In a recent letter from the FCA, sent on 1st August 2024, some payments and Emoney firms were reminded of their responsibilities regarding Suspicious Activity Reporting (SAR). As financial crime continues to evolve, regulators have stressed that firms in the payments and Emoney sectors must prioritise their SAR framework.
This article outlines key areas of focus, including detection systems, alert management, reporting requirements, and staff training, to ensure compliance and maintain the integrity of financial systems.
Systems and Procedures for Detecting Suspicious Activity
Why Detection Matters
The detection of suspicious activities is the cornerstone of a firm’s defence against money laundering and terrorist financing, as failure to detect such activities can expose firms to significant legal, reputational, and operational risks.
The FCA has consistently emphasised the need for robust detection systems, particularly in the payments and Emoney sectors, where the risk of financial crime is high.
Additionally, the FCA’s focus on financial crime prevention is reinforced by the critical role SARs play in helping law enforcement identify criminal activity at an early stage.
Key Elements of Detection Systems
Effective detection systems rely on a combination of automated tools, data analytics, and manual reviews.
Automated systems provide real-time alerts, while data analytics help to identify patterns indicative of suspicious behaviour.
Manual reviews, especially for high-risk clients or transactions, add a personalised layer of oversight that automated tools may overlook.
Common Weaknesses in Detection Procedures
Whilst engaging with firms, we have seen that Payments and Emoney businesses often struggle with outdated or inefficient detection systems. Key weaknesses include:
- – Outdated technology: Legacy systems often lack the agility to process modern, complex data sets, leading to gaps in detection.
- – Lack of integration: In some firms, detection systems operate in silos, with inadequate communication between departments, which can result in missed red flags.
- – Insufficient high-risk monitoring: Many firms fail to properly monitor high-risk clients and transactions, either due to a lack of resources or poorly designed risk assessments.
In a Dear CEO letter sent on 5 March 2024, the FCA stressed the importance of aligning detection capabilities with a firm’s growth and complexity, to avoid situations where the financial crime framework lags behind business development.
Addressing Systemic Gaps
To address these challenges, payments and Emoney firms need to:
- – Regularly upgrade detection systems and ensure they are aligned with the firm’s specific risk environment.
- – Promote interdepartmental communication and data-sharing to build a more cohesive detection framework.
- – Prioritise the monitoring of high-risk clients by integrating more sophisticated risk assessment models and providing regular updates to reflect changes in client profiles.
Firms must continuously review and strengthen their detection systems to stay ahead of financial crime risks, ensuring they can effectively identify, monitor, and report suspicious activities.
Oversight of Suspicious Activity Alert Management
Effective Management of Alerts
Alert management is crucial in detecting suspicious activities and ensuring that firms respond promptly to potential financial crimes. Firms should adopt a systematic approach to managing alerts, ensuring that all suspicious activity is escalated, reviewed, and resolved efficiently.
While automated systems are helpful, human oversight is necessary to verify the validity of flagged alerts. Proper management should also include the timely escalation of cases to compliance teams, with clear justifications for closing alerts to ensure no potentially suspicious activity is overlooked.
Ensuring Accountability
Accountability is a key element of SAR frameworks, and senior management must take an active role in overseeing alert management systems.
The FCA insists that senior leadership, including the Money Laundering Reporting Officer (MLRO) or Nominated Officer, must be involved in the process, from reviewing alerts to making critical decisions on whether to file SARs. Ensuring accountability involves:
- – Tracking alerts: Firms should maintain robust tracking systems to monitor outstanding alerts, conduct ageing analysis, and ensure timely resolutions.
- – Clear escalation procedures: Alerts should be escalated based on their risk or complexity, with compliance teams and senior management involved in high-risk cases.
- – Maintaining audit trails: Proper documentation is crucial to demonstrate decision-making processes regarding alert closures and reporting.
- – Maintaining a SAR register: Firms must have a detailed register recording all internal and external SARs
- – Management Information: Statistics on SARs should be included in regular MI reports to senior management.
Quality Control and Continuous Improvement
Quality control measures are essential to ensuring that alert management systems function effectively.
Regular audits, scenario-based testing, and continuous feedback mechanisms can help identify weaknesses in alert management systems, such as misaligned risk thresholds or over-reliance on automated systems. Firms should also review alert thresholds regularly based on evolving risk profiles and ensure their frameworks remain aligned with regulatory expectations.
By maintaining strong oversight of alert management, firms not only ensure compliance with FCA regulations but also minimise the risk of undetected suspicious activity, which could expose them to financial crime.
SAR Volumes and Reporting
Internal and External Reporting Requirements
Effective SAR reporting requires both internal reporting to the MLRO or Nominated Officer and external submissions to the National Crime Agency (NCA).
Internally, firms must ensure that employees know how to escalate suspicious activities to the MLRO or Nominated Officer, while externally, SARs should be clear and comprehensive, containing all relevant details, such as dates, amounts, and reasons behind the suspicion.
Firms should align their reporting with FCA expectations, streamlining internal procedures to ensure that all suspicious activities flagged internally are escalated to the MLRO or Nominated Officer.
The MLRO or Nominated Officer is then responsible for determining whether the alerts meet the threshold for a SAR, which should be submitted to the NCA following their guidelines. The SAR should focus on critical details without including unnecessary information.
Assessing SAR Volumes
The FCA has raised concerns about under-reporting SARs in certain sectors, particularly amongst payments and Emoney firms, noting that discrepancies between internal and external reporting can indicate under-reporting.
Firms need to assess SAR volumes by comparing the number of internal suspicious activity alerts raised against the SARs actually submitted to the NCA. Discrepancies may suggest that alerts are not being escalated sufficiently or that reporting thresholds are misunderstood within the firm.
Firms should regularly review their SAR volumes relative to their size, client base, and risk exposure. For instance, a firm with a high volume of cross-border transactions should typically submit more SARs due to the inherently higher risk of money laundering and terrorist financing.
Why Accurate Reporting Matters
Accurate SAR volumes are crucial to maintaining the integrity of the financial system. Under-reporting could result in missed opportunities for law enforcement to act on critical intelligence, while over-reporting could dilute the effectiveness of the SAR regime.
More importantly, firms that under-report risk regulatory intervention and potential penalties, as highlighted by the FCA’s recent warnings.
Adequacy of Staff Training and Internal SAR Procedures
Importance of Comprehensive Training
A strong SAR framework depends heavily on well-trained staff who can recognise and report suspicious activities.
Training ensures that employees at all levels are familiar with financial crime risks, SAR obligations, and the importance of compliance. Frontline staff, in particular, must be trained to identify red flags, while management needs to understand their role in overseeing reporting procedures.
The FCA has flagged inadequate training as a common issue, and firms must ensure that regular, role-specific training is conducted.
Elements of a Strong Training Programme
A robust training programme includes:
- – Regular updates: Financial crime risks evolve, and staff knowledge must keep pace. Regular, up-to-date training should be mandatory, covering not only how to identify suspicious activities but also the specific reporting channels and procedures to follow.
- – Clear reporting instructions: Staff need detailed guidance on how to report suspicious activity internally. This includes identifying suspicious patterns and escalating them to the MLRO or Nominated Officer. The reporting process should be simple yet thorough, ensuring no potentially suspicious activity is overlooked.
- – Emphasis on confidentiality: Confidentiality is a cornerstone of the SAR process. Employees must be educated on the importance of maintaining discretion when reporting suspicious activity, avoiding actions that could inadvertently alert customers. The SAR reporting process must ensure that sensitive information is handled with care to avoid legal or regulatory repercussions.
- – Understanding their legal obligations: Employees should be made aware of their obligations under the Proceeds Of Crime Act regarding failure to disclose, tipping off and prejudicing and investigation
Assessing and Improving Training Programmes
The effectiveness of training should be continuously evaluated through assessments, audits, and scenario-based exercises.
The FCA encourages firms to review their training programmes regularly, particularly as regulatory requirements change. Firms should also incorporate feedback from compliance reviews, internal audits, and external regulatory guidance to strengthen their SAR training and internal procedures.
Continuous learning and feedback help maintain a high level of awareness and ensure that staff are prepared to act quickly and correctly in identifying and reporting suspicious activity.
Conclusion: Strengthening Your SAR Framework
To remain compliant, firms must regularly review their systems, procedures, and training programmes related to SARs. As the FCA continues to scrutinise SAR practices, firms must ensure their controls are robust and effective in identifying and reporting suspicious activity. Any weaknesses should be addressed promptly, with oversight from the board, to avoid the risk of regulatory action.
At AuthoriPay, we offer comprehensive support for your firm’s AML compliance and help strengthen your AML and SAR frameworks.
From AML audits that assess and enhance your systems to SARs and AML training workshops that equip your team with practical skills, our expert consultants help ensure your firm is prepared for every regulatory requirement.
Contact us today to book a free consultation call.
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