Suspicious Activity Reports (SARs) are a cornerstone of financial crime prevention. By uncovering money laundering, fraud, and other illicit activities, these reports are designed to safeguard not only financial institutions but society at large.

But over the past three years, U.S. anti-money laundering (AML) authorities have seen a surge in reported suspicious activities. In 2022, financial institutions submitted over 3.6 million Suspicious Activity Reports (SARs) to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), with a record-breaking 351,000 reports in March 2023 alone. Based on this first-quarter data, an estimated 3.75 million SARs will be filed this year, setting a new annual record.

While some of this increase can be attributed to government pandemic relief fraud and elder financial abuse, there has been a substantial rise in the filing of defensive SARs or reports submitted to FinCEN to mitigate regulatory risks, even without clear evidence of illegal activities.

A recent report from Reuters revealed that three of the top ten most reported money laundering activities stem from missing customer data or irregular transactions, with many firms deeming incomplete customer information as enough to flag a money laundering concern. Since SARs lacking evidence aren’t penalized, but failure to file risks severe penalties, firms often adopt broad detection criteria to avoid regulatory scrutiny. Analysts frequently file SARs when they can’t trace fund sources, easily attribute economic legitimacy to transactions, or clarify relationships between involved parties, with over 20% of SAR filings accounting for these gray areas. Even SARs with defined typologies often have these boxes selected.

This influx of filings is a product of resource and time constraints, with more financial institutions submitting defensive SARs as a preventive act of excessive caution. While financial institutions dismiss the excessive filing of reports as a mere cost of business, this stance neglects its cyclical effects on operational efficiency, resource allocation, and detection of high-risk activities that are harmful to both our industry and society as a whole.

Filing defensive SARs locks analysts into decision-making patterns, leading to more work on the same cases in the future while drastically increasing the probability of unnecessarily closed accounts.

To enact meaningful change, we must first understand the driving forces behind these behaviors.

Driving Forces Behind Defensive SAR Filings

The high volume of defensive SAR filings is driven by various factors, each posing challenges for the financial industry and law enforcement.

Understaffed Compliance Teams

Understaffed teams constantly face pressure to review numerous transactions and customer behaviors, often relying on rigid automated alert systems that generate vague alerts, leaving analysts without a specific risk type to investigate. While these systems are designed to catch broad swaths of “unusual” data patterns, not all “unusual” data is suspicious.

Constrained by time and resources, analysts will often play it safe by filing SARs for all alerts, questioning their ability to defend a no-SAR decision to auditors.

Lack of Training and Experience

Many junior teams lack the required training and experience to identify genuinely suspicious activities. Reflecting on the SARs I filed during my initial months as an analyst, I am still embarrassed. A limited understanding of risk nuances can result in over-filing, particularly when senior leadership is absent to guide junior staff or counteract the tendency for defensive filing.

Insufficient and Incorrect Data for Risk Assessment

Incomplete customer information or context, such as an individual’s occupation, can influence an analyst’s decision to file a SAR.

What appears suspicious for an 80-year-old retiree may be entirely reasonable for an 18-year-old college student. Without complete information, analysts can’t make informed decisions.

Unpenalized SAR Filings

Regulators penalize financial institutions for neglecting to file required SARs, but not for over-filing. This naturally encourages a defensive approach where institutions over-file to avoid the risk of severe financial and reputational damage.

Unintended Consequences of Defensive SAR Filings

While SARs are an essential resource for financial crime prevention, defensive filing has become detrimental to law enforcement agencies, compliance professionals, and the broader community.

Floods Law Enforcement With Unhelpful Data

When law enforcement agencies are flooded with defensive SARs that lack evidence of criminal behavior, they have to sift through vast amounts of irrelevant data. Sometimes, that means printing out stacks of paper and sitting in a room reading the filings. This not only hampers their ability to pinpoint genuine financial security threats but also impedes operational efficiency and drains their limited resources.

Unnecessarily Shares Citizens’ Data

Although individual SARs rarely result in criminal convictions, their collective data is invaluable to financial and law enforcement agencies. So, regulators are not inclined to discourage firms from reporting transactions that fall into a gray area, even if they don’t strictly warrant suspicion.

This data in government databases not only raises the risk of misuse or unauthorized access but also prompts bank analysts to dig through customer profiles, elevating the chance of both external and internal data leaks.

Increases Workload for Compliance Analysts

Once a SAR is filed, the financial institution must review that particular activity or client after 90 days.

If the initial SAR was filed defensively due to a lack of information, analysts are highly encouraged to contact the customer for additional details to avoid future, similar filings. Since this requires additional time and resources, contributing to inefficiency, defensive SARs create ongoing work for already-stretched compliance teams.

Solutions

To curb the increase in defensive SAR filings, our industry needs a targeted response. This requires a shift in both the internal operations of compliance teams and the strategies employed by regulators.

Proper Budget for Compliance Teams

While AML compliance departments may not directly drive profit, they build trust and credibility, which is essential for the firm’s long-term success. Securing sufficient budget and resources for your compliance team will help achieve this goal and involve early discussions with stakeholders.

To ensure effective budget conversations, compliance leaders must:

Convince stakeholders to invest by highlighting issues that affect more than just your team, such as brand value and customer safety.
Present a clear action plan outlining how each initiative will benefit the company. Use quantifiable metrics like fraud prevention or reduced suspicious activity to support all points.
Stay informed on industry trends and developments to make your case more compelling.

Better Policies and Procedures

Teams need to add a request for information (RFI) step to their initial review processes, including a responsible buffer to account for customer response time. This will allow compliance teams to gather more context from clients when potential red flags arise. From there, prioritize workflows to efficiently process and analyze responses to these RFIs.

Afterward, regularly assess client risk profiles and consider ending relationships with clients who frequently trigger SARs. To encourage even more accurate analysts, organizations should consider instituting a policy that closes accounts after a single SAR is filed.

This will serve as a robust internal control measure, leading executives to enhance their risk assessment frameworks, SAR filing practices, and overall compliance investments.

Getting Complete Data and Regular Training

To get a more holistic view of customer data and transaction patterns, companies must have a unified compliance team handling fraud, AML, and sanctions across all departments and functions. By breaking down silos, analysts can access richer contextual data that allows more accurate risk assessments. Coupled with up-to-date data sets and regular training on internal software and processes, teams can function more efficiently and effectively.

Shifting the Lens

As illicit finance continues to increase, this defensive approach is not only short-sighted but also ineffective for tackling financial crime. The increasing rate of defensive SAR filings will soon become unsustainable, leaving both institutions and the general public vulnerable, as accumulating data in government databases heightens the risk of leaks.

Responsible SAR filing begins with having software tailored to your specific compliance needs, exponentially scaling your team’s coverage while reducing the cost of operational overhead.

Learn how tools like Sandbar can simplify your AML processes and streamline compliance workflows by scheduling a demo here.

The Rise of Defensive SAR Filings: Causes, Consequences, and Countermeasures