SAR Form Completion Tips? A Trend Analysis of Frequently Asked Questions Received on FinCEN?s Regulatory Helpline

SAR Form Completion Tips ? A Trend Analysis of Frequently Asked Questions Received on FinCEN?s Regulatory Helpline

As in previous issues, FinCEN has reviewed recent calls received on its Regulatory Helpline for the most frequently asked questions about suspicious activity reporting. From May to December 2005, FinCEN responded to over 882 calls from industry and government representatives requesting suspicious activity reporting guidance. An analysis of these calls and other sources revealed the need for additional guidance in the following areas:

1. Suspicious Activity Reporting for Unregistered Money Services Businesses

In April 2005, FinCEN and the federal banking agencies issued guidance to the banking industry on providing banking services to the MSB industry. Among other topics, the guidance clarified that depository institutions should file SARs if they become aware that an MSB is operating in violation of the registration or state licensing requirements. Depository institutions are reminded, however, that, as explained below, there may be legitimate reasons for an MSB to not be registered with FinCEN or licensed in certain states.
31 C.F.R. ? 103.41(b)(3) grants a newly established MSB 180 days to comply with the registration requirement. Additionally, ?103.41(a)(2) clarifies that a person who provides money services solely as the agent of another registered MSB is not required to register with FinCEN. Similarly, certain types of MSBs in some states may not have licensing requirements.

Further, it should be reiterated that banking organizations are not expected to terminate existing accounts of MSBs based solely on the discovery that the customer is an MSB that has failed to comply with licensing and registration requirements (although continuing non-compliance by the MSB may be an indicator of heightened risk). There is no requirement in the BSA regulations that a banking organization must close an account that is the subject of a suspicious activity report. The decision to maintain or close an account should be made by a banking organization?s management under standards and guidelines approved by its board of directors. However, if an account is involved in a suspicious or potentially illegal transaction, the banking organization should examine the status and history of the account thoroughly and should determine whether or not the institution is comfortable maintaining the account. If the banking organization is aware that the reported activity is under investigation, it is strongly recommended that the banking organization notify law enforcement before making any decision regarding the status of the account.

As set forth in the April 2005 Interagency Guidance, depository institutions must conduct a reasonable inquiry into a business? registration or licensing status before they can accurately determine whether a business is unregistered or unlicensed and thus should be the subject of a SAR. It should be clarified that a bank is not required to file a SAR if it makes a business decision to close an MSB?s account based solely on the level of risk, and not on the business? registration or licensing compliance or other reportable activity. As the Interagency Guidance makes clear, requesting that the business provide copies of correspondence acknowledging their registration or licensing is one reliable method of verifying that an MSB has registered with FinCEN. As clarified later in this section (see Question 2), there should be no conflict between this request and SAR confidentiality.


2. Questioning Individuals about Potentially Suspicious Activity

When determining whether suspicious activity has occurred, institutions are responsible for ?examining all the facts, including the background and possible purpose of the transaction.? As part of an institution?s due diligence to determine whether suspicious activity has occurred, reasonable investigation into the nature and purpose of the activity may be necessary. Institutions have expressed concern over the perceived tension between questioning a customer about potentially suspicious activity and the institution?s responsibility to maintain the confidentiality of SARs.

FinCEN recognizes that under certain circumstances, institutions may discreetly question a customer about the nature and purpose of a transaction without revealing their intention to file a SAR. For example, to determine whether a customer?s transactions are ?designed to evade any [reporting] requirements,? an institution may wish to ask a customer why he or she is making frequent cash deposits slightly below a certain reporting or recordkeeping threshold. If the customer provides an answer that reasonably satisfies the institution that the transaction is not designed to evade reporting requirements (e.g. her business has a verifiable insurance policy that covers up to $10,000 in currency in the event of a burglary), no SAR would be required. Financial institutions are encouraged to document SAR decisions, including final decisions not to file a SAR. (See Item 5 for additional guidance on documentation of SAR decisions).

Institutions are reminded that any questioning should not risk ?tipping off? the customer or otherwise disclose that a SAR is being filed. Ultimately, institutions will need to exercise discretion and judgment when determining how and when to inquire of customers about unusual activity.


3. Continued Suspicious Activity Report Filings When No Law Enforcement Action Has Been Taken

A number of institutions, particularly after filing multiple SARs on the same individual, have contacted FinCEN to verify whether law enforcement had received the SARs or if law enforcement intended to act upon the information supplied in the reports. Institutions have questioned whether or not filing of the supplemental SARs is necessary if no law enforcement action has been taken. Law enforcement uses information in SARs to conduct investigations, research, and statistical analysis, and ultimately, investigative priorities and the severity of the suspicious activity reported will determine what action, if any, is warranted.

A financial institution has an obligation to report suspicious activity as prescribed by regulation if the activity continues. FinCEN previously provided the following guidance about the subject of law enforcement contact:

As noted in the June 2001 issue of The SAR Activity Review, ?If conduct continues for which a SAR has been filed, the guidance set forth in the October 2000 The SAR Activity Review (Section 5 - Repeated SAR Filings on the Same Activity) should be followed even if a law enforcement agency has declined to investigate or there is knowledge that an investigation has begun. The filing of SARs on continuing suspicious activity provides useful information to law enforcement and supervisory authorities. Moreover, the information contained in a SAR that one law enforcement agency has declined to investigate may be of interest to other law enforcement agencies, as well as supervisory agencies.?

Although a series of filings may not generate immediate contact from law enforcement, the filings could still prove vital during the investigative process at a later time. FinCEN has advised financial institutions to report ongoing suspicious activity at least every 90 days. FinCEN encourages financial institutions to contact appropriate law enforcement directly if the activity reported warrants prompt attention. Additionally, financial institutions should contact the Financial Institutions Hotline to report suspicious activity that may relate to terrorism. As noted previously, we are in the process of reviewing the 90-day rule.

4. Suspicious Activity Reporting for ?Third Party Receiver of Funds? Scams

FinCEN has received several questions regarding the filing of SARs for a prevailing type of scam that usually involves a third party wiring money order or check proceeds back to business entities located overseas. This type of fraud activity, which is referred to as a ?third party receiver of funds? scam, has features that are similar to ?4-1-9? or ?advance fee fraud.?

Instead of being contacted by a person claiming to be a foreign government official located in a foreign jurisdiction, individuals are usually contacted via email or via online job postings by an entity that claims to be a legitimate business seeking financial transaction assistance in the United States. The business, usually an auction operation, will claim that due to banking restrictions placed on foreign entities, it can not easily engage in financial transactions in the United States. The business will request that the U.S. citizen cash checks or money orders on its behalf and then wire most of the proceeds back to the business. An individual may be referred to a business website that looks very professional, which tricks the individual into believing the business is legitimate.

Financial institutions become aware of the scam once a customer comes to cash the monetary instruments. Callers to the Helpline report that the monetary instruments presented are in some cases obviously fake, containing glaring spelling errors or poorly created seals. In these instances, financial institutions decline to negotiate the monetary instruments and advise the customer that the instruments are counterfeit. Other times, the monetary instruments presented appear authentic and are ultimately cashed for the customer. Later, the monetary instruments are returned as non-negotiable and either the bank or the customer must take a monetary loss.

Due to the slightly different nature of the third party receiver of funds scams in relation to the ?4-1-9? and ?advance fee fraud? scams, financial institutions have sought clarification on whether the third party receiver of funds scams could be treated in the manner that ?4-1-9? or ?advance fee fraud? scams are for SAR filing purposes. In previous guidance,29 FinCEN advised financial institutions that the filing of a SAR was unnecessary for ?4-1-9? or ?advance fee fraud? if there was no monetary loss. FinCEN advised that a financial institution should consider filing a SAR if there was a monetary loss or if the scam involved another illegal activity (such as investment fraud, counterfeiting, forgery, misuse of a U.S. government seal, etc.). Because the activities are similar, the guidance given with regard to ?4-1-9? or ?advance fee fraud? scams would apply to third party receiver of funds scams as well. If the counterfeit monetary instruments are received via the U.S. postal system, financial institutions and individuals may also report the receipt to the U.S. Postal Inspection Service.

5. How Should a Financial Institution Document its Decision Not to File a Suspicious Activity Report?

Documentation of a financial institution?s decision not to file a SAR can be useful not only in the financial institution?s own internal review of its SAR decision-making and reporting procedures, but also to assist internal or external auditors and examiners in their assessment of the effectiveness of the financial institution?s suspicious activity monitoring and reporting system. The Federal Financial Institutions Examination Council?s BSA/Anti-Money Laundering Examination Manual (FFIEC BSA/AML Examination Manual) states that ?[t]horough documentation provides a record of the SAR decision-making process, including final decisions not to file a SAR?Examiners may review individual SAR decisions as a means to test the effectiveness of the SAR monitoring, reporting, and decision-making process.?

Excerpted from SAR Activity Review Issue 10, page 33