Financial institutions today face scrutiny at an unprecedented level and may be subject to civil and criminal penalties for any wrongdoing, involvement in money laundering schemes and terrorism financing.
As a result, FIs are rigorously searching and vetting their data haystacks to ensure they don’t onboard clients with tinted monies or process transactions with the intent of evading or circumventing sanctions.
To do this effectively, reporting entities have a moral and regulatory obligation to file suspicious activity reports (SAR) with the regulator or the financial intelligence unit (FIU) whenever money laundering/terrorism financing red flags have been identified in tandem with certain suspicious transactions.
Given the importance of preparing and filing quality SARs and their usefulness in describing information about specific irregular activity for possible law enforcement investigation, what are the main components of a SAR and the investigation-driven data it must contain?
A SAR narrative should be clear, informative and also demonstrate knowledge of the subject matter.
A recommended checklist is answering the ‘five Ws and How’ – “who, what, where, when, why, and how.”
Nick Bonnema, a senior specialist and compliance team member at Wipfli LLP, expands on how the narrative needs to address the five Ws (and How) to best allow the investigator to understand the situation.
He says, for example: “Who conducted the activity? In addition to describing the suspects, describe any additional details not provided elsewhere in the SAR.” and “What specifically led to the SAR? Describe the aberrant transactions, what instruments were involved, and the activities that raised suspicions.”
He aso highlights points like “How did the activity occur? Describe how the suspect’s transaction or pattern was completed.’’
Answering the “How” becomes easier if the reporting entity can peg the suspicious account to the specific flagged transaction; for instance, a cross-border wire payment received from high-risk jurisdiction in favor of a client who immediately makes several cash or check withdrawals.
In addition, I would recommend some guidelines for compliance officers and reporting entities to embrace in order to fortify their SAR filing mechanism:
- Effective communication and reciprocity between MLRO and senior management should be given enough space in financial institutions wishing to stay ahead of the AML/CFT curve.This kind of dialogue will not only ensure good handling of Enterprise Risk Management (ERM) and Financial Crime Compliance (FCC), but will also keep both parties rowing in the same direction towards fortifying the SAR filing process and engaging in regular discussions and feedback about fate of previous SARs submitted to competent authorities.In today’s complex compliance environment conducive to a constant flow of Legs & Regs and amidst this unprecedented need for professional interdependencies under the same FI roof, siloed thinking is no longer a panacea.
- It is also important to have a balance between the risk-based and rule-based approach when preparing a SAR.Automated AML/CFT dashboards which display transaction alerts according to pre-designed rules and scenarios need not necessarily indicate that repetitive rule-based alerts qualify for SAR filing.As MLROs, we should rather take a deeper dive when managing alerts by employing the principles of risk-based approach which allows us to accurately assess the residual money laundering risk as well as study the account pattern of the customer and consequently, decide whether that pattern can be attributable to a predicate offense that must be reported for proper financial crime investigation or prosecution.
- There is also a need to link a current SAR with any previously reported one (if any). Doing this linkage my unearth new suspicious findings in your customer database.By way of example, this could happen when the FI discovers that a suspicious customer – who was reported to competent authorities last year for possible involvement in the Panama Papers – appears later on to have an accomplice customer, yet not captured by the AML radar at that time.Linking the present STR with the previous one could provide new financial leads to FIUs and law enforcement thus helping in the crackdown on criminal rings and bad actors.
- Avoid filing defensive SARs. Filing a SAR defensively can be an act of simply giving up and admitting that there is insufficient information about the customer.FIUs don’t favor such a practice and always look forward to receiving SARs which provide concrete financial leads they can build upon in their investigative process.
- Re-check the Ultimate Beneficial Owner (UBO). The identity of UBOs (natural persons who either control or own the account) may change throughout the business relationship and need not remain the same since the initial on-boarding stage, especially when stakes in a company shift from one shareholder to another.
The importance of SARs should not be underestimated. Karen M.Thomas, senior executive vice president for the Independent Community Bankers of America (ICBA), has said: “Our position has always been that the focus should be on suspicious activities. Rely on the banks to use their knowledge and expertise when they see something suspicious to report it and file a SAR.”
Shawki Ahwash , CAMS, is the designated MLRO and Head of AML/CFT and Sanctions Division at North Africa Commercial Bank sal, Beirut, Lebanon. He holds a Master’s Degree from the American University of Beirut and has also been a speaker with various banking and compliance organisations.
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