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Effective STRs as the Outcome of a Robust AML/CFT Programme

An ‘effective’ Suspicious Transaction Report (STR) or Suspicious Activity Report (SAR) is the cornerstone of a successful Anti-Money Laundering (AML)/ Countering the Financing of Terrorism (CFT) programme. The large volumes of investment flowing into AML/CFT programmes worldwide could be justified only if they generate credible leads on money laundering and other anti-social and illegal activities for the country’s law enforcement agencies.

How many STRs?

Although there are no set indicators for how many STRs a financial institution or indeed a country must produce in a year, numbers published by FIUs in different countries empirically indicate a direct correlation between the number of STRs filed to variables such as size of the economy, its relative AML/CFT maturity, stringency of regulation, and the number of reporting entities (there could of course be exceptions to this).

Some indicative numbers are listed below:

  • US – 2,171,173 SARs in 2018
  • UK – 463,938 SARs in 2018
  • India – 1,436,340 STRs in 2017-18 (this was in fact an exceptional year for FIU-IND due to demonetisation in India in November 2017)
  • Hong Kong – 73,889 STRs in 2018
  • Sri Lanka – 925 STRs in 2017
  • Philippines – 132,305 STRs in 2016

There are some who may argue that a lower number of STRs does not necessarily signify a weaker AML regime, but that criminals may be deterred from laundering money in that institution/country. However, estimates suggest that between USD 800 million and USD 2 trillion is laundered every year globally. Moreover, reportedly not more than 1 to 2 per cent of laundered money is actually detected and seized, despite the increasingly sophisticated systems invested into by banks and financial institutions. In such a scenario, arguing that a lower number of STRs is suggestive of a better AML eco-system would be counter-intuitive.

Further, there are also no clear indicators on what proportion of alerts generated by an institution should get converted into an STR. While a higher proportion may signal more efficiency, compliance officers often argue that tweaking the AML monitoring programme is a continuous and time-consuming exercise. The risk of the system missing out on positive alerts if thresholds are set too high, makes them opt for more encompassing scenarios. Institutions report a rate of false positive alerts ranging anywhere between 90 and 99 per cent – which means an increasing number of resources are being spent on picking out needles from a haystack. 

An ‘effective’ STR

Despite the ambiguity around the number of STRs that should be filed, there is little disagreement amongst AML compliance officers that an ‘effective’ STR is one that is complete, accurate and timely – with all the necessary customer details, transactional history, investigative and scrutiny details presented – and containing an intuitively sound ground of suspicion.

An effective’ STR is one that is complete, accurate and timely – with all the necessary customer details, transactional history, investigative and scrutiny details presented – and containing an intuitively sound ground of suspicion.

While the definition of an effective STR may be straightforward and non-controversial, regulators often lament the poor quality of STRs received from reporting entities. They point out several problems, including:

  • Incorrect or inadequate customer and transaction data, which ties back into poor due diligence and follow-ups with customers
  • Incorrectly filled out fields while submitting the STR, often due to a ‘copy-paste’ approach to filing
  • Low quality narrative or insufficient explanation of the grounds of suspicion, which makes FIU analysts either reject the STR or go back to the institution for clarifications
  • Delayed submission of STRs leading to precious time lost in apprehending the offender
  • STRs submitted with no real grounds of suspicion only to keep the organisation safe from punitive penalties.

At the level of the Financial Intelligence Units (FIUs), which are almost always struggling with lack of resources, ineffectual STRs clog the system and lead to inordinate delays in disseminating the information forward. Dummy or incorrect data filled into fields – especially fields such as unique identifiers – often lead to false linkages between unrelated STRs, creating further problems for FIU analysts.

In Fintelekt’s interactions with reporting entities as well as regulators around Asia, we have lately seen increasing focus in this area, as FIUs are spending time and resources in communicating the gaps and pointing out errors in STR filing so as to improve the efficiency of the system as a whole.

What leads to effective STRs?

A robust AML/CFT programme would in itself be expected to lead to effective STRs as it would assume appropriate functioning of the following important elements of the framework:

  • Effective governance that fixes responsibilities for oversight and management of the AML programme. This would lead to a culture of compliance and a system geared up to taking on compliant business and identifying suspicious behaviour on a routine basis
  • The use of the right AML monitoring technology for the size of the organisation, optimised for the red flag indicators and typologies best suited to the organisational profile, and reducing the number of false positives
  • Continuous training for AML compliance staff enabling them to prioritise the AML alerts correctly and in turn lead to better quality STRs.

As the FATF and its regional counterparts are also increasingly emphasising on effective implementation of AML/CFT programmes, the quality of STRs (and not just numbers) will become an important parameter for evaluation and assessments. Institutions with a mere tick-in-the-box approach to AML compliance will find it difficult to fulfill this requirement and cannot hope to become useful contributors in the fight against money laundering and other financial crimes.