Omar Bennett
Detecting and reporting suspicious activities in the banking sector is a challenging task, with US financial institutions filing approximately 4.6 million Suspicious Activity Reports (SARs) in 2023. While there is no explicit definition of suspicious activities, they generally encompass any events within financial institutions that could be linked to fraud, money laundering, terrorist financing, or other illegal activities. To combat these threats, banks employ various monitoring systems, including transaction monitoring, AML investigation, and case management reporting. Financial institutions are mandated to report suspicious activities to the authorities within 30 days, and they must also assist the government in preventing money laundering by maintaining records of cash purchases and reporting large cash transactions. The identification of suspicious activities involves scrutinizing transaction sizes, types, and origins, as well as monitoring unusual or potentially suspicious activities related to law enforcement inquiries.
| Characteristics | Values |
|---|---|
| Transactions that serve no business or legal purpose | Fraud, money laundering, terrorist financing, theft, tax evasion, etc. |
| Transaction monitoring | Size, type, and origin of transactions |
| Structuring | Splitting or altering transactions to avoid automatic reporting to tax authorities |
| Check fraud | Writing fraudulent checks, altering checks, creating bad checks, etc. |
| Large cash deposits | Deposits inconsistent with the customer's business activities or subsequent transfers to unrelated accounts |
| Large cash withdrawals | Withdrawals from dormant accounts or those with unexpected large credits |
| Multiple accounts | Paying large amounts into multiple accounts |
| No apparent business activity | Receiving or disbursing large sums with no obvious purpose |
| Multiple institutions | Having accounts with several institutions within the same locality |
| Large third-party cheques | Paying in large third-party cheques endorsed in favour of the customer |
| Foreign currency | Frequent requests for foreign currency drafts or travellers cheques |
| Safe deposit facilities | Increased use of safe deposit facilities |
| Sealed packets | Use of sealed packets for deposits and withdrawals |
| Company accounts | Transactions denominated by cash rather than debit or credit |
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What You'll Learn
Unusual transaction size and frequency
Unusual transaction sizes and frequencies are key indicators of suspicious activity. Banks should be vigilant about monitoring transactions that are unusually large, frequent, or inconsistent with a customer's known behaviour.
For example, a company that typically conducts transactions via cheques and other instruments may arouse suspicion if it starts making unusually large cash deposits. Similarly, substantial increases in cash deposits by an individual or business without an apparent cause, especially if the funds are quickly transferred out of the account or to an unusual destination, could be a red flag.
Another suspicious pattern is when customers deposit cash across multiple accounts, with each individual deposit appearing unremarkable, but the total sum across all accounts being significant. Banks should also be cautious when customers use cash for transactions that are typically conducted through other means, such as commercial operations that usually involve cheques, letters of credit, or bills of exchange.
Additionally, frequent requests for or payments of traveller's cheques or foreign currency, especially if they originate from overseas, could indicate money laundering or other illicit activities. Banks should also monitor accounts with little to no normal banking activity but are used to receive or disburse large sums with no clear connection to the account holder's business or personal profile.
To effectively identify suspicious transaction sizes and frequencies, banks should implement robust monitoring systems, including transaction-based manual reviews, surveillance automated systems, or a combination of both. These systems should be tailored to the bank's risk profile, focusing on higher-risk products, services, customers, and geographic locations.
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No legal purpose or explanation
As per the Financial Crimes Enforcement Network (FinCEN), transactions that "serve no business or other legal purpose and for which available facts provide no reasonable explanation" are among the most common indicators of suspicious activity. This means that financial institutions must monitor the size and types of transactions occurring within their systems, as well as their origins.
One example of this is structuring, which involves splitting or altering financial transactions to avoid automatic reporting to tax authorities. This is often done to avoid certain taxes or to conceal an organization's wealth. Similarly, a customer may deposit cash through numerous credit slips, resulting in a significant total credit but unremarkable individual deposit amounts.
Other suspicious activities include large cash withdrawals from previously dormant accounts or those that have received unexpected large credits from abroad. Banks should also be cautious when customers have numerous accounts and pay large amounts of cash into each of them, resulting in a substantial total credit. Additionally, accounts with no apparent personal or business-related activity but are used for substantial transactions unrelated to the account holder may also be suspicious.
Banks are required to monitor and report such suspicious activities to the authorities within 30 days, as mandated by the Bank Secrecy Act (BSA). This is a critical internal control to combat common forms of suspicious activity, including money laundering, theft, tax evasion, and financial fraud.
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Tax evasion
One common method of tax evasion is through structuring transactions to avoid automatic reporting to tax authorities. This involves splitting or altering financial transactions to stay below reporting thresholds, thereby concealing wealth and avoiding taxes. For example, a business may deliberately structure transactions to underreport their income and qualify for certain loans or tax breaks. Financial institutions should monitor for such activities and report them as potential tax evasion.
Another form of suspicious activity indicative of tax evasion is check or wire transfer fraud. This involves writing fraudulent or bad checks, such as those from accounts with insufficient funds, or misrepresenting financial positions to secure loans. Wire transfer fraud, including well-known scams like the "Nigerian Prince" scheme, also falls under this category. These activities may be indicative of individuals or organisations attempting to conceal their true financial situation to evade taxes.
Financial institutions should also be vigilant against consumer loan fraud, where individuals deliberately misrepresent their financial position to secure large loans. This can include overvaluing assets, underreporting expenses, or providing false income information. By securing loans they may not otherwise qualify for, individuals can effectively hide their true financial status and avoid paying the correct amount of taxes.
Finally, financial agents or fiduciaries acting in their own self-interest instead of their clients' may also be a sign of tax evasion. Financial institutions should monitor for any suspicious transactions where a financial agent's actions do not benefit the client, as this could indicate tax evasion or other fraudulent activities. Overall, by remaining vigilant against these common forms of tax evasion, financial institutions play a crucial role in detecting and preventing this illegal activity.
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Money laundering
Some red flags that may indicate money laundering activities include large cash transactions, frequent or structured transactions just below the reporting threshold, unusual transactions inconsistent with a customer's profile, and transactions involving high-risk jurisdictions or shell banks. Financial institutions should also be vigilant about missing or incomplete customer information, as this could be a sign of money laundering.
To combat money laundering, financial institutions are required to comply with regulations such as the Bank Secrecy Act (BSA) in the United States, which mandates the filing of Suspicious Activity Reports (SARs) within 30 days of detecting potential money laundering or other suspicious activities. The BSA also requires financial institutions to keep records of cash purchases of negotiable instruments and file reports of cash transactions exceeding certain thresholds, such as $10,000 in the US. Similar central transaction reporting systems have been implemented in other countries, such as AUSTRAC in Australia, to enhance the detection and prevention of money laundering.
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Check fraud
To protect against check fraud, individuals should treat their checkbooks like cash and store them in a safe place. It is also important to regularly monitor transaction history and set up account alerts to detect any unauthorized or unusual activity. Digital payment methods are also recommended as they reduce the risk of personal information being stolen through paper checks.
Financial institutions play a crucial role in combating check fraud by implementing transaction monitoring systems and reporting suspicious activities to the corresponding authorities. They should monitor the size and types of transactions, as well as their origin, to identify potential check fraud. Additionally, they must comply with regulations such as the Bank Secrecy Act (BSA) and adopt customer identification programs to prevent and detect fraudulent activities.
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Frequently asked questions
Suspicious activity for a bank customer is any activity that could be related to fraud, money laundering, terrorist financing, or other illegal activities. This includes transactions that serve no legal purpose and for which no reasonable explanation is available.
Examples include unusually large cash deposits, substantial increases in cash deposits without an apparent cause, and frequent use of travellers' cheques or foreign currency drafts.
The BSA requires financial institutions to look for signs of suspicious activity, such as money laundering, theft, and tax evasion, and report them to the authorities within 30 days.
Banks use various monitoring systems, such as transaction monitoring, employee identification, surveillance systems, and transaction-based (manual) systems, to identify unusual activity. They also establish policies, procedures, and processes to identify and report suspicious activities.
A SAR is a report filed by financial institutions to report suspicious activities. These reports are used to assist government agencies in detecting and preventing financial crimes, such as money laundering. Banks must file a SAR within 30 calendar days of detecting suspicious activity.
