Bank Secrecy Act (BSA) Regulations - What is “Suspicious Activity?”

Gregory J. Cook, EA, CPA   

A SAR must be filed by a covered MSB when the MSB knows, suspects or has reason to suspect that the transaction or pattern of transactions is suspicious and involves $2,000 or more. A suspicious transaction is one or more of the following:

*Involves funds derived from illegal activity, or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity.

*Is designed to evade BSA requirements, whether through structuring or other means.

*Appears to serve no business or apparent lawful purpose, and the MSB can determine no reasonable explanation for the transaction after examining all available facts.

*Involves use of the money services business to facilitate criminal activity.

All MSBs should have a system or procedure to ensure that SARs are filed when appropriate. When an MSB employee suspects a person is laundering money, conducting transactions to evade BSA requirements, or conducting a transaction that has no apparent lawful purpose and for which no reasonable explanation can be determined, or involves use of the money services business to facilitate criminal activity, the employee should report that activity to his/her manager or to the MSB compliance officer. Then, if the MSB determines that a SAR should be filed, it must file the SAR and keep a copy of it for five years. Any supporting documentation, such as transaction records, must be maintained with the copy of the filed form and also kept for five years from the date of filing the report.

What are “Funds Derived from Illegal Activity?”

The phrase “funds derived from illegal activity” means the monetary proceeds of a criminal act.

Example. A drug trafficker sells drugs to a user for $500. The money received from the drug purchaser, the $500, is proceeds of the drug sale and is “funds derived from illegal activity.”

What is a transaction that “Is Designed to Evade BSA Requirements?”

Example. A customer conducting an $11,000 cash transaction attempts to bribe an MSB employee not to file a CTR.

What is a Transaction that “Serves No Business or Apparent Lawful Purpose?”

Some transactions may be conducted in such a way that they appear unusual or suspicious. However, additional facts, if known by the reporting business, might disclose a reasonable basis for what, at first, appears unusual or suspicious.

Example. A customer, a retired teacher, frequently sends and receives money transfers of more than $2,000 to and from many different people. The MSB might at first conclude that these transactions are suspicious because they appear to “serve no business or apparent lawful purpose” and because there does not seem to be a legal source for these funds. However, with more information, the MSB might conclude that a business purpose exists. For example, the retired teacher might be regularly using an Internet auction site to buy and sell antique jewelry.

What is a transaction that “Involves Use of the MSB to Facilitate Criminal Activity?”

Example. An MSB suspects that a customer is sending a money transfer in order to fund a terrorist organization.

It is important to note that size alone, such as a large cash transaction or money transfer, should not be a determining factor in the decision to file a SAR. Factors that should contribute to that decision, however, include the following: the size, frequency and nature of the transactions; the MSB’s experience with the customer and other individuals or entities associated with the transaction (if any); and the norm for such transactions within the MSB’s line of business and geographic area.


Red Flags

When a single factor signals that a transaction is unusual and possibly “suspicious,” it should raise a “red flag.”

Examples of Some Common Red Flags:

Customer ID or Information

*Customer uses false ID.
*Two/more customers use similar IDs.
*Customer alters transaction upon learning that he/she must show ID.
*Customer alters spelling or order of his/her full name.

Transactions Below Reporting or Recordkeeping Thresholds

Customer conducts transactions just below relevant thresholds:

*Currency exchanges just under $1,000.
*Cash sales of money orders or traveler’s checks of just under $3,000.

Multiple Persons or Locations

*Two or more customers working together to break one transaction into two or more transactions in order to evade the BSA reporting or recordkeeping requirement.

*Customer uses two or more locations or cashiers in the same day in order to break one transaction into smaller transactions and evade the BSA reporting or recordkeeping requirement.

Overt Illegal Customer Conduct

*Customer offers bribes or tips.
*Customer admits to criminal conduct.

An MSB that correctly verifies and documents a customer’s identity is more likely to recognize suspicious activity that should be reported.