Suspicious Activity Reports

Filing SARs in the United States

A Suspicious Activity Report (SAR) in the United States is a document that financial institutions and certain other entities are required to file with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Department of the Treasury. The purpose of SARs is to report any suspicious transactions or activities that might indicate money laundering, fraud, or other financial crimes.

Financial institutions, including banks, credit unions, and money services businesses, are mandated by law to file SARs when they detect transactions or patterns of behavior that raise suspicions about possible criminal activities. SARs provide a mechanism for these entities to share information with law enforcement and other regulatory agencies to combat money laundering, terrorist financing, and other financial crimes. In recent years, greater emphasis (and enforcement) has been directed towards crypto-related companies – whether licensed centralized exchanges or FinCEN-registered money service businesses operating in the peer-to-peer trading vertical.

Basic SARs Requirements

The Financial Crimes Enforcement Network (FinCEN) plays a crucial role in promoting awareness among financial institutions regarding potential violations of Anti-Money Laundering (AML) regulations, aligning with the requirements of the Bank Secrecy Act (BSA) in the United States. In the U.S., Suspicious Activity Reports (SARs) are mandated to be submitted when a suspicious transaction involves an amount exceeding $5,000. Financial entities must file a SAR within 30 days of detecting initial facts that suggest a basis for reporting. The BSA encourages designated officers to submit these reports through online channels. Additionally, the U.S. stipulates that SARs must be retained for a period of five years.

It’s worth noting that the information contained in SARs is confidential, and financial institutions are protected from legal liability for reporting suspicions in good faith. This helps to encourage reporting without fear of reprisal. SARs play a crucial role in the overall framework for combating financial crimes and maintaining the security of the U.S. financial system.

SARs Components

Typically, a Suspicious Activity Report (SAR) includes comprehensive details about the company or individual implicated in the suspicious incident:

  1. Full legal name, registered number, registered address, designation, trading name, tax number
  2. Beneficial ownership information
  3. Company activity type
  4. Contacts for the Compliance Officer
  5. Type of suspicious transaction (e.g., currency exchange, cash conversion, remittance, use of foreign bank accounts, purchase of goods, gaming activities, use of shell companies, etc.)
  6. Transaction volume and currency details
  7. Alleged jurisdiction where the money originated
  8. Suspected source of the funds (e.g., money laundering, terrorist financing, drug trafficking, fraud)
  9. Implemented security measures
  10. Explanation of the grounds for suspicion
  11. Financial particulars of the suspected client (e.g., account numbers)
  12. Details of associates

Note that in some situations – especially those involving money service businesses engaging in peer-to-peer trading, some (or most) of the above-referenced information is not available to the filer. The obligation to file a SARs requires the financial institution to complete the report to the fullest extent possible using information available to the filer. This presents a “tightrope” of sorts for many financial institutions – especially non-bank FIs. The AML & KYC obligations found in the Bank Secrecy Act apply to both licensed banks and registered money service businesses. However, the nature of a money service business’ typical business activities will not require, for instance, the MSB to collect the tax number for a transactional counterpart in order to meet its AML/KYC legal obligation.

Moreover, it is important to note that the specific AML & KYC laws governing report submission may vary depending on the country. This entry details processes and procedures only relevant to the United States and the Bank Secrecy Act. FATF Recommendation 20 created a general SARs reporting mandate compelling financial institutions to disclose suspicious transactions when they harbor suspicions or possess reasonable grounds to believe that the funds are derived from criminal activities or linked to terrorist financing.

However, national AML/KYC laws impose reporting duties on entities obligated to comply with AML regulations. The definition of what qualifies as “suspicious” activity or transactions within a specific jurisdiction is often broadly defined, and the precise thresholds may differ from one country to another.

SARs Reporting Triggers

For any financial institution, whether it be a bank, money processor, or even a casino (ie, money service business), the submission of a SAR is required under the following circumstances:

  1. When a company harbors suspicions and possesses reasonable grounds to believe that their employee or customer is involved in criminal activity.
  2. When there are indications of Money Laundering (ML) or Terrorist Financing (TF).

Examples of activities that may trigger suspicion and warrant an SAR include:

  • Transactions lacking an apparent economic or lawful purpose.
  • Transactions that deviate from the typical characteristics of the account holder’s regular business or personal dealings.
  • Unusually high-value transactions.
  • Multiple small transactions executed within a short time frame.
  • Transactions involving high-risk jurisdictions or individuals.
  • Transactions with unclear or unverifiable sources of funds.
  • Cash deposits or withdrawals inconsistent with the customer’s profile or known business activities.
  • Transactions routed through intermediaries or third parties seemingly unrelated to the underlying transaction.
  • Transactions structured to circumvent reporting thresholds.
  • Transactions giving rise to concerns regarding the customer’s due diligence measures or compliance with anti-money laundering regulations.

In cases where a company is uncertain about potential suspicious activity, taking a proactive approach by providing valid information to the authorities is essential to avoid potential repercussions for failing to do so.

Note that the foregoing is subject to $5,000 threshold established by FinCEN. However, in the context of filing a SAR, structuring refers to a method of conducting financial transactions to avoid triggering financial institutions’ reporting requirements. This practice is also known as “smurfing.”

Individuals engaging in illegal activities may attempt to structure their transactions to keep them below certain reporting thresholds established by regulatory authorities – such as the $5,000 threshold for SARs reporting. To evade this reporting requirement, individuals involved in illicit activities may conduct multiple smaller transactions, each falling below the reporting threshold, but collectively representing a larger sum.

Structuring is considered a suspicious activity because it can indicate an attempt to conceal the true nature or source of funds, potentially involving money laundering, fraud, or other financial crimes. Therefore, if a financial institution detects a pattern of transactions that suggests structuring, they are obligated to file a SAR to report this suspicious behavior to the appropriate authorities. That is, for example, a series of transactions just shy of $5,000 – say $4,999, would nevertheless trigger the requirement to file a SAR.

How to file a SAR

If any staff member within a financial institution identifies suspicious activity, they are required to submit a Suspicious Activity Report (SAR). Typically, a designated Money Laundering Reporting Officer (MLRO) or another nominated official assesses the situation and determines whether filing a report is warranted. Companies have the option to submit a report either manually or through an automated reporting system.

In the US, it is strongly encouraged to file electronically through the BSA filing system (https://bsaefiling.fincen.treas.gov/main.html) for tracking and record keeping purposes. Moreover, the BSA platform offers (somewhat) convenient forms for completing the SAR.

In my experience, the most important element of the SAR is the “description” component. This is a free form text section where the filer is able to describe in detail the transaction(s) and basis for reasonable suspicion.

Conclusion

In 2022 alone, over 3.6 million SARs were filed in the United States. The overwhelming majority of which are virtually ignored. However, as noted above and seen in cases such as with Wells Fargo (fined $7mm for failure to file SARs), the penalties can be severe. Thus, to file a SARs when there is even an indicia of suspicion is ideal.

Adam Tracy works with financial institutions on licenses and implementing AML/KYC programs. Be sure to reach out with any questions or comments.

Book a free consultation here.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.

Find Adam: https://linktr.ee/adamtracy

Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.

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