Suspicious Activity Reports: The First Line of Defense Between Investors and Money Launderers

Suspicious Activity Reports give financial institutions the chance to report fraud as soon as they detect it. Suspicious activity in the financial industry usually entails transactions that don’t have a clear purpose for the broker’s typical line of business. This could indicate money laundering, which is a type of fraud that filters ill-gotten monetary gains through legitimate financial firms in order to hide their true origin. Under the Bank Secrecy Act, U.S. financial institutions must help government agencies detect and prevent money laundering. The act is also sometimes referred to as the “Anti-Money Laundering Act.” Financial institutions, casinos, mutual funds, and money services businesses are all required to report suspicious activity.

Reporting agents submit Suspicious Activity Reports to the Financial Crimes Enforcement Network (FinCEN) department of the US Treasury. They can also report their suspicions to state and federal regulatory authorities as well as state and federal law enforcement. FinCEN uses the reports to determine “emerging trends and methods in money laundering and other financial crimes.” Businesses must file an SAR within 30 calendar days after the initial detection of suspicious activity. If the firm doesn’t have a suspect, they may delay reporting for another 30 calendar days while they conduct their own internal investigation.

What Triggers a Suspicious Activity Report?

Transactions of at least $5,000 can trigger a report if the institution has a suspect in mind, while transactions of $25,000 can trigger a report if it’s not clear who initiated the transaction. As you might expect, the institution that makes the report is not allowed to inform any of the suspects that the report has been initiated. Individuals who violate this rule may have to pay fines and face jail time.

Firms are required to report cash transactions exceeding $10,000, as well as suspicious activity that could indicate money laundering or tax evasion. Because $10,000 is the cut-off, it might also raise suspicions if a member consistently makes transactions that are just below that number. Money-launderers frequently break up their stolen funds into smaller deposits, putting them through different institutions in order to evade detection and reporting requirements. This is called “structuring,” and it can result in additional criminal charges.

What Happens if a Firm Fails to Report Suspicious Activity?

Firms that do not report suspicious activity risk enormous fines. In August of 2020, five regulators fined a broker-dealer called Interactive Brokers for failing to maintain a system that could adequately detect money laundering. The fines totaled a whopping $38 million. According to the Wall Street Journal, a compliance manager had warned years before that the compliance team suffered from understaffing and could not keep up with the volume of reports.

Financial institutions must have an internal system for flagging potentially fraudulent activity. Failing to report suspicious activity might result in a fine or even jail time. Aside from their duty to report suspicious transactions, firms also have a duty to supervise their registered members in order to protect their client’s interests. When the Financial Industry Regulatory Authority (FINRA) finds that an institution didn’t do enough to protect an investor’s money, they’re often on the hook for the investor’s damages.

What is Included in a Suspicious Activity Report?

Courts have ruled that firms must maintain SAR files and produce them when asked by authorities. They are also required to provide a “narrative,” which should include any identified suspects, how the activity occurred, the dates of the activity, and the location. The institution should also include why they consider the activity suspicious. Financial intuitions might get into trouble with the SEC if they file a report with a deficient narrative.

Why Do Suspicious Activity Reports Matter?

SARs don’t just detect fraud. They can also help protect some of the most vulnerable investors. Unfortunately, a large percentage of suspicious activity stems from elderly financial abuse. SAR filings regarding elder financial exploitation quadrupled from 2013 to 2017. A study of Suspicious Activity Reports in 2017 showed that older adults were more likely to lose money in fraudulent money laundering schemes and that adults between the ages of 70 and 79 had the highest monetary losses. It’s often up to the regulator to take steps to investigate the suspicious activity, as fewer than one-third of elder financial exploitation SARs were reported to the authorities.

What Can I Do?

If you believe your broker-dealer may have failed to supervise your broker, you should get in touch with an experienced securities attorney for a free case evaluation. Contact the attorneys at Fitapelli Kurta: (877) 238–4175 or info@fkesq.com.