SRC Insights: Third Quarter 2004

Evolution and Trends in Suspicious Activity Report (SAR) Filings

by Frank J. Doto, Enforcement and Surveillance Officer and William J. Brown, Senior Examiner

The Bank Secrecy Act (BSA) was enacted in 1970, authorizing the Secretary of the Treasury to require financial institutions to keep records and file reports that the Secretary determined to have a high degree of usefulness in criminal, tax, or regulatory investigations. The BSA criminalized money laundering and placed reporting and record keeping requirements on financial institutions. The submissions of Currency Transaction Reports (CTRs), monitoring for suspicious activity, and the filing of Suspicious Activity Reports (SARs) have served as the foundation of the BSA.

The information presented in this article is meant to provide background on the evolution of the SAR program and context regarding the trends and volume of violations reported both nationally and in the tri-state area. This context may be helpful to financial institutions when reviewing program results, helping management determine if their experiences are aligned with the averages for their market areas.

SARs: The Basics
Effective April 1, 1996, the Suspicious Activity Report (SAR) replaced the Criminal Referral Form. A SAR must be filed with the Department of the Treasury under the following circumstances:

Insider abuse involving any dollar amount that the financial institution detects or any known or suspected federal criminal violation, committed or attempted against the institution when the suspect is a director, officer, employee, agent, or other institution-affiliated party.
Violations aggregating $5,000 or more in funds or other assets where a suspect can be identified.
Violations aggregating $25,000 or more in funds or other assets even though there is no substantial basis for identifying a possible suspect or group of suspects.
Transactions aggregating $5,000 or more that involve potential money laundering or violations of the BSA, or where the transaction has no business or apparent lawful purpose or is not the sort of transaction in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts.

The information provided in a SAR provides the Treasury Department with a means to identify emerging trends and patterns associated with financial crimes. Accurate and timely information is critical to the law enforcement agencies, and financial institutions should ensure that SAR submissions are complete, sufficient, and timely.

In general a SAR should identify the five basic elements of information - Who? What? When? Where? and Why? In essence, the following five questions should be answered when completing a SAR:

Who is conducting the suspicious activity?
What instruments or mechanisms were used to facilitate the suspicious transaction(s)?
When did the suspicious activity take place?
Where did the suspicious activity take place?
Why does the SAR filer think the activity is suspicious?

In addition, the filer should use the narrative section of the SAR to answer the question, "How did the suspicious activity occur?" Any failure to adequately describe the factors that make the activity suspicious undermines the very purpose of the SAR and lessens its usefulness to law enforcement.

The SAR should be filed with the Financial Crimes Enforcement Network (FinCEN), an office within the Department of the Treasury, in either hard copy or electronic form. The financial institution should maintain a copy of the SAR along with any supporting documentation for a period of five years from the date of filing. Bank management should notify its board of directors, or a committee thereof, of all SARs filed.

Supervisory action may be initiated against a financial institution, its board of directors, officers, employees, agents, or other institution-affiliated parties for a failure to file a SAR. The action could be in the form of a cease and desist order or civil money penalties.

Neither the filing nor the contents of the SAR may be disclosed to anyone outside the financial institution, with the exception of authorized law enforcement and regulatory authorities. This so-called safe harbor protection was recently reaffirmed in the federal court, and the highlights of the case were noted in the May 2004 SR Letter 04-8 Interagency Advisory Concerning the Legal Protections Associated with the Filing of Suspicious Activity Reports.¹

The USA PATRIOT Act and AML
Since the BSA was signed into law in 1970, it has been amended several times. The most recent changes to the BSA came with the passage of the USA PATRIOT Act in October 2001. These amendments shifted the BSA's emphasis from recordkeeping to a broader application of all-encompassing Anti-Money Laundering (AML) programs. The USA PATRIOT Act also extended AML requirements to other types of financial institutions previously not covered under the BSA. Currently, depository institutions, money service businesses, casinos and card clubs, and securities/broker dealers are required to have AML programs, and are required to file SARs.

The broader application of AML programs reflects Congress's realization that the U.S. financial system is an important instrument in identifying potential threats to our country. By using the primary AML reporting tool—the SAR—financial institutions can help identify the threat of terrorism, in addition to aiding in identifying other types of clandestine activities, such as organized crime, drug smuggling, and a number of other serious crimes.

SAR Trends
The Numbers. The number of SAR filings has increased dramatically over the years. In the past seven years, national SAR reporting increased 255 percent from 81,197 filings in calendar year 1997 to 288,343 filings in calendar year 2003.² From 2000 to 2003 alone, SAR filings increased 77 percent. As shown in Exhibit 1, the increasing filing trend in the tri-state area has been even greater, with 5,440 filings in 1997 and 24,353 filings in 2003. New Jersey leads the increase with 10,209, up from 1,530, and has recorded one of the highest percentage increases in the nation.

Exhibit 1. SAR Filings in the Tri-State Area

When aggregating all SAR filings by state from April 1996 through December 2003, California has the highest number of SAR filings, representing 24.1 percent of all filings, followed by New York with 11.7 percent, and Florida and Texas with 6.3 percent each. Due to the size and geographic location of these states, this is probably not surprising. What is more surprising is that New Jersey ranks seventh with 2.8 percent, Pennsylvania ranks eighth with 2.5 percent, and Delaware ranks eleventh with 2.2 percent. Collectively, the top ten states represent over 65 percent of all SAR filings.

Many factors contributed to the significant increase in SAR filings, but most are related to the events of September 11. An increased awareness by financial institutions coupled with the expanded filing requirements in the USA PATRIOT Act have both contributed to the increase.

The Reasons. There are currently 22 violation categories under which SARs can be filed, but BSA/Structuring/Money Laundering is the most common category, representing 48.1 percent of all filings from April 1996 through December 2003. Check Fraud, Check Kiting, and Counterfeit Checks collectively represent the second largest grouping, totaling 20.1 percent during this period.

Exhibit 2. Top Ten SAR Violations Types For the Nation (4/96 - 12/03)

Reflecting the changing environment, Computer Intrusion was added as a new category in June 2000, and the number of filings quickly grew from 419 in 2001 to 4,713 in 2003 (included in "Other" in Exhibit 2). In July 2003, Identity Theft and Terrorist Financing were added as new categories and 3,165 SARs were filed during the first five months for Identity Theft and 495 were filed for Terrorist Financing (both included in "Other" in Exhibit 2).

Table 1 summarizes the violations cited in SARs filed in the three states comprising the Third District and in the nation. Delaware's reporting trends and profile are vastly different from the national trend and profile. This is understandable considering the profile of institutions headquartered in Delaware and their emphasis on credit card lending, which explains the significantly higher proportion of SARs filed for Check Fraud and Credit Card Fraud. New Jersey and Pennsylvania's reporting trends and profile more closely represent the national trend with only slight deviations.

Table 1. Analysis of 2003 SAR Filings

The Consequences. For the SAR program to be effective, the information reported has to be accurate and complete. In a review of approximately 300,000 SARs filed between July 1, 2002 and June 30, 2003,³ FinCEN found that:

Four percent were filed without a suspect name.
Eight percent did not list an address for the suspect.
Twenty-three percent did not provide the suspect's social security number.
Four percent did not provide any indication of what suspicious activity occurred.
Six percent did not include a completed narrative.

Accurate and complete information is not only essential for law enforcement to do their job, but it also saves time by reducing the need for follow up calls to the financial institution. The Secretary of the Treasury has delegated primary responsibility for criminal enforcement of the BSA as it pertains to financial institutions to FinCEN, and failure to file accurate or complete SARs can subject a financial institution to paying significant civil money penalties. Recent examples include the following. ⁴

In 2002, Great Eastern Bank of Florida in Miami, Florida, was subject to a $100 thousand fine for failure to file SARs and failure to file complete SARs.
In 2003, Banco Popular de Puerto Rico was assessed a $20 million penalty for violations of the BSA. The press release stated that, "Although the bank filed SARs on these accounts, they were untimely or, in some cases, inaccurate."
In 2004, the Office of the Comptroller of the Currency (OCC) and FinCEN concurrently fined Riggs Bank in Washington, D.C. $25 million for, in part, failure to file approximately 33 SARs on a timely basis.

It is clear and imperative that financial institutions not only file complete and sufficient SARs but that the SARs are filed within the established timeframes. FinCEN has issued guidance on completing an accurate SAR in its Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative.⁵ Questions related to Suspicious Activity Reporting can also be referred to the FinCEN Regulatory Help Line at (800) 949-2732.

Final Thoughts
Although the SAR reporting program has existed for a number of years, it has recently received additional focus by Congress and bank regulators due to the highly publicized weaknesses found at Riggs Bank. In addition, over the past few years, compliance and operational risk have become of much greater importance to the financial industry, stemming from highly publicized failures in corporate governance.

Compliance and operational controls are not just areas that auditors and regulators force management to address. In today's environment, both are essential ingredients in ensuring an institution can operate profitably, serve its community, and maintain its reputation, while minimizing its operational and legal risks. Improved risk management practices, such as the strong emphasis on Enterprise-wide Risk Management (ERM), have also helped to focus business leaders on compliance and operational risks.

If you have any questions on the filing of SARs, please contact your primary banking regulator. If you are supervised by the Federal Reserve Bank of Philadelphia, please contact your institution's central point of contact or assigned manager at the Reserve Bank. You may also contact Frank J. Doto at (215) 574-4304 or William J. Brown at (215) 574-7291.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

¹ SR Letter 04-8 is available on the Board of Governors' website .
² See FinCEN's The SAR Activity Review by the Numbers , Issue 2, May 2004.
³ See FinCEN's The SAR Activity Review Issue 6 , November 2003.
⁴ A complete list of FinCEN enforcement actions is available on its website .
⁵ Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

SRC Insights: Third Quarter 2004

Evolution and Trends in Suspicious Activity Report (SAR) Filings

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