Suspicious activity reportsHow to build a better SAR

1 | Suspicious activity reports How to build a better SAR

In 2013, the Securities and Exchange Commission (SEC) sent nearly 8,800 letters to more than 4,600 companies asking over 66,000 questions regarding corporate disclosures the companies had made.1 In addition to seeking more complete disclosure and better adherence to accounting rules in registration statements and periodic reports, the SEC’s letters pointed out jargon and redundancies and suggested where to put commas.

The requests for clarity exemplify challenges facing regulators who must sift through unprecedented volumes of data. While companies reporting to the SEC struggle to make their disclosures clear, financial institutions that are required to file suspicious activity reports (SARs) face even greater stakes. SARs notify law enforcement of potentially criminal activity occurring through the institutions filing the reports.

SARs serve critical functions: They help protect national security by exposing criminal enterprise and terrorist activity. They enable law enforcement to connect independently reported activity and reveal patterns that might otherwise go undetected. Timely, effective SARs safeguard trust in the financial system, protect the reputation of banks and other filers, and may help avoid steep regulatory fines and costly remediation efforts. Nonetheless, financial institutions struggle to produce clearly written reports that contain the basic information for SARs to fulfill their function. This article looks at why it is both critical and challenging to produce high-quality SARs, examines the role of SARs within the context of an anti-money laundering (AML) compliance framework and provides guidance on how to build a better SAR.

In the increasingly complex world of financial services, the need for clear and accurate reporting has never been more pressing.

Introduction

1 “To Be Clear, SEC Reviewers Want Filings in Plain English, Period,” The Wall Street Journal, September 12, 2014.

2Suspicious activity reports H o w t o b u i l d a b e t t e r S A R |

SA R b asicsTh e F inancial C rim es E nf orcem ent N etw ork ( F inC E N ) 2 is resp onsib l e f or col l ecting S AR s and oth er rep orts req uired under th e B ank S ecrecy Act ( B S A) . F inC E N m aintains th e national datab ase of S AR filings to help law enforcement identify, track and interrupt a nearly endless array of criminal activity, from drug and human trafficking, elder abuse and terrorist financing to bribery, fraud, corruption and more. A financial institution is required to file a SAR when it detects a viol ation of f ederal l aw , a susp icious transaction rel ated to m oney l aundering activity, or a viol ation of th e B S A if th e activity in q uestion is at l east $ 5 , 0 0 0 w ith a susp ect or $ 2 5 , 0 0 0 or m ore w ith or w ith out a susp ect. 3 A filer reports activity occurring by, through or ag ainst th e institution if th at activity m eets certain estab l ish ed criteria, specifically that it is a known or suspected criminal violation of l aw , a susp icious transaction rel ating to m oney l aundering activity, a B S A viol ation or a currency transaction th at ap p ears structured to avoid th e $ 1 0 , 0 0 0 th resh ol d f or a currency transaction rep ort and if exam ination into avail ab l e f acts f ail s to p rovide a reasonab l e explanation for the activity. To be clear, a filer’s role is to report, not determ ine concl usivel y, th at a crim e m ay h ave occurred. F il ers h ave 30 calendar days to file a SAR after determining that a transaction is susp icious or th at rep ortab l e activity h as occurred.

2 Th e m ission of F inC E N , a b ureau of th e U . S . D ep artm ent of th e Treasury, is to “ saf e-guard the financial system from illicit use and combat money laundering and p rom ote national security th roug h th e col l ection, anal ysis, and dissem ination of financial intelligence and strategic use of financial authorities,” www.fincen.gov, N ovem b er 2 1 , 2 0 1 5 .

3 M oney services b usinesses are req uired to rep ort susp icious transactions th at are $ 2 , 0 0 0 or m ore.

3 | Suspicious activity reports How to build a better SAR

Expanded whistle-blower protections, along with an industry-wide focus on red flags and enhanced AML training, produce individuals who are incentivized and equipped to identify and escalate potentially suspicious activity.

4Suspicious activity reports H o w t o b u i l d a b e t t e r S A R |

U r g e n c y a n d o b s t a c l e s i n b u i l d i n g a b e t t e r S A R

SAR filings have increased steeply, from 81,000 reports in 1997, the first full year of SAR filings, to 1.25 million 10 years later, and reach ing nearl y 1 . 6 m il l ion in 2 0 1 2 . 4 Th e increase in S AR s is attrib utab l e, in p art, to a b roadening of th e typ es of institutions that are required to file SARs. Initially, only depository institutions had to file, but, over time, SAR filing requirements were extended to m oney services b usinesses ( 2 0 0 2 ) , securities b rok ers and deal ers ( 2 0 0 3 ) , casinos and card cl ub s ( 2 0 0 3 ) , certain insurance com p anies ( 2 0 0 6 ) , and m ortg ag e l enders and b rok ers ( 2 0 1 2 ) . P rop osed l eg isl ation w oul d req uire investm ent advisors to file as well.

Trends in th e industry sug g est S AR s w il l continue to increase in num b er and com p l exity. E xp anded w h istl e- b l ow er p rotections, al ong w ith an industry- w ide focus on red flags and enhanced AML training , p roduce individual s w h o are incentiviz ed and eq uip p ed to identif y and escal ate p otential l y susp icious activity. Further, firms that seek to demonstrate a cul ture of com p l iance b y setting th e ap p rop riate “ tone f rom th e top ” cul tivate a b roader ap p reciation of th e duty to rep ort. Advanced tech nol og ies, evol ving m oney- l aundering sch em es and diverse f orm s of currency and p otential cyb ersecurity b reach es introduce additional complexities for SAR filers. Increased rep orting can l ead to g reater detection of financial crimes, but may also result in S AR q ual ity b eing com p rom ised.

The push to improve SAR quality reflects th e critical rol e S AR s p l ay in identif ying crim e. I n recent years, F inC E N h as p rovided g uidance on h ow to rep ort certain categ ories of activity. F inC E N al so revised th e S AR form to facilitate electronic filing and to stream l ine data th e ag ency col l ects. 5 Th e g uidance and S AR f orm revisions p rom ote consistency in rep orting and are desig ned to aid l aw enf orcem ent’ s ef f ective use of th e reports. Ultimately, however, the SAR filer is resp onsib l e f or m ak ing sure th e inf orm ation reported is sufficiently clear and thorough to com m unicate viol ations of l aw or susp icious activity. As F inC E N h as p ointed out:

Inaccurate information on a SAR, or an incomplete or disorganized narrative, may make further analysis difficult,ifnotimpossible,thereby underminingtheusefulnessofthefiling. In particular, the SAR narrative section iscriticalbecauseitistheonlyarea whereafirmmayexplainwhythe activitywassuspicious.6

Despite challenges filers face in producing consistentl y h ig h - q ual ity S AR s, th e rep orts rem ain a cornerstone of successf ul AM L p rog ram s. I ndeed, an AM L com p l iance p rog ram is incom p l ete w ith out S AR s to com m unicate th e activity th e p rog ram is desig ned to detect.

4 TheSARActivityReview:BytheNumbers, U . S . D ep artm ent of th e Treasury, F inancial C rim es E nf orcem ent N etw ork , I ssue 2 , J une 2 0 0 1 , and I ssue 1 8 , D ecem b er 2 0 1 3 . 5 SAR Stats Technical Bulletin , U . S . D ep artm ent of th e Treasury, F inancial C rim es E nf orcem ent N etw ork , J ul y 2 0 1 4 . F inC E N ’ s ef f orts to stream l ine th e data it col l ects incl ude im p l em enting a sing l e S AR f orm f or use by all filers, which replaces the industry-specific SAR forms historically used for reporting suspicious activity. F inC E N noted th at th e m ove to a sing l e f orm w as desig ned to f acil itate a m ore p ow erf ul data m odel and create tool s needed to anal yz e b roader categ ories of activity m ore ef f ectivel y, incl uding identif ying p atterns and trends across industries.

6 The SAR Activity Review: Trends Tips & Issues, U . S . D ep artm ent of th e Treasury, F inancial C rim es E nf orcem ent N etw ork , I ssue 1 5 , M ay 2 0 0 9 .

5 | Suspicious activity reports H o w t o b u i l d a b e t t e r S A R

H o w t o b u i l d a b e t t e r S A R n a r r a t i v e

The SAR form consists of data fields and th e narrative section, b oth of w h ich need to b e com p l eted f ul l y and accuratel y. E ven th e b est w ritten narrative is inef f ective if th e data fields don’t lead law enforcement to it. The fields provide a place for data such as th e dol l ar val ue of th e activity rep orted, th e filing institution’s identifying information, the type of SAR being filed (e.g., corrected, am ended or a j oint rep ort) , data reg arding th e sub j ect ( i. e. , susp ect) , th e typ e of activity b eing rep orted and oth er b asic inf orm ation. The revised SAR form identifies fields th at are req uired to b e com p l eted w ith an asterisk, and forms cannot be filed without th e req uired inf orm ation. D esp ite F inC E N ’ s m easures to m inim iz e m istak es in th e data fields on the SAR form, SAR narratives often lack sufficient descriptions of the activity b eing rep orted and w h y it is view ed as susp icious.

C l arity is k ey w h en it com es to draf ting an ef f ective S AR narrative. Avoiding errors in filings in the first instance saves time and money, since filers are expected to correct even seem ing l y inconseq uential errors. As FinCEN has noted, a filer may view inf orm ation th at is onl y a sm al l p art of a larger pattern as insignificant, but it m ay b e indisp ensab l e to l aw enf orcem ent p ersonnel w h o seek aw areness of th e entire p attern of activity. 7 With the unified SAR f orm , th e num b er of ch aracters p erm itted in th e narrative section w as reduced f rom 3 9 , 0 0 0 to 1 7 , 0 0 0 . F il ers now h ave l im ited sp ace to com m unicate th e activity and w h y it is susp icious. Th e f ol l ow ing are k ey w ays to m ak e th e m ost of th at sp ace.

• U se tem p l ates w isel y.S AR tem p l ates, w h en used j udiciousl y, promote efficiency and consistency and can m ak e th e draf ting p rocess l ess daunting . As a m eans of q ual ity control , a sol id tem p l ate can h el p k eep an errant narrative on track . Tem p l ates, h ow ever, sh oul d never rep l ace critical th ink ing or caref ul anal ysis of transactions under review . Training to h el p S AR w riters understand th e tool and avoid rote use of tem p l ates th eref ore sh oul d accom p any th e rol l out of new tem p l ates.

F irm s som etim es tink er w ith th e f orm at of th eir tem p l ate b ef ore settl ing on one th ey deem suitab l e. W h il e it is tem p ting to tak e a w el l - w ritten S AR , strip it dow n and use th e sk el eton as a tem p l ate, draf ting a tem p l ate th at can b e used f or dif f erent typ es of transactions req uires draw ing on p rior exam p l es as w el l as l essons l earned. In the event of prior deficiencies in a firm’s susp icious activity rep orting , docum ents th at describ e th ose w eak nesses ( such as sup ervisory l etters or internal audit rep orts) sh oul d b e consul ted b ef ore desig ning a tem p l ate.

S AR tem p l ates sh oul d b e p rep ared b y th ose who are familiar with a firm’s products and services as w el l as reg ul atory exp ectations. Tem p l ates sh oul d b e p rep ared w ith an aw areness of th e m ost com m onl y rep orted typ e of activity at a g iven institution. F or exam p l e, if th e m aj ority of S AR s an institution files relate to currency transaction reporting, th e tem p l ate m ay incl ude l ang uag e th at identifies suspected currency transaction reporting evasion. If an institution files many S AR s, it m ay b e advisab l e to h ave several dif f erent tem p l ates to describ e dif f erent patterns of activity (e.g., suspected Office of F oreig n Assets C ontrol ( O F AC ) sanctions evasion or structuring transactions to avoid detection rep orting req uirem ents) .

Tem p l ates sh oul d incl ude an introduction, b ody and concl usion, h ow ever b rief . E ach tem p l ate sh oul d contain standard introductory l ang uag e f or accurate identification of the filing institution, esp ecial l y w h en an institution rel ies on a centralized SAR filing function to report on b eh al f of m ul tip l e sub sidiaries and b ranch es. A usef ul tem p l ate p rovides th e w riter w ith op tions and m ay of f er al ternative inf orm ation in b rack ets to p rom ote consistency across rep orts. I nstances th at req uire escal ation should be flagged in templates. For example, if terrorist activity is susp ected, th e tem p l ate w oul d identif y desig nated individual s to contact w ith in th e org aniz ation.

7 SAR Activity Tips, Trends, Reviews, F inancial C rim es E nf orcem ent N etw ork , I ssue 9 , O ctob er 2 0 0 5 .

Tem p l ates encourag e th e consistent p resentation of inf orm ation in a S AR narrative. I n th is w ay, th ey h el p S AR users q uick l y l ocate rel evant inf orm ation. Th is is esp ecial l y usef ul w h en institutions p erf orm l ook - b ack s th at invol ve review and anal ysis of m ul tip l e p rior S AR s, or w h en l aw enf orcem ent seek s to cul l data f rom rep orts b y various institutions to identif y a p attern of activity across institutions. Tem p l ates al so serve oth er f unctions, such as p rom oting consistent nam ing conventions. W h en used correctl y, tem p l ates h el p th e w riter describ e th e activity b eing rep orted and ef f ectivel y com m unicate w h y it is susp icious.

• Tak e a tip f rom j ournal ism .S AR w riters can b orrow several tip s f rom j ournal ism , such as rem em b ering to answ er th e b asic w h o, w h at, w h ere, w h en, w h y and h ow q uestions. Additional l y, S AR w riters, l ik e g ood j ournal ists, sh oul d w rite in l ang uag e th at is easy to understand and f ree of j arg on. A S AR w riter can com m unicate com p l ex inf orm ation b y p resenting it in b asic term s, p roviding b ack g round and exp l anation as necessary. S AR w riters al so sh oul d avoid rep etition w ith in a narrative, saving tim e f or b usy readers and m inim iz ing th e l ik el ih ood of errors. Th ese instructions sh oul d b e incl uded in S AR training and em b edded into q ual ity control p rocesses and tool s l ik e q ual ity control ch eck l ists. S im il ar to j ournal ists and th eir team of editors, S AR w riters sh oul d b e trained to th oroug h l y edit draf ts b ef ore sub m itting th em f or review , and a team of w el l - trained q ual ity assurance review ers sh oul d f ul l y review and, if necessary, edit th e work before a team leader approves the SAR for filing.

• R em em b er your p urp ose and audience.S ince S AR s enab l e l aw enf orcem ent to “ connect th e dots, ” a successf ul narrative w il l incl ude easil y search ab l e data and k ey w ords to h el p l aw enf orcem ent draw connections b etw een activities th at m ig h t not b e ob viousl y rel ated. F or th is reason, th e correct sp el l ing of nam es, al iases and oth er inf orm ation is vital l y im p ortant. L ik ew ise, search ab l e inf orm ation, such as cel l p h one num b ers, em ail addresses and w eb sites, w h ich m ay p rovide a connection b etw een seem ing l y unrel ated individual s and entities, p rovides l aw enforcement with critical links. To maximize searchability, filers sh oul d ch eck w ith F inC E N f or g uidance on h ow b est to p resent such inf orm ation ( e. g . , excl uding dash es in p h one num b ers) .

U sed j udiciousl y, tem p l ates h el p promote consistency and efficiency.

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7 | Suspicious activity reports H o w t o b u i l d a b e t t e r S A R

G e t t i n g t h e m o s t f r o m p r o j e c t p l a n n i n g , t e a m m a n a g e m e n t a n d q u a l i t y a s s u r a n c e

To p roduce consistent and ef f ective S AR s, a firm needs the proper organizational inf rastructure. Th e p il l ars of a sol id S AR p rog ram incl ude exp erienced l eadersh ip to manage the SAR program and qualified anal ysts and S AR w riters, cl ear p ol icies and procedures that capture a firm’s approach to SAR filing, up-to-date training tailored to the filer’s risk profile, and testing and review . Tog eth er w ith caref ul p l anning , th oug h tf ul team m anag em ent and rob ust q ual ity control s, th ese p il l ars op tim iz e S AR p roduction.

• An effective and qualified l eader to p rovide g uidance to th e team and serve as a p oint p erson f or com m unications w ith oth er institutions and l aw enf orcem ent, as necessary

This person should have sufficient SAR w riting exp erience to l ead a team of S AR w riters and th e auth ority to m ak e im p ortant decisions, such as w h en to rep ort activity directl y to l aw enf orcem ent and not w ait f or a S AR to b e f orm al iz ed ( e. g . , in th e instance of suspected terrorist financing and oth er instances as determ ined internal l y) . Th is l eader can b e resp onsib l e f or k eep ing th e team inf orm ed of rel evant reg ul atory devel op m ents. F or exam p l e, som etim es F inC E N g uidance cal l s f or p articul ar l ang uag e to use to h el p l aw enf orcem ent conduct targ eted search es ( e. g . , f or el der financial abuse, foreign corruption and other specific activity). An effective team leader w il l h ig h l ig h t reg ul atory g uidance f or team m em b ers and incorp orate it into w ritten p rocedures as ap p rop riate.

• I nternal p rocedures to p rovide confidentiality and consistent rep orting and h andl ing of sensitive sub j ects

E stab l ish ed w ritten p rocedures f acil itate onb oarding new m em b ers of th e S AR team and can serve as a resource f or S AR w riters in th eir dail y activities. Th e p rocess of w riting , review ing and up dating p rocedures h el p s m anag em ent el ucidate areas of inconsistent rep orting f rom p erson to p erson. I n addition, docum ented p rocedures can b e used to h el p stak eh ol ders understand th e f unction of a S AR w riting team . I nternal w ritten p rocedures h el p estab l ish an institution’ s standards of q ual ity and exp ectations reg arding h ow to h andl e sensitive m atters such as activity th at m ay p ose a rep utational risk to th e filer. Procedures promote consistency in the treatm ent of certain m atters and h andl ing of unusual circum stances, such as instances in w h ich an internal p arty w h o norm al l y w oul d be apprised of a SAR filing is a possible SAR sub j ect.

• R ob ust training of th e p ersons resp onsib l e f or disp ositioning incident rep orts and draf ting S AR s

A S AR training p rog ram consists of g eneral AML training as well as job-specific training f or al l w h o p rep are and escal ate incident rep orts and th ose w h o draf t and ap p rove S AR s. C entral to th e training are th e w ritten p rocedures th at g uide susp icious activity rep orting activities. B ef ore any w ork invol ving S AR s is started, each S AR team m em b er m ust b e educated ab out th e confidentiality surrounding the SAR process. Th e team m ust m ak e certain th at each new m em b er cl earl y understands th at “ tip p ing of f ” th e sub j ect of a S AR is p roh ib ited and th at S AR - rel ated com m unications are h el d strictl y on a need- to- k now b asis.

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Training h el p s increase accountab il ity and individual resp onsib il ity, esp ecial l y w h en attendees attest to th eir p articip ation.

Training sh oul d l everag e existing m aterial s f rom b oth internal sources, such as m inutes f rom S AR review com m ittees and audit rep orts, and external sources, l ik e industry p ub l ications th at identif y l eading p ractices. Training m aterial s m ay incl ude a sam p l e q ual ity control ch eck l ist tail ored to recent reg ul atory g uidance or ob servations as w el l as th e p articul ar p roducts, services and g eog rap h ies th at p ose the greatest risks. Training can draw on data gathered from SARs filed to describe patterns and risky transactions in view of the filer’s risk profile, with careful attention paid to confidentiality.

As w ith oth er AM L - rel ated training , a record sh oul d b e m aintained th at notes w h o attends th e training , w h ich m aterial is covered and th e f req uency w ith w h ich such training is g iven. Training h el p s increase accountab il ity and individual resp onsib il ity, esp ecial l y w h en attendees attest to th eir p articip ation. S uch a record, al ong w ith rel evant and up - to- date training m aterial s, is ef f ective in dem onstrating to reg ul ators th at S AR rep orting is tak en seriousl y and control s are in p l ace f or an ef f ective p rog ram .

• Q ual ity assurance f or ef f ective S AR sE f f ective q ual ity assurance rel ies on op en- l oop com m unication th roug h out th e S AR decision and w riting p rocess. R isk s arise w h en team m em b ers f eel too inh ib ited to ask q uestions. Th e ideal environm ent f or a S AR w riting team , th eref ore, is one of f ree and op en com m unication b etw een individual m em b ers and th e team as a w h ol e.

Q ual ity control s can b e tail ored to th e siz e and exp erience of th e team , th e nature of th e w ork ( e. g . , b usiness as usual or a l ook -b ack setting ) and th e risk p osed b y th e activities under review . F or exam p l e, a sm al l team starting a targ eted l ook - b ack p erf orm ed under reg ul atory review m ay req uire a f ul l q ual ity assurance p rocess th at incl udes second- l evel review of every S AR disp osition and com p l eted S AR f orm . As th e team l earns m ore ab out th e accounts under review and th e transactions b eing anal yz ed, and as th e team and team l eadersh ip identif y risk s in th e underl ying activity and p ossib l y in th e institution’ s p rocesses, a targ eted q ual ity assurance p rocess m ay b e instituted as p art of a b roader risk - b ased ap p roach .

9 | Suspicious activity reports How to build a better SAR

10Suspicious activity reports How to build a better SAR |

Steve Beattie Principal, Financial Services Ernst & Young LLP steven.beattie@ey.com +1 212 773 6378

Katherine Johnson Manager, Financial Services Ernst & Young LLP katherine.johnson@ey.com +1 212 773 3105

Don Johnson Principal, Financial Services Ernst & Young LLP donald.johnson@ey.com +1 703 747 0562

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ConclusionCareful planning, preparation and management are all key tools to building a better SAR. The time and resources required are a small investment compared with the return. Quality SARs help protect an institution’s integrity, reputation and assets and play an integral role in assisting law enforcement in the fight against money laundering and terrorism financing.

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