Suspicious Transaction - AML/CFT

 A suspicious transaction is a financial transaction that may be related to money laundering, terrorist financing, or other unlawful activity. Financial institutions are required to report suspicious transactions to the government as part of their efforts to counter financial crimes. A suspicious transaction is a transaction that causes a reporting entity to have a feeling of apprehension or mistrust about the transaction considering its unusual nature or circumstances, or the person or group of persons involved in the transaction. Reporting entities assess the suspicion according to a risk-based approach for customer due diligence, real-time payment screening, transaction monitoring and behavioural monitoring, to identify changes in the respondent’s transaction risk profile.

RBI Definition

Suspicious transaction” means a “transaction” as defined below, including an attempted transaction, whether or not made in cash, which, to a person acting in good faith:

a.       Gives rise to a reasonable ground of suspicion that it may involve proceeds of an offence specified in the Schedule to the Act, regardless of the value involved; or

b.      Appears to be made in circumstances of unusual or unjustified complexity; or

c.       Appears to not have economic rationale or bona-fide purpose; or

d.      Gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism.

Explanation: Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist acts or by a terrorist, terrorist organization or those who finance or are attempting to finance terrorism.

Transaction

 “Transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes:

a.       Opening of an account;

b.      Deposit, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means;

c.       The use of a safety deposit box or any other form of safe deposit;

d.      Entering into any fiduciary relationship;

e.       Any payment made or received, in whole or in part, for any contractual or other legal obligation; or

f.       Establishing or creating a legal person or legal arrangement.

Reasonable grounds to suspect

According to FINTRAC, Canada, reasonable grounds to suspect is the required threshold to submit a Suspicious Transaction Report to FIU-Ind and is a step above simple suspicion, meaning that there is a possibility that a money laundering or terrorist activity financing offence has occurred.

You do not have to verify the facts, context or money laundering or terrorist activity financing indicators that led to your suspicion, nor do you have to prove that a money laundering or terrorist activity financing offence has occurred in order to reach this threshold. Your suspicion must be reasonable and therefore, not biased or prejudiced.

Reaching this threshold means that you considered:

• The facts
• The context
• The money laundering or terrorist activity financing indicators
• The sanctions evasion characteristics related to a financial transaction

After having reviewed this information, you concluded that there are reasonable grounds to suspect that this particular financial transaction is related to the commission of a money laundering or terrorist activity financing offence. It also means that you are able to demonstrate and articulate your suspicion of money laundering or terrorist activity financing in such a way that another individual with similar knowledge, experience, or training would likely reach the same conclusion based on a review of the same information.

Many factors will support your assessment and conclusion that a money laundering or terrorist activity financing offence has possibly occurred. These factors, along with an explanation of your assessment, should be included in the narrative section of the Suspicious Transaction Report. 

Process of Establishing Suspicion

In-Depth Analysis

1. Gathering Information: Collect all relevant information about the transaction. This includes the parties involved, the nature of the transaction, the amounts, dates, and any other pertinent details.
2. Contextual Analysis: Understand the context of the transaction. Compare it against the customer's profile, historical transaction patterns, and known behaviors. Look for inconsistencies or anomalies.
3. Investigative Tools and Techniques: Utilize various investigative tools and techniques. This may include transaction pattern analysis, link analysis to identify connections with other parties or transactions, and checking against watchlists or databases of known financial criminals.

Making Informed Decisions

1. Assessment and Decision Making: Based on the analysis, assess whether the transaction is indeed suspicious. If it is, decide the appropriate course of action, which might include filing a Suspicious Transaction  Report (STR) with relevant authorities.
2. Documentation: Document every step of the investigation process. This documentation should be thorough and clear, as it may be reviewed by regulators or law enforcement.
3. Feedback Loop: Provide feedback to improve the monitoring system. If an investigation reveals new patterns or indicators of suspicious activity, update the system parameters to incorporate these insights.

Escalation and Reporting

1. Escalation Procedures: If the transaction is deemed highly suspicious, escalate it to senior management or a specialized investigation team, if available.
2. Regulatory Reporting: Follow the legal and regulatory guidelines for reporting suspicious transactions. Ensure that all reports are timely and comply with the requirements of the jurisdiction.

This step-by-step process combines technological tools and human expertise to ensure a comprehensive investigation of suspicious transactions. It's a dynamic process, adapting to new threats and evolving tactics used by those attempting to exploit the financial system. The goal is not only to identify and report suspicious transactions but also to strengthen the overall monitoring and prevention mechanisms. Before concluding , CDD is done in its enhanced version to complete the picture. The in-depth analysis stage may use more quantitative tools,  progressively decreasing as it reaches third stage where the suspicion is confirmed and STR is drawn. 

Suspicious Transaction  Reports

Suspicious Activity Report is a document that financial institutions and those associated with their business, must file with FIU-Ind whenever there is a suspected case of money laundering or fraud. These reports are tools to help monitor any activity within finance related industries that is deemed out of ordinary, a pre-cursor of illegal activity or might threaten public safety. The purpose of an STR is to alert law enforcement agencies to potential illegal activity, enabling them to investigate and take appropriate action.

 

The quality aspects such as data and completeness of the STR and its timely submission to enable law enforcement authorities to proceed before the funds are mingled into mainstream beyond detection are most important aspects of STR submission.

When to submit STR : FATF

Where the financial institution is unable to comply with the applicable for carrying out CDD  (subject to appropriate modification of the extent of the measures on a risk-based approach), it should be required not to open the account, commence business relations or perform the transaction; or should be required to terminate the business relationship; and should consider making a suspicious transactions report in relation to the customer. These requirements should apply to all new customers, although financial institutions should also apply this Recommendation to existing customers on the basis of materiality and risk, and should conduct due diligence on such existing relationships at appropriate times. Specific areas requiring CDD that may lead to STR with respect to DNFPBs are as follows:

DNFBPs: 

The customer due diligence and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17, apply to designated non-financial businesses and professions (DNFBPs) in the following situations:

(a) Casinos – when customers engage in financial transactions equal to or above the applicable designated threshold.

(b) Real estate agents – when they are involved in transactions for their client concerning the buying and selling of real estate

(c) Dealers in precious metals and dealers in precious stones 

Paragraph  (c) of Recommendation 22

Dealers in precious metals and dealers in precious stones – when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.

Dealers in precious metals and dealers in precious stones should be required to report suspicious transactions when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.

(d). CAs/CMAs/CSs including  corporate professionals

Paragraph (d) of Recommendation 22.

(d) Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

◼ Buying and selling of real estate;

◼ Managing of client money, securities or other assets;

◼ Management of bank, savings or securities accounts;

◼ Organisation of contributions for the creation, operation or management of companies;

◼ Creation, operation or management of legal persons or arrangements, and buying and selling of business entities.

(e). Trust and Company Service Providers

Paragraph (e) of Recommendation 22

Trust and company service providers – when they prepare for or carry out transactions for a client concerning the following activities:

◼ Acting as a formation agent of legal persons;

◼ Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;

◼Providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;

◼ Acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another form of legal arrangement;

◼ Acting as (or arranging for another person to act as) a nominee shareholder for another person.

Tipping-off and confidentiality

Financial institutions, their directors, officers and employees should be: (a) protected by law from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred; and (b) prohibited by law from disclosing (“tipping-off”) the fact that a suspicious transaction report (STR) or related information is being filed with the FIU. These provisions are not intended to inhibit information sharing under Recommendation 18.

RBI on STR by Payment System Service Providers

Reserve Bank of India has asked[Apr 22, 2024] all authorisednon-bank Payment System Operators (PSOs) to report high value and suspicious transactions undertaken on their platforms during the election period.

The leading players in this sector are card networks like Visa, Mastercard, and Rupay, to payment gateways like Razorpay, Cashfree, Mswipe, Infibeam, and PayU. Additionally, it extends to payment apps such as Paytm, BharatPe, MobiKwik, Google Pay, and PhonePe, as well as firms involved in cross-border money transfer, ATM networks, PPIs, instant money transfer, TReDS, BBPD, and related systems. These fintech firms operate within the payment ecosystem, facilitating transactions and hence they have been instructed to send daily reports to ensure fair elections.

Happy Reading

Those who read this, also read:

1. Transaction Monitoring

2. IBA WGR 2010 - Preparation, Review and Submission of STRs

3. Obligations by RE under PMLA 2002