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The Adviser’s Guide to SARs: How to Avoid Costly Compliance Mistakes
The Securities industry is operating under heightened scrutiny as the sophistication and frequency of financial crimes continues to grow. The 2024 amendment to the AML rule expanded the definition of “financial institutions” under the Bank Secrecy Act (BSA) to now include SEC-registered investment advisers (RIAs) and some exempt reporting advisers (ERAs).
RIAs and ERAs are advised to take a proactive approach to risk management, ensuring that the firm’s Suspicious Activity Reports (SARs) process is developed, implemented and documented. Filing SARs is a critical step towards AML compliance and is required by the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Broker-dealers have a regulatory requirement to establish AML programs and file SARs, when needed.
At Jacko Law Group, we understand that complex and new rules can be confusing. Here is a clear, practical guide to help financial firms meet their SAR filing obligations with confidence.
- Implement a Risk-Based AML Program
Detecting suspicious activity is possible when a robust AML compliance framework is in place. Your AML program should include: risk assessment framework, written policies and procedures, customer due diligence, transaction monitoring, ongoing employee training, and most importantly, suspicious activity detection and reporting procedures. The program should categorize clients into various risk tiers based on factors such as client type, transaction patterns and investment products used.
The program must include automated transaction monitoring systems, regular risk assessments, SAR filings procedures (outlined below), comprehensive staff training, and annual independent testing. Having an adequate infrastructure along with a qualified AML compliance officer will allow for ongoing performance monitoring to ensure regulatory compliance. This also will ensure any suspicious activity like money laundering and terror financing are flagged and reported in a timely manner.
- Recognize the Red Flags
The first step in understanding and defining “suspicious activity” is the ability to distinguish between anomalies and concerning activities. Some red flags to watch out for include:
- Clients who are not transparent about the source of their funds
- Transactions that are inconsistent with the client’s investment goals
- Repeated withdrawal activity just below reporting thresholds
- Unexplained third-party transfers
Once you have identified the suspicious behavior, you must consider whether it rises to the level of filing a SAR with the appropriate authority.
- SAR Filing Procedures: Accuracy, Timeliness, and Confidentiality
Filing a SAR requires precision, confidentiality, and strict adherence to regulatory timelines. The goal of the SAR is to collect the right facts, present them clearly, and tell the story of why a transaction doesn’t add up. Firms or practitioners must use the correct FinCEN Form and ensure the SAR is filed within 30 days of detecting suspicious activity if a suspect has been identified. However, if no suspect is identified, the deadline extends to 60 days.
Steps to Complete a SAR:
- Collecting the right data
Before you log into the FinCEN systems, you will want to gather all the details that are bringing the suspicious transaction to the forefront. Think of this step as building the case file for your SAR. The data collected should provide a clear explanation as to why the activity is concerning.
The first step is starting with the basics. Collect all relevant information regarding the individual or entity involved, including the full legal name, DOB, address, Social Security or other ID number, occupation and contact information.
Next is the transaction itself. Some of the details to capture include the date and time of the activity, type of transaction, amount of transaction and where the transaction took place.
Lastly, outline why this activity stands out. Some questions to ask include:
- Was there an unusual transaction?
- Are there any known or suspected links to criminal activity?
- Does this transaction differ from the customer’s usual behavior?
- Did anyone on the staff interact with the customer and if so, what happened and what was discussed?
- Complete the FinCEN Form
Once you have the facts compiled, you can enter all the information into the FinCEN form. This is your opportunity to provide the investigators with a clear, well-documented story.
- Narrative Section
The heart of the form is the narrative section. Provide as much detail as possible, including adding multiple categories, if appropriate, such as fraud, structuring, identify theft, money laundering, etc. This section will answer the investigators’ questions before they ask them. State the facts clearly and concisely around the basic facts: who, what, when, where, why and how. A well written narrative will separate a useful SAR and trigger an investigation, from one that is incomplete and will get overlooked.
Law enforcement agencies depend on the information financial institutions provide. A well-documented SAR adds to their ability to detect trends, build cases, and protect the financial system. Financial institutions required to adhere to the AML rule understand that an effective SAR program is about not just protecting their firm and their clients, but also the integrity of the financial system.
Conclusion
Having an effective SAR filing protocol in place is essential for financial institutions subject to AML compliance. It is important for your team to understand what to do, how to escalate these issues, and when. For assistance with developing and implementing a comprehensive AML program that includes a solid and actionable SAR program, contact us at 619.298.2880 or email [email protected].
