Most people generally understand the definition of a committee to mean a group of individuals organized to oversee, investigate and report on an activity; independent from the main body authorizing its formation but ultimately responsible to that body. In sports, the term is often used to describe multiple players who combine to execute a task where each player alone would have limited success. Over the last decade much discussion has taken place regarding suspicious activity report (SAR) committees, not that every other practice stemming from the Bank Secrecy Act (BSA) and anti-money laundering (AML) laws has not raised the same never-ending dialogue. SAR committee discussions run the gamut from the make-up of the committee to whether they compromise the independence of the process. Having served on several SAR committees to acting unilaterally as a BSA officer, I offer the following perspective on the subject.
To committee or not to committee
Whether you choose to have a SAR committee is generally predicated on several factors, the most predominant of which is the size of the institution. The size of the institution will normally dictate the number of product lines offered and the size of the workforce. In turn, this creates a symbiotic relationship to the structure needed for effective BSA compliance and the likely number of SARs that will eventually be filed. This, however, may all be trumped by the philosophy of the president and board of directors, philosophy ranging from micromanaging to a laissez-faire attitude about the BSA. The extremely small institution may have a BSA officer who wears multiple hats, with BSA compliance being their secondary or tertiary responsibility and priority. The BSA officer of these smaller institutions may report directly to the president. For the few SARs they file per year, less than 10 (including supplemental filings), a SAR meeting as opposed to a committee may be satisfactory. A large institution, one that files north of 150 SARs per year, may have several BSA/AML analysts on staff in addition to the BSA officer. There may also be further layers of management for review and sign-off authority. At a certain point, no institution wants its personnel spending more time at SAR meetings than their normal job functions. We as BSA/AML professionals sometimes lose sight of the fact that the financial institution we work for needs to earn a profit and compliance is a cost of doing business. It is the mid-sized community bank and credit union, one that files 50 to 100 SARs per year, which is the most likely candidate for a committee.
One of the recurring questions I read from compliance professionals around the world asks if a committee compromises the independence of the individual investigating the suspicious activity. In the financial services industry a system of checks and balances is the cornerstone of limiting economic crime, and while institutions waver from time-to-time, such as keeping staff levels low to maintain targeted capital requirements, BSA compliance is no different. Having one individual as judge, jury and executioner is the antithesis of internal controls. Everyone reports to someone. Ask yourself, should a junior AML analyst be filing a SAR without the knowledge of management? While the degree of trust increases with job performance and experience, unilateral sign-off authority is rare, and may only be the unintentional by-product of a financial institutions size and/or economic difficulties.
Independence, of course, can be obstructed or influenced by one manager, or a small cabal of individuals, no matter what safeguards you employ (see the Retaliation Factor, ACAMS Today, December 2010–February 2011 issue). Independence, however, should not be confused with a robust discussion among colleagues of like minds. One could counter argue that in some respects a SAR committee can act as a safety net to allow an investigator to be independent since the committee would not subject the investigator to the control of one individual. A committee, by nature, is additionally designed to police itself because of the differing personalities and expertise of its members.
Composition of the committee
If your institution decides to go forward with a committee, the optimum make up of the committee should be at least three, but no more than five participants. The BSA officer is a given, and depending on the number of additional analysts the most senior analyst may be another logical participant. In many institutions the BSA officer is also an analyst or is assisted by one or more analysts. In the case of multiple analysts, you may wish to restrict their attendance to only the cases that pertain to them; or simply have each analyst readily available for further insight.
Candidates for the other seats should be managers drawn from deposit operations, lending, security, branch administration and compliance, with at least one being on the senior level and chairing the committee. Selecting the facilities or IT manager, for example, may not be a wise choice. The participants should be career-banking professionals, experts in their own field, yet with a rudimentary understanding of the other areas. In other words the longer they have been in banking the better. An experienced collection manager is another possible choice, since much of their job function revolves around negative behavior and people avoiding the truth.
One group that should not be included is directors or individuals on supervisory committees or advisory boards. Directors of community banks and credit unions may be well known in the community and politically connected, becoming emotional and irrational regarding an investigation of someone they know. Many may take the Pollyanna view that by interceding, which can range from an angry tongue-lashing to some fatherly advice, will resolve the situation to everyone’s satisfaction, notwithstanding that their motive may be more sinister instead.
Despite all the training, those not exposed to the BSA on a daily basis may see their action as nothing more than a harmless common sense solution to a problem, rationalizing that the safe harbor provision was not really meant for this particular situation. A director on a committee is also the ultimate irony. In one respect you are reporting SARs to the board with no identifying information so as to protect the integrity of the process, while on the other hand that same director is sitting at the board meeting fully aware of the facts surrounding the filing.
Decision of the committee
The last thing you want is for the committee to work like the court system and cause an endless stream of delays and extra work because people are reluctant to make a decision. This goes back to the members you choose for the committee. The single most difficult concept to drive home to some is that a SAR is not a criminal complaint, nor should the activity be viewed in a cavalier or reticent manner. Much of it is common sense. The activity will either be so blatantly criminal or suspicious that the decision to file is thoughtless; or so gray that more work and further monitoring may be needed. A preponderance of the votes should be unanimous one way or the other. People on the committee should understand that while not the objective of the BSA there are no penalties for filing endless, dumb or inconsequential SARs. Closing an account or deciding under what circumstances a letter soliciting further information is warranted will additionally become part of the review process, devolving into a further decision by the committee.
Protection against a false SAR
In the final analysis, after all is said and done, preventing a false SAR from being filed may be the single most overriding reason to have a committee. I am only aware of one instance in which a false SAR was filed, which is filing a false government document. Why someone would file a false SAR is like asking why someone would commit any crime, the reason often locked in the deep recesses of the suspect’s mind. While a committee is no guarantee that a false filing can be prevented it certainly eliminates the unilateral filing. And while one layer of sign-off authority can be manipulated, multiple individuals raising multiple questions with documents in front of them definitely makes navigation much more difficult. Abandoning any contemplated nefarious action increases when the road is tougher. For the institution, the negative publicity, legal and potential monetary fallout for a fraudulent SAR can be extremely deleterious.
Exposing other flaws
What I find is a major benefit of a SAR committee is that a by-product of AML/economic crime investigations is the exposure of other weaknesses in your institution. Because much of banking is interrelated and since the BSA encompasses every area of banking an internal avenue exists to expose training, policy and procedural flaws and/or violations. Some of the examples of such flaws are employees failing to follow account opening procedures; the discovery of custodial accounts where the minor is now 30 years old because the bank has no procedure to flag them; an inconsistent or non-existent cash-exchange policy; negligent collection activity on past due safe deposit box rents; improper check holds and loans paid years in advance — the result of something not thought of years earlier when processing rules for loans were established. The committee provides a regular forum for these problems to be discussed and addressed, since the committee may include some of the department heads directly responsible for the errors raised, management that has the authority to correct them.
Need to know basis
Everyone is aware of the safe harbor provision and the fact that the target(s) of a SAR is not to be told under any circumstances about the filing. Only those on a need to know basis should be privy to a filing. Reports that law enforcement will sometimes tell a suspect that a SAR was filed against them or just the fact that someone may infer a SAR was filed against them is out of the control of the financial institution. We have all heard the story of the guy who is being investigated and his bank transactions become part of the investigation. Since he only banks in one place it is not very difficult for him to deduce that law enforcement obtained the information from his bank. Every now and then a question will arise that the formation of a SAR committee expands the number of people who know, and the more people that know, expands the chance of a slip of the tongue. While true for anything secretive, if you construct your committee the proper way the chance of something happening is probably the same as if you had no committee to begin with — or maybe, even worse.
Charles Falciglia, CAMS, Suffern, New York, USA, firstname.lastname@example.org