How To Assess Suspicious Financial Activity


The banking world is littered with institutions that have paid astronomical fines for their failures around anti-money laundering (AML) legislation. Much has been written and said about these events. However one of the areas that has received perhaps less attention is the programs that banks and other financial institutions have set up to comply with the ever-growing increase in AML regulations. But just as crooks tend to follow the money, sophisticated lawbreakers, who tend to engage in crimes such as money-laundering will try and move their operations to business and industries with less robust protections around AML. That is why I found this month’s article by Carole Switzer, President of the Open Compliance and Ethics Group (OCEG), in the June issue of Compliance Week, entitled “The Battle to Balance Vigilance and Suspicion”, to be instructive for the anti-corruption/anti-bribery practitioner who typically focuses on Foreign Corrupt Practices Act (FCPA) or UK Bribery Act compliance.

In the article Switzer makes clear that she believes that “the most effective AML programs are based on the understanding that financial institutions have an obligation to all of their stakeholders to remain vigilant about AML risks. Banks are not required to prove money laundering; rather they are required to strike the right balance in their vigilant reporting of suspicious activity.” She recognizes that “banks must file a suspicious activity report (SAR) when suspicious activity arises. What qualifies as a suspicion often is a difficult question—as is the determination of whether or not to file a SAR.” Yet Switzer also notes that “filing of too many (and/or incomplete) SARs can overwhelm regulatory agencies, reducing their ability to address genuine criminal activity” and that filing “too few SARs and a company can turn a blind eye to potential money laundering, opening itself and, in some cases, its top managers to significant penalties.” I would posit that the dynamic tension would appear for any company; whether financial institution or other commercial operation. Hence, I believe that Switzer’s thoughts can be used by a non-financial concern to help protect it from violation of US or UK AML laws.

As usual, Switzer has provided a road map to illustrate her thoughts, entitled “Suspicious Activity Investigation Lifecycle”. In the diagram Switzer notes that it is important to understand each step in the lifecycle, so that a company can exploit “opportunities for technology and automation”. Technology, coupled with the human element, which recognizes the signs of suspicious AML activity can help your company protect itself and “hear through the noise.” She counsels that the “focus is to identify suspicious activity and report it, not to prove criminality; law enforcement will take it from there, blending your information with information from other institutions before making a decision on how to proceed.” She lists the following four steps.

1.      Triage – Switzer believes that “understanding and managing your inbound alerts can be an intimidating task. High alert volume and false-positives can abound, often at a 50:1 ratio (False/True).” A company should also focus on automated solutions that allow you to invest human capital into exception cases. Finally, remember to consistently review and modify the system until your organization can hear through the noise.

2.      Investigation – As an investigation process can tax your resources, you should strive to ascertain that you are making the right inquiries documenting the process at every turn. Some of the questions that Switzer suggests you focus on include “Do you understand the context? Are your procedures applicable to the product used? How does the processing channel affect the investigation? What history does the customer or organization have with your institution? Are you truly investigating or just documenting?”

3.      Action – After you have ­finished conducting research, obtained an understanding of the suspicious activity, its context, and the implications, Switzer advocates that this is the time to react. She believes that it is important to have a protocol in place. Some of her suggestions include placing the party on a continued Watch List, or you could “kick off your Enhanced Due Diligence cycle, or offboard the customer altogether.” She notes that the key here is “expediently limiting risk and exposure and promptly notifying regulatory authorities.” To which I would add: document, document, and document.

4.      Feedback/Review – As with any process you need validation or ‘a second set of eyes.” Switzer proposes that you should review your actions and reports for accurateness. Some questions that you may wish to keep in mind are the following: “Was your investigation fruitful? What did you learn? Is our current process sound and comprehensive? Learning what you have done, how it has affected your risk profi­le, and how you have reacted is critical to ongoing success.” A rigorous system would “constantly challenge assumptions and work to refine the process. Evaluate how your customers, products, and business are changing, and develop new scenarios.”

Switzer notes some of the more common mistakes made include failure to document your compliance efforts and missing of key internal and external deadlines for reporting. She cautions against tipping off customers directly during the inquiry process or indirectly through sending questions to a third party which may convey such information. Finally, training is important so that any report which is generated is not of such poor quality, incomplete or overly vague as to be useless and miss important information.

As with other areas of compliance, there are best practices which are fairly well known. Switzer reminds us that your suspicious activity program should constantly challenge your ongoing assumptions and evaluate the accuracy of your program. You should regularly review and adjust thresholds amounts for such investigations and study new typologies. Tone at the top is key in the suspicious activity area of AML compliance so your company should create a culture of compliance, ensure the staff is aware and empowered to do the right thing. Your compliance program should incorporate ongoing monitoring and outcome analysis. Lastly, do not forget to train.

Most non-financial enterprises do not look at potential AML issues, certainly not as thoroughly as financial institutions. However, I believe that this may well be the next area that corrupt persons and parties will try to exploit from otherwise law-abiding entities. The time to prepare is sooner rather than later. Switzer has laid a protocol which you can implement and which can go a long way down the road to protecting your company.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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