR.
Understanding a Suspicious Activity Report (SAR)
The Bank Secrecy Act of 1970 was the first piece of legislation in the United States to introduce the concept of a suspicious activity report. As stated by the IRS, “The purpose of the Suspicious Activity Report is to report known or suspected violations of law or suspicious activity observed by financial institutions subject to the regulations of the Bank Secrecy Act (BSA).”
By 1996, the SAR had become the standard process for financial institutions in the United States to report any suspicious behavior. As time has progressed, the potential applications of these reports have broadened, particularly as globalization and the digitization of banking have increased.
When a financial institution notices questionable behavior in an account, it files a SAR. The report is subsequently sent to the Financial Crimes Enforcement Network, or FinCEN, which will conduct an investigation into the occurrence. FinCEN is a section of the United States Treasury.
Any account activity that the financial institution believes to be suspicious or unusual must be reported in writing within 30 days. A 60-day extension may be requested if more information needs to be gathered. The institution doesn't require evidence that a crime has been committed. A SAR about a client's account is not disclosed to the client.
FinCen mandates that the suspicious activity reports (SARs) submitted by financial institutions include the following six key components:
- Who is conducting the suspicious activity?
- What instruments or mechanisms are being used?
- When did the suspicious activity take place?
- Where did it take place?
- Why does the filer think the activity is suspicious?
- How or by what method of operation did the suspicious activity take place?
What Triggers a Suspicious Activity Report?
Several potential thresholds have been recognized by the Federal Deposit Insurance Corporation (FDIC) as ones that may necessitate submitting a SAR. The U.S. Department of the Treasury's financial record-keeping laws mandate that federally supervised banking organizations submit a SAR if they find a known or suspected violation of federal law that satisfies the appropriate reporting requirements, according to the FDIC.
These thresholds can include the following, as the FDIC explains:
- Abuse by insiders (inside the financial institution) involves any kind of financial gain.
- Transactions more than $5,000 in which a suspect in a federal crime is readily recognizable.
- Transactions of more than $25,000, whether or not a suspect has been found.
- Situations related to terrorism, impersonation, money laundering, cyber hacks, and other unusual circumstances, regardless of the monetary value.
What Happens After a SAR is Filed?
Securities brokers, banks, currency exchanges, gambling establishments, and other financial institutions might all need to submit a SAR. Federal authorities will make use of these reports as they see fit after these entities have complied with the law's requirement to file a SAR.
SARs are shared by FinCEN with law enforcement agencies such as the Federal Bureau of Investigation and US Immigration and Customs Enforcement. However, because of banking privacy rules, these reports "are utilized to detect crimes but cannot be used as direct evidence to prove judicial cases."
As a result, if the investigating body feels it will need to seek further records or information from the financial institution, the inquiry must be escalated and a subpoena issued.
Guidelines for Detecting and Reporting Suspicious Activity
The following six recommendations can help financial institutions enhance their current SAR procedures:
1. Use Transaction Monitoring Software to Flag Suspicious Activity
Every day, the biggest financial institutions handle millions of transactions. However, even small and medium-sized institutions handle hundreds of transactions per day. Therefore, it will be essential to develop methods for effectively tracking these transactions as they progress.
Financial institutions may easily monitor all incoming and leaving cash flows and rapidly react to any potential signals of illicit conduct by employing transaction monitoring software to highlight suspicious behavior. These platforms also keep an eye out for potential fraud indicators and other systemic issues, enabling financial institutions to take action before the repercussions of these transactions compound.
2. Immediately Report Potential Suspicious Activity
Because there is a 30-day (occasionally 60-day) period before suspicious activity must be reported, financial institutions may choose to wait four weeks or so before completing any documentation. However, while an institution may be able to follow this approach for the time being, it will almost certainly cause problems in the future.
Quite a few external events can slow down the procedure; whether the SAR filing requires more information, the institution needs to start an inquiry, or the number of reports required has dramatically increased. To reduce the chance of receiving further fines, financial institutions should submit all SARs as soon as suspicious behavior has been identified.
3. Record Large and Unusual Transactions
There are many different transactions that may be signals of suspicious activity, but there are also a few obvious indicators that this activity has started. Extensive deposits, transactions unrelated to the underlying organization, and international transactions are a few of the most typical indicators. It will be simpler for a financial institution to submit a report once one is required by law if it actively records and pays close attention to these transactions.
4. Implement a Detailed Narrative into the Report
Financial institutions need to make these reports clear, transparent, and chronological in order for a SAR filing to be helpful and to lessen the possibility of needing to create another report. What suspicious conduct has taken place? - to name just a few, should be properly addressed in a SAR filing. What time did it occur? Who were the parties to these transactions? What made it suspicious?
A SAR filing will be more productive if the answers to these questions are clear and simple.
5. Educate Your Staff About the Rules and Regulations of SAR
While excellent software will surely help, it is also vital to ensure that all account-facing staff are informed of SAR rules, regulations, and common risks. The more members of a team who are aware of these red flags, such as signals of money laundering, irregular transactions, and large payments, the easier it will be to detect and report suspicious activity.
6. Understand Your Responsibilities
Financial institutions need to be accountable to more than just the people who bank with them. They also need to be answerable to the government agencies that oversee and maybe even prosecute them. This can be a problem in some situations, especially when there is a chance of criminal activity.
Therefore, these financial organizations do, in fact, have a number of responsibilities. The connections between these institutions and their clients will improve if strict privacy requirements are maintained. In addition, working with law enforcement and submitting SAR will strengthen these organizations' connections with the government. All parties concerned will ultimately gain from finding a solution to balance these responsibilities.
Importance of SARs
Identification of clients who are involved in money laundering, fraud, or terrorism funding is the aim of the SAR and the investigation that follows.
The failure to file a SAR or disclose it to the customer may result in very harsh penalties for both people and institutions. Law enforcement can identify patterns and trends in organized and individual financial crimes using SARs. In this manner, they are able to foresee criminal and fraudulent activity and stop it before it gets out of hand. The Anti-Money Laundering Act of 2020, which went into effect on January 1, 2021, dramatically increased the obligations under the anti-money laundering statutes once more.
Financial institutions in the US are required to submit a SAR if they believe a client or employee has engaged in insider trading. If a financial institution notices proof of cybercrime or a customer is running an unauthorized money services business, a SAR is also necessary. SAR filings must be retained for five years following the filing date.
SARs have frequently allowed law enforcement officials to launch or continue in-depth inquiries into cases involving money laundering, terrorist funding, and other types of criminal activity.
Patterns of Common Suspicious Activity
The Financial Crimes Enforcement Network has observed a lot of regular patterns of suspicious activity, including the following:
- Transactions that happen in quick bursts, especially in accounts that aren't being used.
- Deposits made in an oddly blended manner into a business account.
- Multiple accounts, banks, and parties are involved in an unusually complex series of transactions.
- Transactions that are atypical compared to the volume of similarly situated businesses operating locally or that are not consistent with the claimed business type.
- Unusual high volumes or amounts of wire transfers, or recurring wire transfer patterns.
- Transactions or activity levels that are not compatible with the intended use of the account or the level of activity that was specified by the account holder when the account was opened.
- Transactions that try to get around the need for reporting and recordkeeping.
- Bulk payments in cash and monetary instruments.
- Financial nexuses that are unusual for particular business types.
- Lack of proof that many of the parties to the transaction engaged in legal commercial activities, or perhaps any company operations at all.
Any financial organization cannot afford to disregard the requirement to apply SAR guidelines. These reports are critical in combating money laundering, financial fraud, and other sorts of financial crimes.
If you'd like to learn more about Flagright's transaction monitoring and case management features to support SAR filings, contact us to schedule a demo.