Suspicious activity reports (SARs), also known as suspicious transaction reports (STRs), as the term varies from jurisdiction to jurisdiction, form the backbone of the AML and CFT framework.
Broadly speaking, these reports are forms that financial institutions (FIs) are required to submit to financial intelligence units (FIUs) when they suspect or detect suspicious activity related to money laundering or terrorist financing. According to the annual report of the Egmont Group of FIUs, 15,773,126 SARs were submitted worldwide in the financial year 2021-2022.
However, there is a significant challenge. FIs are often in the dark about the effectiveness of their submissions. They are unsure whether the SARs are helping to combat illegal activity, or whether they are simply adding to a pile of poor-quality submissions. This situation makes it difficult to measure progress or determine how well an FI is performing relative to its counterpart.
Extreme Lithuanian example
An example of the global struggle is the experience of Lithuania, a country that has seen an exponential increase in SAR submissions. In 2020, 3526 SARs were received, jumping to 99,911 by 2022.
However, the number of these reports that are analyzed and referred for further investigation reflects a consequent decline in the effectiveness of controls – from 14% (497) in 2020 to just 0.8% (808) in 2022.
The rate of successful criminal investigations triggered by SARs remains low, with only 38 investigations initiated out of almost 100,000 such reports in 2022.
SARs in Lithuania
SARs volume instead of value
While Lithuania’s recent volume of SARs is an extreme example, and there are differences between countries in terms of publicly available SAR-related metrics (as well as the exact responsibilities of their FIUs), the trend of increasing numbers of SARs is global. This is well illustrated by the statistics published by the FIUs of global economies such as the United Kingdom and the United States.
The system shows an inherent bias towards generating a large volume of low-quality SARs for a few compelling reasons. Fear of regulatory sanctions takes precedence over the quality of SARs. Financial institutions are rarely penalized for submitting low quality or irrelevant reports. However, the absence or unreasonably low number of SARs, especially compared to other market participants, immediately attracts regulatory attention. As a result, the focus is often on volume rather than value.
SARs in United Kingdom and United States
This scenario gives rise to the practice of “defensive SARs”. When FIs compare the volume of SAR submissions with market trends and find that they are lagging, they typically respond by increasing the number of SARs as a precautionary measure to avoid unwanted regulatory scrutiny. Unfortunately, this defensive posture has become the norm across the industry, perpetuating a cycle of low quality reporting.
An illustrative example of the overall effectiveness of the AML/CFT framework within the EU is presented in a report published by EUROPOL. According to EUROPOL’s estimate, based on data from EU Member States, “the amount of assets that law enforcement authorities manage to take out of the hands of criminal networks remains below 2% of the annual proceeds of organised crime”, while “the value of assets seized annually in the EU averaged at least EUR 4.1 billion in 2020 and 2021”.
Raises important questions
The continuing defensive trend in the submission of SARs poses significant challenges for FIUs. The flood of information they receive can obscure valuable insights, hindering their ability to perform their critical functions effectively. There is a quiet consensus in the industry that too many reports are being filed and that the flood of information received may obscure valuable intelligence.
This gap between the ideal SAR system and its real-world implementation is a significant concern that demands attention. The discrepancy in results calls into question the viability of the system and prompts a re-evaluation of the SAR submission process and the overall fight against money laundering and terrorist financing.
A divergence between the increasing volume of SARs and the resulting analysis, investigations and successful enforcement actions underscores the inherent problems with the current AML measures in place.
The statistics make a compelling case for improved efficiency and effectiveness in the global response to financial crime. Addressing these challenges requires a reassessment of current practices and the development of more effective AML/CFT policies, considering both compliance requirements and broader AML/CFT objectives.