Reporting Regulatory Requirements and Best Practices for FIs
Given the pervasiveness of land conversion linked financial crime, and the many ways in which various industries across the globe are exposed to it, the private sector has an essential role to play in identifying and reporting activity linked to these criminal practices.
This is primarily done through the submission of suspicious transaction reports (STRs) and suspicious activity reports (SARs), which are widely used to report certain types of financial crime and related predicate crimes but have so far been severely underused in relation to environmental crime —many of which are linked to land conversion.
Although different countries have specific suspicious transaction and activity reporting requirements, there is clear overarching guidance from international bodies such as FATF, UNODC, and the Wolfsberg Group. Under most countries’ legal frameworks, businesses are obliged to report transactions where there is suspicion that the proceeds are related to a crime, or that funds are to be used to commit, conceal, or benefit from a crime.
The Importance of STRs and SARs
Each STR or SAR, although it may seem individually insignificant, contributes to the bank of information being accumulated by countries’ Financial Intelligence Units (FIUs). This information serves not only as vital evidence in individual criminal cases, but also as a dataset from which new trends in the ever-evolving threats of illicit finance can be identified. FIUs are responsible for producing actionable financial intelligence. This information is used to prosecute criminals, ensure national security, and identify new trends in the ever-evolving threats of organised crime and terrorism.
STRs and SARs are not only key contributors to improving the FIU’s understanding of the threats and vulnerabilities present in the UAE financial system, but they also produce tangible results, leading to the arrest of criminals and the seizure of illegal assets. For example, in 2022, UAE law enforcement confiscated over AED 3 billion; approximately 45% of these investigations were instigated by intelligence disseminated by the FIU. STRs and SARs played a key role in generating this financial intelligence, with the FIU receiving over 38,000 reports of suspicious activity, more than double the number received in 2020.
STRs and SARs for Environmental Crime
The FATF reports that only a small number of STRs submitted globally relate to environmental crimes. It highlights that in one country, unnamed but described as having one of the highest deforestation rates in the world, less than 1% of STRs received from 2015 to 2019 were linked to illegal logging and land clearance. Cases like this indicate the existence of a vast gap between the reality of environmental crime on the ground and its perceived or acknowledged levels.
This trend of underreporting is concerning as STRs and SARs provide FIUs, regulators, and law enforcement authorities with crucial information to help identify, understand, and address financial crime. There are indications that this trend may be changing as the international community and regulators pay increasing attention to the nexus of environmental and financial crimes. With countries such as the US highlighting a recent upward trend in environmental crime and associated illicit financial activities, regulators are issuing specific guidance on identifying and describing environmental crimes in STRs and SARs.
The FATF Recommendations, which are the international standard for anti-money laundering regulation, have, since October 2021, included in their list of designated categories of offences: “environmental crime (for example, criminal harvesting, extraction or trafficking of protected species of wild fauna and flora, precious metals and stones, other natural resources, or waste)”.
Businesses should not fulfil their reporting duties purely out of a sense of bureaucratic necessity or compliance-related box-ticking, however. The submission of STRs and SARs offers the private sector a chance to play an active part in tackling environmental crime.
Best Practices for STRs and SARs
The quality of an STR or SAR is crucial to its usefulness. It is perhaps understandable that a business might be tempted to protect itself by filing STRs or SARs ‘defensively’ (filing reports on activity it does not truly consider suspicious, or has not fully investigated, to technically meet its legal obligations). This practice is, however, fundamentally detrimental to the basic functioning and purpose of the national and international anti-money laundering system.
Content
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Data fields should be filled out as carefully and accurately as possible, with reporters double-checking the details of their submissions.
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The most important section of a report is its description or narrative. It should include a comprehensive account of the activity or transaction in question, with information on the background to the report and a description of the parties involved.
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The purpose of the description is to outline the reasons why transactions or activity are suspicious.
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It should aim to answer six key questions:
- Who is involved in the suspicious activity?
- What exactly is being done?
- When did it take place/for how long has it been taking place?
- Where is it being done?
- Why is/was this activity carried out?
- How is it being done?
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The description should include a list of any red flags for criminal activity – direct references to financial and predicate crime typologies/indicators are very helpful for the supervising authority and the FIU to organize and link together their databases.
Style
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Write clearly and concisely: make all information, especially the reasons for suspicion, easy to understand.
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Structure logically: give a chronological account of transactions and take the reader through the story of suspicious activity step-by-step.
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Avoid jargon/acronyms as much as possible.
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Give a simple explanation of technical terms used.
Confidentiality is Essential—No Tipping Off
It is essential for businesses to keep in mind that STRs and SARs are highly confidential documents, to be shared only with the FIU and the relevant supervisory authority. It is vital that businesses do not deliberately or inadvertently tell (”tip off”) their clients—or, indeed, anyone involved in an STR or SAR—that they are under suspicion. In doing so, they run the risk of jeopardising any investigation and are also liable to legal penalties of fines and imprisonment.
Post-Reporting Process
After submitting an STR or SAR, the related customer or business relationships should immediately be classified as high risk. This may result in a business wishing to terminate its relationship with a customer. If the relationship is continued, the business should conduct appropriate risk-based enhanced due diligence and implement ongoing monitoring procedures. The need to preserve the confidentiality of an STR or SAR remains, however: businesses may choose to not conduct enhanced customer due diligence investigations if they consider that the process might tip off a customer about their suspicions.
Once a reporting entity has submitted its STR/SAR, the FIU may respond with requests for further information, or it may give the reporting entity instructions on continuing transactions with and monitoring the suspected client. Often, however, the FIU will offer no response to a report of suspicious activity. In such cases, it is the business’s own responsibility to conduct a proper post-report process.