We have a business loan customer who has always paid loans as agreed. However, our Credit Dept in their reviews has expressed some concerns as to cashflows and ability to service the debt based on customer's financial statements.

During a discussion with our loan officer, customer states that he does not report all of his income to the IRS.

Bank has financial statements on file, but we have never examined his tax return or compared the financial statements to a tax return.

Is this SAR worthy? Is a customer statement enough evidence to file a SAR?

Customer's statement could be true or false...Where is the customer getting to by making such statement?
Do you see any suspicious activity in the lending or any other account that would trigger a SAR?

Now, since you have a copy of the tax returns and a copy of his financial statement... You could review such documents for signs of potential loan fraud...

I had a case where the loan repayment history was good but during the annual loan review it was discovered that the customer's financial statement was inconsistent with tax returns...

While we are not the IRS, keep in mind that some banks would review both documents from a loss prevention point of view and as part of the underwritting process...

We DO NOT have copies of any tax returns. Our Credit Dept had looked at the customer's financial statements and noted that there were negative cash flows. Even though customer has paid as agreed, there was concern about his ability to continue to do so just based on the financials.

As I understand it, the customer wanted to talk about other possible loans with his lender. When the lender brought up our concerns about cash flow, the customer basicially said he does not report all of his income to the IRS.

We don't have any "evidence" to support this statement, which is why we are debating whether to file a SAR.

It is a Suspicious Activity Report (SAR).

The customer is either not telling the truth about paying his taxes or the source of funds to pay his loan.

Either way he is not providing a truthful statement of where the funds are comming from to pay his loan.

FWIW I would file.

In my opinion, you have enough evidence to file with the basis of tax evasion. The SAR burden of proof is essentially "reasonable belief", which you can support with your analysis of the financials and the customer's admission.

With no evidence, i think you should NOT file.
My next question is if you decide to file, what would the amount be? His unreported wages or the loan amount?

Sadly, we as bankers should not play big brother unless you have evidence.

Personally, I find it hard to see where this meets the SAR filing criteria. What activity is suspicious, and how do you quantify it? Do you add up the customer's loan payments, because you suspect those funds represent underreported receipts? If the funds are lawfully obtained in the normal course of business and you don't suspect otherwise, how can you report the activity based on suspicion that a future event (income reporting) will not take place?

I would obtain a copy of his filed tax returns. There's normally a form that the customer can sign which gives the bank the right to obtain the last few years tax filings directly from the IRS (we used to get that signed as a matter of course at my last employer). If the financials that the customer gave do not agree to the income reported on the tax forms, then I would presume he's either filing false income tax reports (unless its income that is not reportable) or falsifying the income he's telling you he has. Either way that would strike me as suspicious.

I'm not arguing that a SAR is required in this circumstance. Given the situation, I would consider this a voluntary SAR, but a prudent one to file. In order to determine the reported amount, I would obtain previous tax filings as Doug Hendrickson suggested, and calculate the difference between the income on them vs his financials.

The report would not be based upon a future event, it would be based upon his admission to a past event. Personally, I'd have a hard time turning a blind eye to this one.

I'm not suggesting turning a blind eye, I'm suggesting that this isn't SAR material.

His financials show a negative cash flow, and he has stated that he doesn't report all of his income, so wouldn't the tax return and the financial show the same numbers?

If he had padded his financials to qualify for the loan, I'd agree with filing. But in this case, he's paying a loan that he seems to not qualify for. So unless the funds used to pay the loan are in and of themselves suspicious, where is the activity conducted at or through the bank that warrants a SAR?

I'm presuming that since the customer is saying that he does not report all of his income to the IRS, that the income he is reporting to the lender is different (higher) than what he is reporting to the IRS. If a review of the tax returns shows such a difference, then the activity conducted at or through the bank was the application for the loan, which might reveal an intent to evade taxes or might warrant a more comprehensive review to support and prove the cash flow reported. I'm not suggesting that there is a need to file a SAR now, but a SAR may be warranted if there is a perception of attempt to evade taxes (possible tax evasion), or if false financials were submitted (possible loan fraud).

I would need more info. to comment on the possible tax evasion SAR.

However, as Doug stated above, if the customer submitted false financials in order to obtain a loan, a SAR should be filed due to loan fraud.

I agree that if the financials and the tax return don't match then, the discrepancy might indicate tax evasion and/or fraud. But it really doesn't sound like that's what is happening here.

In this case it appears that the two do match, and on paper this customer doesn't qualify. If the income that he is reporting to the lender is higher, as you presume, then the credit review wouldn't have raised concerns about the customer's financials.

Am I missing something? He admitted to Tax Evasion – this should generate a SAR.

At a Bank I once worked at, we had the same problem and the same confession. We compared the dollar amount of the total receipts on the return to the total deposit and the difference was the dollar amount of the SAR.