Suspicious activities in banking and financial institutions are widespread. In fact, in the fiscal year 2023, U.S. financial institutions filed approximately 4.6 million Suspicious Activity Reports (SARs). This figure reflects a substantial increase from previous years, highlighting the growing challenges in detecting and reporting suspicious activities. However, it’s important to note that this figure only accounts for transactions reported through SARs; the actual volume of suspicious activities could be much higher.
Here, we’ll dig into this topic to help you understand the nuances around what constitutes a suspicious transaction and what doesn’t, including:
- What Are Suspicious Activities in Banking?some text
- What Makes a Suspicious Activity?
- What are the Regulations Around Suspicious Activities?
- 9 Common Examples of Financial & Bank Suspicious Activities
- What is the Threshold for Reporting Suspicious Activities?
- How to Identify Suspicious Activities & Money Laundering
- FAQs About Suspicious Activities
What Are Suspicious Activities in Banking?
Suspicious activities in banking are any event within a financial institution that could be possibly related to fraud, money laundering, terrorist financing, or other illegal activities. Suspicious activities are flagged for investigation, but many of these are simply false positives.
What Makes a Suspicious Activity?
One of the problems with filing reports of suspicious activities is that there is no universal definition of what constitutes a suspicious transaction. A given action might be deemed suspicious if it occurs within one account, while the same activity would be considered “normal” if it occurs in another. Generally speaking, a financial transaction might be deemed suspicious if it is unlike any other activity that has occurred within that account. Of course, an activity being new will not necessarily mean that any malicious actions have occurred.
For example, it might make sense for a petroleum supplier to receive a $100 million wire transfer from a foreign conglomerate, but if that same action were to appear in the account of a local non-profit, it would raise some red flags.
Finding the “threshold” for what constitutes suspicious activities is far from easy. However, by keeping a few basic principles and protocols in mind, financial institutions of all kinds can make some much-needed changes and improve how they monitor suspicious activities and transactions.
For example, an individual making a sizeable down payment on their first home is an activity that is unusual but not malicious. The processes involved in identifying suspicious activities are far from cut and dry. However, it is still a good idea to flag and potentially follow up on any action that seems far from the norm.
What are the Regulations Around Suspicious Activities?
As defined by the Financial Crimes Enforcement Network (FinCEN), one of the most common indicators of suspicious activities are transactions that “serve no business or other legal purpose and for which available facts provide no reasonable explanation” are one of the most common signs of suspicious activity. This means that, in some cases, financial institutions will need to monitor the size of transactions occurring within their system, monitor the types of transactions taking place, and determine where these transactions originated from.
Additionally, the Bank Secrecy Act (BSA), which was signed into law in 1970, requires financial institutions to look for signs of suspicious activity and report them to the corresponding authorities (usually within 30 days). The BSA aims to combat some of the most common forms of suspicious activity, including money laundering, theft, tax evasion, financial fraud, and more.
However, contrary to some other financial regulations, the BSA still contains many gray areas. Financial institutions must comply and report suspicious activities in a timely manner (or else face fines and possible legal consequences). At the same time, they must balance their account holders’ fundamental rights to privacy.
Ultimately, no formula will clarify that a given activity must be reported or will never need to be reported. However, carefully monitoring for a few common red flags, such as substantial transactions, transactions from an unclear location, foreign transactions, identity fraud, and others, will help these institutions better balance their seemingly “competing” interests.
9 Common Examples of Financial & Bank Suspicious Activities
As the Federal Deposit Insurance Corporation (FDIC) helps explain, many different types of transactions might trigger the need to file a SAR. These can include, but are by no means limited to, the following transactions:
1. Money Laundering
This suspicious transaction process involves taking money generated by illicit activity and “cleaning” it by falsely presenting it as if it were earned through a legitimate business. Money laundering is one of the most costly types of fraud in financial institutions, making Anti-Money Laundering compliance paramount in any fraud management system.
One of the largest money laundering schemes of all time, the 1MDB scandal, involved the theft of more than $4.5 billion from a Malaysian state fund, which was then laundered through Goldman Sachs. Following the trial, Goldman Sachs was forced to return most of the funds to Malaysia and pay a $600 million fine.
2. Cash Transaction Structuring
These suspicious activities involve splitting or otherwise altering financial transactions to avoid automatic reporting to tax authorities. Usually, structuring is done to avoid being subject to certain taxes or to conceal otherwise an organization’s wealth (which may help them qualify for certain loans, etc.).
3. Check Fraud
Check fraud is a broad term used to describe any deliberate misrepresentation, use, or creation of checks. This type of suspicious transaction includes writing fraudulent checks, altering checks, creating bad checks (checks you know will bounce), and more. A 2023 survey conducted by the Association for Financial Professionals revealed that more than 60% of businesses reported having to conduct at least one check fraud investigation in the past year.
4. Check Kiting
This is a form of check fraud that involves writing a check from an account with insufficient funds and depositing it into another bank account. Due to “the float,” the time before checks are cashed between banks, this type of suspicious activity can temporarily give people access to uncovered funds.
5. Wire Transfer Fraud
Wire transfer fraud is a broad term used to describe any suspicious transaction in which malicious activity occurs during the course of a wire transfer. Perhaps one of the most well-known wire transfer scams was the “Nigerian Prince” email fraud, which happened in the early 2000s (and still makes a considerable amount of money today).
6. Mortgage and Consumer Loan Fraud
This type of suspicious transaction involves consumers deliberately misrepresenting their financial position to secure a loan (usually a large loan, like a mortgage). Misrepresenting income, overvaluing assets, and underreporting expenses are all types of consumer loan fraud.
7. Misuse of Position (Self-Dealing)
This term describes any suspicious transaction instance where a fiduciary, a financial agent acting on behalf of their client, takes action or makes a suggestion that is in their own best interest rather than the client’s. For example, if a fiduciary invests a client’s funds into their account, that would be considered self-dealing.
8. Identity Theft or Fraud
While identity theft is used to describe an instance where someone is pretending to be someone else, identity fraud is used to describe any misrepresentation of a person’s identity. These suspicious activities can result in severe punishments, even if no financial transactions have occurred.
9. Terrorist Financing
While the federal government has laws and regulations banning financial transactions connected to any illegal activity, it is particularly strict about activity that could be linked to terrorism. Since the passage (and subsequent renewal) of the USA PATRIOT Act, regulators have a broad ability to monitor certain accounts for terrorist financing.
These are just a few of the most common types of suspicious activity a financial institution can potentially encounter. Therefore, if there are any indicators that these, among other suspicious activities, have occurred, financial institutions are required by law to file a SAR.
What is the Threshold for Reporting Suspicious Transactions?
There are various types of suspicious activities that may eventually require filing a report.
At first, a financial institution might have a “simple suspicion.” At this point in time, they might have a hunch or believe that suspicious activities might be occurring but do not have enough evidence or reason to file a report yet. Because this stage does not include articulating any reasons for suspicion, this hunch can come from as little as a simple irregular activity within an account.
Eventually, this simple suspicion might grow into reasonable grounds to suspect. This occurs once they have a legitimate reason to suspect a suspicious transaction is occurring. Because of this, the financial institution now has some evidence to prove that their suspicion is more than an ordinary “hunch.” While this stage doesn’t require proof of fraud or illegal activity, there is a clearer rationale behind the suspicion, and irregularities are reported with an explanation of why they are considered suspicious activities.
At this point, it is unlikely that the accused party could be convicted of any crime within the criminal justice system. Nevertheless, by law, even a tiny red flag or a single piece of tangible evidence should be considered enough to file a suspicious activity report. Keep in mind that only some SARs are followed up on (the Bank Policy Institute reports that as few as 4% are reviewed by law enforcement), and an even smaller fraction ever results in a criminal conviction. Not all red flags are related to the transactions themselves, and non-monetary indicators can be just as fruitful in identifying suspicious activity.
As evidence continues to build, whether through additional suspicious transactions or other signs of financial crimes, a suspicion might eventually become grounds to believe that a suspicious transaction has occurred. By this point, financial institutions have a legal (and perhaps moral) obligation to report this activity to authorities.
Once the threshold is reached and there is no reasonable justifiable reason for the behavior, then a SAR is required for each suspicious activity incident. SARs must be submitted to FinCEN within 30 calendar days of the suspicious activity occurring. To follow guidelines and avoid fines and penalties, read more about our detailed instructions on how and when to file a Suspicious Activity Report (SAR).
How to Identify Suspicious Activities & Money Laundering
While there is no explicit cutoff for what constitutes suspicious activities, it is the responsibility of financial institutions to keep an eye out for the early signs that any of the activities listed above have occurred. It's important to incorporate transaction monitoring into your fraud and AML system to effectively combat threats.
Luckily, with technologies like Unit21, transaction monitoring, AML investigating, and case management reporting, these sorts of activities are easier than ever before. With diligence, a thorough understanding of the law, and a commitment to consistent banking, both large and small financial institutions can develop the SAR protocols they need to remain compliant and help in the fight against financial fraud.
By leveraging advanced tools and collaborative methods within their communities, individuals and organizations can more effectively detect and respond to suspicious activities and transactions.
Effectively Combat Suspicious Activities with Unit21!
Staying vigilant is crucial in combating suspicious activities. Recognizing the signs and knowing how to report suspicious activity, whether it's related to a person, image, or vehicle, is essential for maintaining security. Unit21 provides advanced tools to help you identify and manage suspicious activities efficiently, streamlining your reporting process and ensuring compliance. For more information about how Unit21 can help, get in touch today!
Frequently Asked Questions About Suspicious Activities
To better understand suspicious activities in banking, we’ve answered some of the most commonly asked questions about the topic. Let's take a look at them below:
Can a single suspicious transaction trigger a SAR?
Yes, a single transaction can lead to a SAR if sufficient suspicion is raised. For instance, a sudden, unexplained transfer to a high-risk jurisdiction could warrant reporting.
Are there penalties for not reporting suspicious transactions?
Yes, financial institutions face significant penalties for failing to report suspicious activities. Non-compliance with SAR filing requirements can result in heavy fines, reputational damage, and even license revocation for the institution.
Can multiple SARs be filed for the same individual or account?
Yes. If a financial institution identifies recurring or escalating suspicious activities linked to the same individual or account, it is required to file additional SARs for each separate incident or period. These reports provide an ongoing record for regulators to monitor suspicious transaction trends.
How do banks differentiate between suspicious activities and normal behavior?
Banks rely on algorithms and transaction monitoring systems to flag irregularities based on thresholds and patterns. However, human review is critical to evaluate whether flagged transactions truly qualify as suspicious. For instance, a large transaction might be unusual but legitimate for one account and suspicious for another.
Are SARs only required for large suspicious transactions?
No. There is no minimum dollar threshold for filing a SAR. While large amounts often draw scrutiny, smaller transactions structured to evade detection or those linked to potential illegal activities can also be flagged as suspicious transactions.
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