Top SAR – STR - (Suspicious Transaction Report) Issues and Challenges FIBA Conference, Miami Peter Warrack CAMS, February, 2014 My views and opinions expressed during this presentation and this conference are my own, based on my knowledge and experience and should not be interpreted as reflecting those of my current employer. 25 February 26, 2014 The Playing Field In Canada, the SARs equivalent is called an STR – (Suspicious Transaction Report.) The landscapes, within North America differ: o In common we report transactions relating to suspected money laundering and terrorist financing. o In the United States, fraud is also reported per se, i.e. counterfeit checks over a certain value etc. (Not so in Canada.) Result - the perspectives, regulatory expectations ergo, the issues and challenges differ. 26 February 26, 2014 No. 1 Challenge – Balancing Quantity, Quality and Effort  Drivers of quality and quantity: (FTE) # of SARs  Regulatory expectations / changing domestic regulations/ identify and report more.  Increasing consumer expectations (e.g. law enforcement): Provide more information and detail.  Changing world events, e.g. Argentinian currency regs. – capital flight (tax evasion?) Clampdown on corruption in China (offshoring funds.)  Changing threats and typologies  Crypto currencies, (e.g. Bitcoin). 27 February 26, 2014 The Relationship between Quantity and Quality is not Linear The Relationship between Quantity and Quality is dependant upon several variables. Quantity means the # of STRs reported, but ‘effort’ expended to complete is also dependant upon the content of the STR, i.e. incl. quality.  Quality does not just mean providing more information.  Quality includes providing the right information, which includes: Filing for the right reasons, e.g. for suspected money laundering or terrorist financing; not Defensive filing based purely on misunderstood red flags. 28 February 26, 2014 Example – Quantity (STR Content) Transaction volumes: o Every suspicious transaction must be separately itemized in the STR. Example: o 8000 transactions. o 1 FTE can populate 18.5 transactions per hour to the STR. o Therefore – 8000/18.5 = 432 hours, which equals (37.5 hours per week), i.e. 11.5 weeks. We have 30 days to report? 29 February 26, 2014 Keys to Ensuring Quality and Managing Quantity Includes, (but are not limited to):  Technology, e.g. automation of reported suspicious transactions. Advanced analytics to reduce effort from working false positives. Investigative tools for investigators to increase efficiencies.  On-going training focused on understanding ML and TF, and (Less reliant upon) recognizing (but not understanding) ‘red flags’; and Training that keeps pace with emerging trends and typologies and provides knowledge. 30 February 26, 2014 Example - Relationship Between Training, Quality and Quantity Quality vs Quantity mitigated through on-going Training Level of Knowledge (Quality) Training Delivery # Defensive SARs Training Gap # SARs (Quantity) 31 February 26, 2014 In Summary There is no one size fits all turnkey solution to the STR challenges we face. The challenges aren't going away and we must get smarter and more efficient to meet these. Technology is a key enabler, but my focus has been on making the right decision about what to report and this is dependant upon knowledge and training. Reducing defensive filing frees up resources to manage increasing volumes and expectations. 32 February 26, 2014 Thank You 2/26/2014 33 Top 10 SAR/STR Issues –Year in Review From the Perspective of a Foreign Bank in the US Michele Fernandez BCI – Miami Branch My views and opinions expressed during this presentation and this conference are my own, based on my knowledge and experience and should not be interpreted as reflecting those of my current employer. TRENDS Red Flag Activity Individuals paying corporate clients Round dollar payments in USD between two residents of the same foreign country Country of originator is not the same as the country of originating bank Multiple outgoing/incoming transactions from the same beneficiary/originator but from different countries. Transactions involving countries outside of the client’s known target market. $500,000 $50,000 $80,000 $500,000 CHALLENGES AND SUGGESTIONS FOR OVERCOMING THEM Challenges Economic Technology Social Political BSA/AML Overcoming the Challenges 1. Know Your Client Base and their trends Analyze by client type (corporate versus personal) Within each client type, are there trends? (personal expenses, or investing, if corporate, it is a concentration account or for business activity) Group and analyze by industry Understand flows of funds Overcoming the Challenges 2. Know Your Customer Line of business Import/export What role do they play? Are they the producer, distributor, retailer. What countries do they import/export from? Their markets. Local or international or both? Concentrations? Do they use brokers or foreign representative to sell their product? Top suppliers/customers. You cannot possibly identify all of your client’s customers or suppliers. Source of income Overcoming the Challenges 3. Know the Country What are the top imports/exports. Top trading partners, country’s GDP, concentration of workforce/population, top cities. CIA World Fact book World Bank International Monetary Fund Third party providers Embassies Consulate offices Overcoming the Challenges 4. Know the Industry US Department of Commerce (Industry guides) Country commerce website Associations Overcoming the Challenges 5. Know Your Risks Keeping monitoring & risk management programs current Review the bank’s historical SAR data to identify trends Put the information to use Top SAR Issues – A Consultant’s Perspective John Atkinson Protiviti Inc. Top SAR Issues Investigating Unusual Activity • Lack of external due diligence in researching businesses, e.g., not checking physical location, not verifying corporate status, not confirming business activities. • Lack of industry research for business customers, e.g., common practices for business types, industry norms, etc. • Failure to review aggregate activity, particularly for customers who have both business and personal accounts. Top SAR Issues Investigating Unusual Activity (Cont’d) • Not questioning customer or relationship manager explanations of unusual activity. • Not having escalation and approval processes for investigations and decisions on filing SARs. Top SAR Issues Completing SAR Forms • SARs narrative does not clearly describe activity under question and dispositioning process as to why SARs are being filed. • SARs were not reviewed and approved by management prior to filing. • Use of internal acronyms without first defining them. Top SAR Issues Completing SAR Forms (Cont’d) • Failure to encompass relevant details from the case notes into the SAR narrative – mismatch between case file and SAR narrative, e.g., failure to list all suspects. • Inconsistent structure in SAR narratives due to lack of internal best practices guidelines. • Copy and pasting of activity, in place of actual analysis – no explanation of why listed activity is considered suspicious. Top SAR Issues Post-filing Use of SAR Data • Not using SAR information to evaluate the effectiveness of the transaction monitoring system or customer risk rating model – What are the customer risk ratings of SAR suspects? – What rules generated alerts that led to SARs? – Do trends or themes from analyzing SAR filings indicate a need to adjust monitoring? Questions?