Enforcement actions sanctioning firms and, in a few cases, individuals for failing to investigate and report suspicious activity have been significantly on the rise. SEC, FinCEN, FINRA, and others have been active in this area, particularly with regard to trading at, by, or through the financial institution. One critical component of a financial institution’s ability to maintain a robust anti-money laundering (“AML”) program and comply with its suspicious activity reporting (“SAR”) obligations is to ensure that the firm actively identifies and timely reviews “red flags” of potentially suspicious activity. What constitutes a “red flag” varies depending on many factors, including the firm’s business, location of the firm and customers, customer activity, and many other factors. Regulators over the years have issued guidance detailing “red flags” for potentially bad activity in an effort to assist firms in developing and enhancing their SAR reporting programs.
Consolidation of “Red Flag” Guidance or One Stop Shopping
On May 6, FINRA published a Regulatory Notice 19-18 (the “Notice”), which aggregates federal government and other regulatory “red flag” guidance issued over the past 17 years. Included in the Notice are the “red flags” that FINRA included in its own original notice issued in 2002, Notice to Member 02-21. FINRA issued the Notice to provide “one stop shopping” for firms searching for insights from the government and regulators on what they should monitor. The Notice lists no fewer than 104 “red flags” compiled in five categories: customer due diligence and interactions with customers, deposits of securities, securities trading, money movements, insurance products, and a catch all (other potential red flags).
- Never static – not one-and-done. Firms need to review periodically their AML/SAR programs to assess “red flags” employed to ensure they evolve to reflect new concerns in the industry, new methods by the “bad guys” to use the financial system to engage in illegal activity, and changes at the particular firm that implicate new “red flags.”
- Not one size fits all. Variations of firms in terms of size, business, model, products, etc. means different “red flags” will be at play.
- Not an exhaustive list. The 104 “red flags” are examples and not a complete list. As noted, additional “red flags” will arise based on unique facts and circumstances of the activity at issue. If something appears questionable, follow up.
- As the slogan says: “if you see something, say something.” SAR reports are extremely valuable resources and information to law enforcement to put the investigative pieces together. The reports have led to many successful law enforcement cases, and firms remain obligated to investigate a red flag and where appropriate file a SAR report.
- Ignore a red flag at your peril. Of course, the bottom line for financial institutions with SAR reporting obligations: failure to investigate and, if appropriate, file SAR reports exposes the firm to significant sanctions and reputational damage when a regulator identifies the “red flags” and no appropriate follow up.