What Do Banks Do When They Encounter a Suspicious Activity?

Blog / How Banks Respond to Suspicious Activities

Money launderers' core objective is to legalize dirty, illegal money. Many banks use money that has entered the accounts of legal or physical individuals and then has been converted into other banks in the country or abroad by the banking system. This is usually accomplished by entering illegal money through transfers to escape the legal duty to notify the bank. Banks are among the most well-known financial institutions and organizations in the money laundering scheme, and their position is vital. Banks have a legal duty to follow the rules of the Anti-Money Laundering (AML) and Other Proceeds of Crime and Terrorist Finance Laws that have a protocol for detecting irregular transactions made by banks and their obligation to notify Financial Intelligence Units.

If banks suspect money laundering involving large sums of money, they must file reports on any illegal transactions. The reports come from a number of organizations that notify government officials of cash transfers that may include consumer theft, drug smuggling, organized crime, and other criminal activities. Specific forms of cash withdrawals, for example, are widely known as suspicious acts.

Banks, being the backbone of the financial sector, need a sharp eye to detect illegal transactions. Banking AML policies, like those of all other organizations, are influenced by the FATF's policy. Employees on the front lines are skilled in anti-money laundering tactics and are allowed by law to detect illegal activities. Banks could hire employees with the aim of improving anti-money laundering policies. AML enforcement officers are security specialists. 

In this context, AML solutions for banks play a crucial role in helping financial institutions comply with Anti-Money Laundering regulations and detect and prevent illegal transactions effectively.

The Role of Banks in Combating Financial Crime

Banks play a crucial role in combating financial crimes, including money laundering, fraud, and terrorism financing. Financial crimes pose a significant threat to the integrity of the financial system and can have severe economic and social consequences. Here are some ways banks help combat financial crime:

  • Customer Due Diligence: Banks perform customer due diligence (CDD) to identify and verify the identity of their customers. This process helps to ensure that the bank's customers are legitimate and not involved in any criminal activities.
  • Monitoring for Suspicious Activity: Banks use sophisticated software to monitor transactions and identify suspicious activity. This helps to prevent financial crimes and provides valuable information to law enforcement agencies.
  • Reporting Suspicious Activity: Banks are required by law to report suspicious activity to FinCEN. The information provided in SARs can be used by law enforcement agencies to investigate and prosecute financial crimes.
  • AML Programs: Banks have robust AML programs that include policies, procedures, and controls to detect, prevent, and report financial crimes. AML solutions for banks are designed to support their program and ensure compliance with laws and regulations and to mitigate the risks associated with financial crimes.
  • Collaboration with Law Enforcement: Banks collaborate with law enforcement agencies to combat financial crimes. They share information and work together to identify and prosecute criminals.

Detailed guidance to learn AML compliance in the Banking Industry

The Importance of Identifying and Reporting Suspicious Activity

Identifying and reporting suspicious activity is crucial in the fight against financial crimes, including money laundering, fraud, and terrorism financing. Banks play a crucial role in this effort as they are often the first line of defense against financial crimes.

Identifying suspicious activity involves monitoring customer transactions, identifying patterns, and monitoring for red flags. Red flags may include unusual transaction amounts or frequency, transactions with high-risk countries or entities, or transactions involving a new customer with no prior banking history.

When suspicious activity is identified, banks are required by law to report it to the Financial Crimes Enforcement Network (FinCEN) through the filing of a Suspicious Activity Report (SAR). SARs provide valuable information to law enforcement agencies, including details about the parties involved, the nature of the activity, and any additional information that may be relevant to the investigation.

Reporting suspicious activity is not only a legal obligation, but it is also essential for preventing financial crimes. By identifying and reporting suspicious activity, banks can prevent criminals from using the financial system to carry out illegal activities. Additionally, it helps to maintain the integrity of the financial system, which is essential for the economy's stability and growth.

Banks play a critical role in combating financial crime, which includes money laundering, terrorist financing, fraud, and other illicit activities. These crimes pose a significant threat to the financial system's integrity and stability, and they must take active steps such as implementing robust AML solutions for the bank's needs, preventing and detecting illegal activities, and reporting suspicious transactions.

What Are Suspicious Activities?

The US Department of Treasury's FinCEN provides comprehensive guidelines about the kinds of financial activities that may cause a SAR. Their advice effectively notes that any action that raises concern and includes funds above the target amount should be identified as suspicious activity. According to the guidelines, the following are among some of the common suspicious activities: 

  • A lack of proof of legal, commercial practice, or even any commercial activities by many of the parties to the transaction(s). For example, a bank might use AML solutions to flag a transaction as suspicious if it is made between two individuals who do not have any apparent business relationship.
  • Unusual financial nexuses and exchanges between different types of businesses (for example, a food importer negotiating with a car parts exporter).
  • Money transfers that are uncommon and unusual concerning the volumes of similar businesses operating in the same location.
  • Transfers that are not proportional to the specified market form and/or unusual and uncommon purchases compared to the volumes of similar businesses operating in the same locale. AML solutions for banks can use machine learning to identify patterns in customer transactions that are outside of the norm. For example, a solution might flag a transaction as suspicious if it is much larger than the customer's average transaction size.
  • Unusually high numbers and/or quantities of wire transfers, as well as repeated wire transfer patterns.
  • A sequence of extraordinarily complicated transactions involving various accounts, banks, individuals, and jurisdictions, indicating layering activity.
  • Transactions were carried out in bursts over a short period of time, especially in accounts that had been unused.
  • Money transfers and/or amounts of aggregate activity that are not compatible with the account's intended goal and the planned levels and forms of account activity provided to the financial institution when the account was opened.
  • Victims of accounts at international banks have already been the focus of SAR documents.

 Through the analysis of financial transactions, AML Transaction Monitoring is utilized to detect and stop money laundering

Types of Suspicious Activities Banks Look Out For

Some of the types of suspicious activities that banks look out for include:

  • Large Cash Transactions: Banks may monitor cash transactions that exceed a certain threshold, as these transactions can be indicative of money laundering or other illegal activities.
  • Structuring: Structuring involves breaking down larger transactions into smaller amounts to avoid triggering reporting requirements. Banks may monitor for structuring activity as it is often associated with money laundering.
  • Unusual or Unexplained Transactions: Transactions that are inconsistent with a customer's known financial profile or that lack a clear source or business purpose may be considered suspicious by banks.
  • High-Risk Customers: Banks may identify certain customers as high-risk due to factors such as their occupation, country of origin, or previous criminal activity.
  • Transactions Involving Politically Exposed Persons (PEPs): PEPs are individuals who hold prominent public positions, and transactions involving them may be subject to increased scrutiny by banks.
  • Transactions Involving Sanctioned Countries or Individuals: Banks may monitor transactions involving individuals or countries that are subject to economic sanctions, as these transactions may be indicative of money laundering or other illegal activities.
  • Cybersecurity Threats: Banks may monitor for suspicious activity related to cybersecurity, such as attempts to access customer accounts or transfer funds without authorization.

The Process of Investigating and Responding to Suspicious Activity Reports

When a bank identifies suspicious activity manually or with an AML solution, it is required to file a SAR with the relevant regulatory authority. The SAR provides information about the suspicious activity, including the customer involved, the type of activity, and any other relevant details. Here are the steps involved in investigating and responding to SARs:

  • Review and Analyze: The bank's compliance team will review the SAR and analyze the information provided to determine the validity of the report and the appropriate response.
  • Investigate: If the SAR is determined to be valid, the bank will conduct an investigation to gather additional information about the suspicious activity, including reviewing customer records, transaction history, and any other relevant data.
  • Determine Risk: Based on the investigation, the bank will determine the level of risk associated with the suspicious activity and determine the appropriate response. This may include closing the account, freezing assets, or reporting the activity to law enforcement.
  • Report to Authorities: If the bank determines that the suspicious activity is related to money laundering, terrorist financing, or other criminal activity, it will file a report with the relevant regulatory authorities and law enforcement agencies. AML solutions for banks can help with this step by providing tools to generate and submit SARs to the appropriate authorities.
  • Follow-up: The bank will continue to monitor the account and transaction activity to ensure that the suspicious activity has been fully resolved and to prevent any future suspicious activity.

It's important to note that SARs are confidential and are not shared with the customer or any third parties unless required by law. Additionally, banks are required to maintain records of SARs for a specified period of time, which may be subject to regulatory examination and audit.

Sanction Scanner provides AML solutions for banks, such as Transaction Monitoring or AML Screening, to instantly monitor or screen transactions in banks and other financial institutions and warns AML employees by alarming suspicious transactions with its dynamic rule feature. When AML employees examine the warnings and realize that there is a really suspicious situation, they prepare a SAR file about this process and submit it to the necessary authority institution. With Sanction Scanner, it is very easy to check suspicious transactions and speed up the process safely. So you can contact them and discover the most suitable solutions for your institution.

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