STR plays a vital role for detecting crime, laundering of criminal proceeds and terrorism financing activities. Financial institutions, as the first barrier against illegal money, need to use it proactively
New York Governor Andrew M Cuomo, on 1 December 2015, while announcing Anti-Terrorism Regulation requiring Senior Financial Executives to certify effectiveness of Anti-Money Laundering Systems said in a statement that “Money is the fuel that feeds the fire of international terrorism; global terrorist networks simply cannot thrive without moving significant amounts of money throughout the world. At a time of heightened global security concerns, it is especially vital that banks and regulators do everything they can to stop that flow of illicit funds.”
Suspicious Transactions Report (STR) is a vital tool in identifying funds that maybe used for terrorism, criminal and/or other illicit activities. Therefore, its effectiveness is crucial. It is the STRs that lead to detection of black money. The Indian financial intelligence unit (FIU) disseminates the information in STRs to the law enforcement agencies. As per the FIU Director Report 2013-14 the unaccounted money detected by the agencies was of the order of Rs7,848 crore while the amount of assets seized, frozen and confiscated was of the order of Rs195 crore within the country and abroad. The detection of huge amount of black money could be possible as the FIU received 61,953 STRs during 2013-14 as compared to a mere 31,731 STRs received during 2012-13. That is a jump of almost 100%. All banking, financial intermediaries, insurance companies, payment system operators and capital market operatives are required under the Prevention of Money Laundering Act (PMLACT) to submit STRs to the FIU.
From the above statistics, it is quite obvious that STRs, if furnished with adequate and relevant details, have the potency to disrupt the nefarious activities that are funded by tainted money.
FIU-IND provides financial intelligence to assist law enforcement, revenue and national security agencies within the country to combat money laundering and terrorism financing. It also regulates entities that have obligations under the Prevention of Money-laundering (Amendment) Act, 2012 to establish anti-money laundering and counter-terrorism financing (AML/CTF) programs and to meet compliance obligations by reporting transactions suspected of being linked to money laundering, terrorist financing, criminal proceeds, drug trafficking or other serious criminal activities. These reports are an essential contribution to the development of the financial intelligence resources that are used by country’s law enforcement, revenue and national security agencies.
The greater the quality, accuracy, and timeliness of reports, the greater the value they provide to the detection, deterrence and disruption of criminal and terrorist activity. The most unique and potentially valuable report is the STRs under the Prevention of Money-laundering (Amendment) Act, 2012. A robust regime of reporting high quality, relevant suspect financial activity is of major benefit to financial intelligence unit (FIU) role and the work of Indian law enforcement, revenue and national security agencies.
These reports are often the main information source authorities use to detect suspected offenses and identify that criminal activity is occurring through a transaction or series of transactions. Reports are analysed for activities and patterns that may indicate wrong doing and are used by law enforcement to aid investigations. An STR is more often the first indication that financial crime is occurring and can be a powerful tool against organized crime.
Recommendation 20 of the Financial Action Task Force (FATF) states that if a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU). Financial institutions (FIs) should pay special attention to all complex, abnormally large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies.
The system of STR is recommended internationally as the effective mechanism to prevent, detect and fight money laundering. It is designed to use information reported by financial institutions for investigations of money laundering and predicate offences and to prevent crime organisations from abusing financial services. Its purpose is to get useful financial information concerning money laundering from financial institutions to utilise the information for actual investigations and to maintain confidence in financial institutions and the overall financial system.
The gathering, processing, reporting, analysing and sharing of suspicious transaction is critical to preventing crimes, including those associated with domestic and international terrorism. Hence, the STR becomes an important source of information for detecting crime, laundering of criminal proceeds and terrorism financing activities. Early detection of such activities helps reduce crime and keeps the organisation and the nation safe and secure.
A fundamental element of international anti‐money laundering (AML) systems is the requirement that financial institutions file STRs with financial intelligence units. Although the Financial Action Task Force (FATF) has established global standards, there is a range of national laws, practices and experiences with STR systems. The number of STRs received by Financial Intelligence Unit-India (FIU-IND) has risen steadily every year. These STRs have also led to the detection of a number of significant cases, some of which were not even discovered by the victims had it not been for the STR.
The value of an STR depends on the quality of information it contains. An STR must set out in a clear manner the basis for knowledge or suspicion of money laundering or terrorist financing. Reporting entities should include as much relevant information about the customer, transaction or activity that it has available from its records.
This concept is based on the fact that it is very difficult to chase money flow once it enters the financial system. Therefore, it is necessary for the law enforcement authorities to get co-operation and information from financial institutions before or when illegal money enters the financial system. Financial institutions are expected to play a role of a first barrier against illegal money, as they can examine such financial transactions from the viewpoint of their expertise. The cooperation from financial institutions is essential to detect money laundering.
Battling Organised Crime (OC) is a global challenge. To finance its operations, OC relies on funds raised through ransom from kidnapping, extortion, drug trafficking and funds transfers from one person to another across countries and continents. However, a single STR can help stop this flow of illegal money and prevent the repercussions financial crime causes. Frontline staff can serve as the first line of defence against such illicit transactions being passed through their organisation. Financial institutions must keep a tight lid on investigations of suspicious account activity, even when transactional alerts do not merit regulatory reporting.
(SSA Zaidi is a retired banker and consultant for training and development. He is also author of Anti Money Laundering /Anti-Terrorism Financing & Know Your Customer)