SARs: To File and Not to File (5 Action Steps)

Whether to file a Suspicious Activity Report is one of those murky questions with no clear answer - just a lot of grey. Sure, every now and then a genuine crook or terrorist will come along and you can file with speed and confidence. But most of the situations amount to a "should we or shouldn't we."

Examiners have brought pressure to the question by raising concerns (and making citations) if the financial institution doesn't file enough SARs to satisfy the examiner's quest for compliance.

To avoid being criticized for non-filing, institutions have been inclined to file when in doubt. This is also the best advice that has been circulated recently. Now, however, FinCEN's Director, William J. Fox, would like to modify this advice. While encouraging you to file a SAR whenever it is appropriate, Fox also recommends that you not file unnecessarily.

Fox coined the term "defensive filing" to describe the unnecessary filing of SARs simply to have something to show examiners. He used the term to describe filing when the activity or transaction is not really suspicious. His concern with defensive filing is that it leads to a dilution of the value of the SAR database.

So, on the one hand, there is the examination process which questions whether the compliance program is strong enough. Some examiners measure the strength of the compliance program by the number of situations identified and reported. On the other hand, there is FinCEN's concern that the data be vigorous and valuable.

Director Fox is not without sympathy for the financial community. He is also not without humor. He openly discussed what he called the pink elephant that has inspired so many SARs. The pink elephant is the number and nature of recent enforcement actions taken by FinCEN.

Enforcement
The financial institution regulatory agencies function very differently than other federal enforcement agencies. The financial regulatory agencies work through regular examinations, giving them much closer contact to the activities and institutions they regulate. It also enables these agencies to send clear messages fast.

Other federal enforcement agencies operate through case by case enforcement, relying on the enforcement case to make the point to others that have not been visited or evaluated. The goal of civil enforcement actions is not only to generate improved compliance in the affected institution, but also to educate others on expected standards.

Fox expressed some concern that financial institutions have overreacted to FinCEN's enforcement actions. He attributes this to the possibility that BSA officers have read only the headlines and have not actually studied the orders to understand the nature of the problem that resulted in the enforcement action.

The recent cases involve significant weaknesses or failures in the compliance program. The actions are not the result of a few missed situations but of a systemic failure to identify, investigate, and file when appropriate. The Riggs and AmSouth cases involved much more than some missed SAR filings. Both institutions made a decision to economize when it came to compliance. Both institutions showed significant break-downs in BSA programs.

Standards For SARs
Fox asked the industry to respond with two things. First, do not overreact to enforcement actions. Instead, learn from them. The agencies that use enforcement actions as a tool for compliance usually choose cases that will provide the rest of the industry with guidance, what Fox called a road map for compliance. So, follow the map.

Second, don't drop back any commitment. Institutions must maintain programs, policies and procedures. Effective compliance is essential to protect your institution and to protect us all from terrorism.

The decision about filing SARs should be approached from two directions. For the first direction, you should establish whether the activity involves funds derived from or disguising illegal activity, evading BSA (structuring), or has no business or apparent lawful purpose. In short, to support filing a SAR, you should have a well-founded belief or suspicion (and yes, suspicions can be well-founded) that the activity is or may be criminal. This means that it should be more than simply strange or unusual.

For the approach from the other side, you should be sure that there really is something going on, not merely an eccentric customer or an odd coincidence. Many customer actions lend themselves to the interpretation of criminal activity. But sometimes, the devoted grandchild really is helping Granny move money out of the mattress and into an interest-bearing account. In other words, before filing, be sure that there is something going on - or that there seems to be something going on - that should be reported.

Ultimately, all investigations and decisions should be documented. You should be prepared to explain to your examiner why you did or did not file a SAR for the specific situation. This means investigating situations for which you decide not to file a SAR. It also means documenting situations called to your attention that you concluded did not merit investigation.

Taken together, this documentation illustrates your program and your understanding of what is required by BSA. This understanding, and the actions that go with it, should be what your examiner is looking for.

ACTION STEPS

Read the enforcement orders for Riggs Bank and AmSouth. Look to see what specific elements they require for compliance.
Review your BSA policy, program, procedures and training and decide whether there is adequate guidance and standards for compliance.
Review your SAR files, both situations filed and situations that were not filed. Consider whether the decisions were correct and defensible.
Discuss SARs with branch staff, including tellers. Be sure they are reporting situations that should be investigated.
Also consider whether the discussion demonstrates a good understanding of suspicious activity. If not, more training is called for.