Suspicious Activity Reports in the Securities Industry: How to File a SAR, How SARs are Used, and the Consequences for Failure to File

By Staff of the Securities and Exchange Commission6

One of the cornerstones of the Bank Secrecy Act (BSA)7 is the requirement that financial institutions monitor for, and report to the Financial Crimes Enforcement Network (FinCEN), suspicious activity. This reporting is critical to the United States? ability to utilize financial information to combat terrorism, terrorist financing, money laundering, and other financial crimes.

Following the USA PATRIOT Act?s8 amendments to the BSA, broker-dealers and mutual funds (in 2003 and 2006, respectively) became subject to regulations requiring them to file Suspicious Activity Reports (SARs) with FinCEN on Form 101, generally referred to as the SAR-SF form.9 The BSA, SEC and self-regulatory organization rules and regulations collectively require firms to establish and implement procedures that can reasonably be expected to detect and cause the reporting of suspicious transactions.

Factors to Consider When Filing SARs

Mechanics of Filing
A SAR can either be mailed to a processing center or filed electronically on a secure website accessible on the Internet using the BSA E-Filing system.10 In addition to supporting electronic filing of individual or batch BSA forms, such as SAR-SF forms, the system also allows filers to exchange secure messages with FinCEN. FinCEN also uses the system to issue advisories and system updates to the user community. FinCEN promotes the use of BSA E-Filing because it is more efficient, faster, and more secure than paper filing.

Process for Filing
The SAR must be filed no later than 30 calendar days from the date of the initial detection of the suspicious activity. If no suspect can be identified, the time period for filing a SAR is extended to 60 days. FinCEN has provided guidance that ?initial detection? does not mean the moment a transaction is highlighted for review.11 The time to file a SAR starts when a firm, in the course of its review or on account of other factors, is able to make the determination that it knows, or has reason to suspect, that the activity or transactions under review meet one or more of the definitions of suspicious activity. Specifically, the 30-day (or 60-day) period does not begin until an appropriate review is conducted and a determination is made that the transaction under review is ?suspicious? within the meaning of the SAR regulations. Of course, a review must be initiated promptly and completed in a reasonable period of time.12 Firms should maintain some type of record reflecting the date the transaction was deemed suspicious. In situations involving violations of law requiring immediate attention, the firm should immediately notify appropriate law enforcement and supervisory authorities,13 in addition to filing a SAR.

Firms also should remain cognizant of the need to comply with suspicious activity reporting obligations even where other BSA obligations, such as customer identification requirements, may not apply. For example, every clearing firm?s anti-money laundering program should contain risk-based policies, procedures, and controls for assessing the money laundering risk posed by its clearing arrangements, for monitoring and mitigating that risk, and for detecting and reporting suspicious activity.14

Unless jointly filing a SAR, each broker-dealer involved in a transaction must individually identify and report suspicious activity. Only one SAR is required to be filed by a firm so long as the SAR includes all the relevant facts concerning the transaction and the names of all entities. In the case of a jointly filed SAR, each entity should keep a copy of the SAR. In addition, in adopting the SAR rule, FinCEN acknowledged that the rule does not require a firm to alter its relationship with its customers in a way that is inconsistent with industry practice.15 FinCEN noted, for example, that based on the nature of the services that a broker-dealer provides to their customers, certain types of broker-dealers will have more information available to them in making suspicious activity determinations than other types of broker-dealers.16

Finally, a firm may use its reasonable business judgment to decide whether to close an account after a SAR filing has been made. It would be prudent for a firm to implement additional monitoring of an account that is the subject of a SAR filing, particularly if numerous SAR filings are involved.17

6 This article was prepared by staff in the Securities and Exchange Commission?s (SEC or Commission) Division of Trading and Markets, with assistance from the staff in the Commission?s Division of Enforcement (Enforcement) and Office of Compliance Inspections and Examinations (OCIE), but does not necessarily represent any staff views. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this document do not necessarily represent the views of the Commission, or the members of the staff of the Commission.

7 The Currency and Foreign Transactions Reporting Act of 1970 (commonly referred to as the Bank Secrecy Act) is codified at 31 U.S.C. 5311, et seq. The regulations implementing the Bank Secrecy Act are located at 31 CFR Part 103.

8 Pub. L. No. 107-56, 115 Stat. 272 (2001).

9 See 31 CFR 103.19 and 103.15. The SAR-SF form is available at http://fincen.gov/forms/bsa_forms/.

10 Additional enrollment information about FinCEN?s BSA Direct E-Filing system is available at http://bsaefiling.fincen.treas.gov.

11 The SAR Activity Review, Trends Tips & Issues, Issue 10, at 44-46 (May 2006). See http://www.fincen.gov/sarreviewissue10.pdf.

12 An expeditious review is recommended and can be of significant assistance to law enforcement.

13 See, e.g., AML Source Tool for Broker-Dealers, Part 14: Useful Contact Information, available at http://www.sec.gov/about/offices/ocie/amlsourcetool.htm. As provided in the SAR rules, in situations involving violations that require immediate attention, firms must immediately telephone an appropriate law enforcement authority in addition to filing a SAR. Additionally, firms wishing to voluntarily report suspicious transactions that may relate to terrorist activity can call the U.S. Treasury Department?s Financial Crimes Enforcement Network (FinCEN) hotline at 1-866-556-3974. Broker-dealers may also, but are not required to, contact the SEC to report situations that may require immediate attention by the SEC. The SEC SAR Alert Message Line number (202-551-SARS (7277)) should only be used in cases where a broker-dealer has filed a SAR that may require immediate attention by the SEC and wants to alert the SEC to the filing. Calling the SEC SAR Alert Message Line or FinCEN?s hotline does not alleviate the broker-dealer?s obligation to file a SAR or notify an appropriate law enforcement authority.

14 See Customer Identification Program Rule No-Action Position Respecting Broker-Dealers Operating Under Fully Disclosed Clearing Agreements According to Certain Functional Allocations (FIN- 2008-G002; March 4, 2008), available at http://www.fincen.gov/statutes_regs/guidance/html/fin-2008-g002.html.

15 Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations? Requirement that Brokers or Dealers in Securities Report Suspicious Transactions, 67 FR 44054 (July 1, 2002).

16 Id.

Excerpted from SAR Activity Review Issue 15, page 16