Sources For Identifying Suspicious Activity

Sources for identifying suspicious activity can be regular controls, name screening, look back exercises, and transaction monitoring.

Institutions are required to monitor the huge amount of transactions each day.  Monitoring systems are the main source for SARs simply due to the volume of cases those systems generate. Still, the conversion rate from the alerts to SARs is very low.

Identifying Suspicious Activity

Sources For Identifying Suspicious Activity

SARs are adverse media, law enforcement requests, and third parties.  Let’s look at each one briefly.  Adverse media is becoming an important source to investigate.  Adverse media can be regarding one client or something like the Panama Paper – which led to huge investigations.  Numerous SARs were filed after the Panama Papers publication. 

Another source of potential adverse media is reporters asking financial institutions for background information ahead of publications.  This can be serious and should initiate an investigation.  Law enforcement requests like subpoenas or requests for information can lead to SARs and help with ongoing law enforcement investigations.  Third parties, like whistleblowers, a complaint from a person reporting to be the victim of a crime, or another financial institution asking for transaction information can also be sources for a SAR.

FinCen requires financial institutions to identify the five essential elements of the reported suspicious activity on their SAR forms:

  • Who is carrying out the suspicious activity?
  • What tools or mechanisms are employed?
  • When did the suspicious activity occur?
  • Where did it happen?
  • Why is the filer suspicious of the activity?

Furthermore, the method of operation (or, how is the activity carried out?) must be included in the report.

The extreme confidentiality required for such reporting is linked to the effectiveness of a SAR report. The person under investigation is never informed of the impending report. Similarly, any discussion with third parties, such as media companies, is considered an unauthorized disclosure and is a federal criminal offense.

When a bank or financial institution files a SAR, they must take significant steps to ensure that the information provided is reviewed at multiple stages by financial investigators, company management, and attorneys before the SAR is finalized. It is critical to maintain strict confidentiality. Because of this. There are special protections for people who report suspicious activity, whether as part of a company or on their own.

Importance Of Identifying Suspicious Activity And SAR

SARs are part of the anti-money laundering statutes and regulations in the United States, which have become much stricter since 2001. As part of an effort to combat global and domestic terrorism, the Patriot Act significantly expanded SAR requirements. The SAR and the investigation that follows aim to identify customers who are involved in money laundering, fraud, or terrorist funding.

Failure to disclose to the customer or to file a SAR can result in severe penalties for both individuals and institutions. Law enforcement can use SARs to detect patterns and trends in organized and personal financial crimes. This allows them to anticipate criminal and fraudulent behavior and intervene before it becomes a problem. The Anti-Money Laundering Act of 2020 significantly expanded the requirements under anti-money laundering statutes, effective January 1, 2021.

In the United States, financial institutions are required to file a SAR if they suspect an employee or customer of engaging in insider trading. A SAR is also required if a financial institution discovers evidence of computer hacking or a consumer running an unlicensed money services business. SAR filings must be kept for a period of five years from the date of filing. In a number of cases, SARs have allowed law enforcement to launch or pursue major investigations into money laundering, terrorist financing, and other criminal cases.

SAR reports are required by a wide range of financial industries, including banks and credit unions, stock and mutual fund brokers, and various money service businesses (check cashing companies, money order providers, etc.) Casinos and card clubs, precious metals or gems dealers, insurance companies, and mortgage lenders, on the other hand, are all subject to the BSA’s rules. If there is a possibility of money laundering, tax evasion, or criminal financing in the institution’s day-to-day operations, the organization and its employees must be aware of the rules and regulations governing suspicious activity reports.

Final Thoughts

A suspicious transaction is one that causes a reporting entity to be concerned or suspicious about the transaction due to its unusual nature or circumstances, or the person or group of people involved in the transaction. To identify changes in the respondent’s transaction risk profile, reporting entities assess suspicion using a risk-based approach for customer due diligence, real-time payment screening, transaction monitoring, and behavioral monitoring.

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