Suspicious Activity Reporting: 6 Best Practices to Follow

February 9, 2022

In response to money laundering (and other issues) occurring around the globe, key regulators, such as FinCEN and the IRS, have developed a wide variety of tools for financial institutions to work with. Most notably, American financial institutions are required to file a suspicious activity report (SAR) whenever there is evidence of possible money laundering or other suspicious activities.

Though money laundering is still ubiquitous, there are several documented instances of SARs being used to combat illicit activity. This guide will discuss the most important things you need to know about SARs, including the best practices financial institutions should observe, and help you fit it within your overall fraud and AML program.

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Suspicious Activity Reporting Overview

Here's what you need to know about suspicious activity reporting in the United States:

What is a Suspicious Activity Report (SAR)?

A suspicious activity report (SAR) is a tool that can be used by financial institutions to help monitor, report, and control almost any kind of suspicious activity. SARs can be used for various purposes but frequently help report potential money laundering and other illegal financial operations.

In the United States, the concept of the suspicious activity report was first introduced with the Bank Secrecy Act of 1970. According to 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 became the standard protocol used by American financial institutions to report any suspicious activity. As time has gone on, the possible uses of these reports have expanded, especially as banking has become increasingly global and digital.

What Triggers a Suspicious Activity Report?

The Federal Deposit Insurance Corporation (FDIC) has identified several possible thresholds that can trigger the need for filing a SAR. According to the FDIC, "The U.S. Department of the Treasury's financial record-keeping regulations require federally supervised banking organizations to file a SAR they detect a known or suspected violation of federal law meeting applicable reporting criteria."

As the FDIC helps explain, these thresholds can include:

  • Insider (within the financial institution) abuses involving any amount of money.
  • Transactions greater than $5,000 in which there is an identifiable suspect of a federal crime.
  • Transactions greater than $25,000, regardless of whether a suspect has been identified.
  • Regardless of the dollar amount, situations linked to terrorism, identity theft, "computer intrusions," and other exceptional circumstances.

As soon as any significant red flags are raised, financial institutions are required by law to file a SAR within 30 days.

What Happens After a Suspicious Activity Report is Filed?

Several types of financial entities might be required to file a SAR, including securities brokers, banks, money exchanges, casinos, and other financial institutions. Once these organizations have filed a SAR, as is required by law, federal authorities will utilize these reports as they see fit.

As ICIJ further explains, "FinCEN shares SARs with law enforcement authorities including the Federal Bureau of Investigation and U.S. Immigration and Customs Enforcement." However, it is essential to note that—due to banking privacy laws—these reports "are used to detect crimes, but cannot be used as direct evidence to prove legal cases."

Therefore, if the investigating authority believes they will need to obtain any additional records or pieces of information from the financial institution, they will need to escalate the investigation and likely need to get a subpoena.

SAR Regulations and Fines to be Aware Of

Typically, the deadline for filing a SAR is 30 days—in certain situations, such as when the financial institution needs to confirm a suspect, the deadline might be extended to 60 days. However, if the institution has failed to meet these deadlines, it may be subject to fines from the government.

According to the Financial Crimes Enforcement Network (FinCEN), civil and criminal penalties may apply. In terms of civil penalties, "Any person who fails to comply with the registration requirements be liable for a civil penalty of up to $5,000 for each violation." Regarding criminal penalties, "it is unlawful to do business without complying with the registration requirements. A criminal fine and/or imprisonment for up to 5 years may be imposed."

In other words, SAR filing is something that all financial institutions need to take seriously.

Suspicious Activity Report Examples: Notable Cases

Since SAR regulations were first introduced in the 1970s (and further institutionalized in 1996), there have been many instances where these filings resulted in the successful prosecution of various criminal enterprises. For example, according to FinCEN, in 2005, "BSA documents lead to repatriation and seizure of over $9 million generated by illegal internet pharmacy."

Additionally, FinCEN also identified a case that resulted in $8.9 million being seized by state and federal agencies who were "brought together by [the] Gateway Alert Match Program." In total, millions of dollars are collected due to SAR filings every year.

6 Best Practices for Identifying and Reporting Suspicious Activity

Here are six of the most effective ways financial institutions can improve their ongoing SAR practices:

1. Use Transaction Monitoring Software to Flag Suspicious Activity

The nation's largest financial institutions process millions of transactions every day. However, even small and medium institutions process thousands of transactions every day, and it will be crucial to find ways to track these transactions as they unfold efficiently.

By using transaction monitoring software to flag suspicious behavior, financial institutions can easily monitor all incoming and outgoing cash flows and quickly respond to any potential signs of illegal activity. Furthermore, these platforms also monitor for possible signs of fraud and other systematic risks, making it possible for financial institutions to act before the effects of these transactions can compound.

2. Educate Your Staff About SAR Rules and Regulations

While having effective software will undoubtedly be a step in the right direction, it is also critical to ensure that all account-facing employees are aware of SAR protocols, regulations, and common risks. The more people on a team are aware of these red flags (such as signs of money laundering, unusual transactions, substantial payments), the easier it will be to promptly spot and report suspicious activity.

3. Report Potential Suspicious Activity as Soon as Possible

Because there is a 30-day window (sometimes a 60-day window) before suspicious activity needs to be reported, it can be easy for financial institutions to wait four weeks or so before filing any paperwork. However, while this practice is something an institution can probably temporarily "get away with," it will likely create problems further down the road.

Whether the SAR filing is calling for additional details, the institution needs to launch an investigation, or the volume of reports required has significantly increased, quite a few external events can cause delays in the process. Therefore, financial institutions should file all SARs as soon as suspicious activity has been flagged to minimize the likelihood of facing future fines. On that note, having an effective system for case management that includes automated SAR filing and audit trails is beneficial for staying organized and keeping track of reporting timelines.

4. Record Large, International, and Generally Unusual Transaction

There are quite a few types of transactions that can indicate suspicious activity—however, there are still a few telltale signs that this activity has emerged. A few of the most common signs include extensive (more than $10,000) deposits, transactions that are unrelated to the underlying business, and international transactions. Actively recording and paying particular attention to these transactions will make it easier for a financial institution to file a report once required to do so by law.

5. Include a Clear, Chronological Narrative in the Report

For a SAR filing to be helpful (and to reduce the likelihood of needing to create another report), financial institutions must make these reports concise, clear, and chronological. A typical SAR filing should quickly answer a few questions: what suspicious activity has occurred? When did it happen? What parties were involved with these transactions? Why was it suspicious?

The easier it is to answer these questions, the more effective a SAR filing will be, which is why having a process for case management to keep track of the investigation details is critical.

6. Understand Your Dual Responsibilities

Financial institutions need to be accountable to multiple parties, including the customers who bank with them and the government agencies that regulate (and possibly prosecute) them. In some cases, especially those involving potential criminal activity, this can create a conflict of interest.

As a result, these financial institutions effectively have "dual responsibilities." Maintaining strong privacy standards will improve these institutions' relationships with their customers. At the same time, cooperating with investigative agencies and submitting SAR will enhance the ties these institutions have with the government. Ultimately, finding ways to balance these "competing" responsibilities will benefit all parties involved.

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Everything You Need to Know About Suspicious Activity Reporting: Key Takeaways

The need to implement SAR best practices is not something any financial institution can ignore. On the contrary, these reports are crucial for combatting money laundering, financial fraud, and other types of financial crimes.

To sum it all up,

  • Financial institutions are required, by law, to file a SAR report whenever signs of suspicious activity have emerged.
  • Failing to file these reports can result in steep fines and even criminal penalties for the underlying financial institution.
  • There are many different types of software available to help identify suspicious financial activity. Investing in a robust, flexible system early on is paramount for a successful BSA/AML program.
  • Financial institutions can protect their customers, cooperate with the government, and maintain their organizational integrity by implementing the best practices mentioned above and improving SAR filing.

If you are looking for more information regarding Unit21’s transaction monitoring and case management capabilities to support SAR filings, get in touch to request a demo today.

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