, Terrorist Financing
At the International Compliance Association we find ourselves discussing money laundering issues almost constantly. One of the reasons that I love my job is that I get to discuss the finer points of anti money laundering regulations with other like-minded people.
The United Kingdom's Financial Intelligence Unit (FIU) recently released the 2015 figures for suspicious activity reports. The Annual Report was scrutinised within the office and one of my colleagues wrote an update on the key points gleaned from the report.
At that point, we started discussing the suspicious activity report (SAR) regime around the world, wondering how the UK's figures compared to other countries, whether the challenges were similar and if there were any similarities in the entities that submitted the greatest number of reports. I chose to take a closer look at the SAR regime within Switzerland.
Duty to Report
It is clear that financial institutions play a key part in the fight against money laundering and terrorist financing; the sharing of information with law enforcement agencies is a critical component.
The duty to report when there is a suspicion that funds are the proceeds of criminal activity, or are related to terrorist financing, is enshrined in the Financial Action Task Force (FATF) Recommendations. This ensures that any country who is a member of FATF, or a FATF-style regional body, must set the requirement to report to their FIU.
Whilst the requirement to report seems clear cut, there is no ‘minimum amount’ required and attempted transactions must also be reported, so putting this into practice can present difficulties. Whilst concrete proof is not required, the decision on when to report and what constitutes ‘suspicion’ are by their nature, subjective.
Being able to recognise indicators of suspicious activity, especially when dealing with ever-evolving threats from criminals, can feel like a struggle. Ensuring that all employees are equipped with the knowledge which allows them to recognise suspicious transactions, including those that relate to attempted transactions, is one of the many challenges that anti money laundering professionals face.
Focus on Numbers
When analysing the number of SARs that have been submitted, it could be easy to infer that the greater the number submitted, the more effective the jurisdiction’s SAR regime. But if FIUs were to only receive reports that contained genuine, well-articulated suspicion, would the numbers could go down? Would FIUs see a benefit if the reports were based on quality over quantity?
The fear of getting it wrong has led in some jurisdictions to ‘defensive’ reporting. The money laundering enforcement action around the world has seen financial institutions take a more conservative approach to requirements. Some firms may err on the side of caution and report transactions, even when they do not have a reasonable ground for suspicion.
Switzerland Reports Increase
The Money Laundering Reporting Office Switzerland (MROS) saw a 24% increase in reporting volume during 2014, breaking the previous record set in 2011. What is most interesting about the 2014 increase is that it cannot be easily explained, unlike the 2011 record which was attributed to one event, the Arab Spring.
The Arab Spring thrust the financial flows in and out of those countries into the spotlight amid concerns that corrupt politicians may have been funnelling public funds out of the country, but 2014 saw no similar global events.
Whilst SARs relating to fraud remained the most popular predicate offence, the number of reports relating to bribery more than doubled. A total of 50 reports were received relating to one large and complex case which was reported to the prosecution authorities.
The Rise of Voluntary Reports
What sets Switzerland’s SARs regime apart from most other jurisdictions is that alongside the requirement to report when there is a reasonable suspicion (as required under Article 9 of the Anti Money Laundering Act), firms also have the ‘right to report’.
Voluntary reports (as detailed under Article 305ter paragraph 2 of the Swiss Criminal Code) do not require reasonable suspicion, but allows the filing of a report based on ‘a likelihood, a doubt or even a sense of unease about continuing the business relationship.’ Voluntary reporting allows for a broader range of activities that can be reported to MROS.
The 2014 figures were characterised by an increase in the number of voluntary reports received; for the first time the number almost equalled the amount of mandatory reports. This increase was mainly attributed to the banking sector.
Interestingly, a difference has also been noted between foreign-controlled banks (which are more likely to submit mandatory reports) and major Swiss banks (which made more use of the voluntary reporting).
Asset Management Sector Sees Decrease
But whilst reports from banks are on the increase, the number received from fiduciaries and asset managers/investment advisers has nearly halved. This is not consistent with the increase received from banks, especially in light of the requirement for both the custodian bank and the independent asset manager or fiduciary to submit a SAR where there is a reasonable ground for suspicion.
Investigations by Prosecution Authorities
The proportion of SARs that were forwarded to prosecution authorities fell by 7%, this decline was attributed to a number of factors which have resulted in MROS having a greater capacity to analyse SARs in more detail and filter out cases that were unsubstantial or couldn’t be proven with a reasonable amount of effort.
The annual report does not give a clear indication as to whether the reports that were not taken forward to law enforcement were from mandatory or voluntary reports. However it does clearly state that the decline is not a reflection of the high-quality reports it receives from financial intermediaries.
The publication of the 2015 annual report will be welcomed and will not doubt provide interesting reading, especially in light of the corruption scandals that have rocked the sporting world.
It is clear that the vital role of financial institutions in recognising and reporting suspicious activity plays in the global fight against financial crime must continue.
The onus remains on banks to ensure that they understand emerging threats, have implemented a robust internal reporting framework and ensure that employees are adequately trained in both recognising suspicious activity, and knowing where to report the activity. Individuals with the responsibility to report to FIUs must understand best practice and be able to clearly detail the suspicion in order to provide the FIU with the intelligence that is required to extract meaningful information.
With money laundering, terrorist financing and predicate offences such as bribery and corruption playing such a big role in discussions within the global community, the responsibility on financial institutions has never been greater, but so are the consequences for getting it wrong.
I hope this insight into the SAR reporting regime and the look at Switzerland has been useful. We have been discussing ultimate beneficial ownership (UBO) around the world and my next update will be a closer look at UBO, a topic getting a lot of recent attention globally.
If you are interesting in learning more about anti money laundering around the world, have a look at our qualifications. We offer the International Diploma in Anti Money Laundering, which examines the AML frameworks from a global perspective.
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