Even though AML compliance for nonbanks has been in effect since August 13, 2012, many Residential Mortgage Lenders and Originators (RMLO) still seem to have considerable difficulty in two specific areas: how to determine when a Suspicious Activity Report (SAR) should be filed, and which suspicious activity events or features may trigger the SAR filing requirement.
In one article, entitled Anti-Money Laundering Debuts for Nonbanks, I unpack the AML Program in a way that will provides some familiarity with the AML Compliance scope, while perhaps also making its implementation a bit less daunting than it might otherwise seem to be.
In another article, entitled Anti-Money Laundering Program: Preparation is Protection, I outlined many of the so-called Red Flags and other triggering events. In addition, I offered a way to construct a SAR narrative - the description to FinCEN about the alleged suspicious activity - that, based on years of experience auditing and implement AML compliance on behalf of our clients, best meets FinCEN's expectations of an informative statement.
To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over fifty pages – which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures – the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.
So, a word of caution is due: do not take the chance of buying an abbreviated or defective AML Program, in the hope of merely satisfying the “basic” FinCEN requirements. Obtaining a boilerplate document with your company’s name on it is regressive, and it is a tactic that Examiners are now regularly criticizing in adverse findings.
These days, regulators are fully aware of this ‘short cut’ to compliance. An insufficient AML Program may cause adverse examination findings. Indeed, in some cases, template-driven policy and procedures may cause Examiners to escalate their regulatory review of an RMLO’s anti-money laundering implementation.
AML compliance is a specialized area of mortgage compliance, necessitating genuine, practical, hands-on, regulatory compliance and experiential knowledge, and an AML Program must reflect precise policies and procedures that not only implement the SAR regulations but also conform to a company’s way of doing business.
Therefore, an AML Program is one policy statement and set of procedures where the purchase price should not be an operative consideration. Caveat Emptor!
This is why I want to further outline the descriptive process of completing the SAR narrative, emphasizing a simple method I call The 5 W's and the How, and I will also provide details regarding both so-called Red Flags and triggering events. So, even if a company has a skimpy or defective AML policy and procedures, at least those who implement AML Compliance may be offered some rudimentary guidelines to consider in the practical experience of actually filing a SAR.
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IN THIS ARTICLE
The 5 W's and the How
Triggering Events
Documentation Red Flags
Applicant Red Flags
RMLO's Employee Red Flags
Library Resources
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The 5 W's and the How
If I were to choose the central feature of the SAR, I would select the SAR narrative.
Each SAR requires a narrative to be provided by the SAR filer.
Over time, my firm has compiled numerous examples of common patterns of suspicious activities from our audit and due diligence reviews. Based on our experience and FinCEN’s own stated guidance, we believe that there are five interrogative categories to be considered when writing a SAR narrative: who? what? when? where? and why?
The method of operation (or how?) is also very important and should be included in the SAR narrative.
HERE ARE “THE 5 WS” TO THE SAR NARRATIVE:
1. Who is conducting the suspicious activity?
2. What instruments or mechanisms are being used to identify the suspicious activity?
3. When did the suspicious activity take place?
4. Where did the suspicious activity take place?
5. Why does the filer think the activity is suspicious?
FinCEN suggests that the RMLO describe briefly its industry or business (i.e., mortgage banker, mortgage broker). Then describe, as fully as possible, why the activity or transaction is unusual, considering the types of products and services that the mortgage industry or the RMLO offers, and the nature and normally expected, transactional activities of customers.
HERE IS THE “HOW” TO THE SAR NARRATIVE:
Always include the How! This is an important feature of a SAR narrative.
• How did the suspicious activity occur?
The narrative section of the SAR should describe the modus operandi or the method of operations of the subject conducting the suspicious activity. In a concise, accurate, and logical manner, the filer should provide a description of how the suspect transaction or pattern of transactions was committed. As completely as possible, the SAR narrative should offer a full picture of the suspicious activity.
At all costs, avoid long, rambling, and circuitous descriptions. When completing the narrative section of the SAR, many clients actually state the forgoing questions and then answer each question. Consequently, FinCEN is able to quickly understand the predicate conditions for filing the SAR.
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Triggering Events
FinCEN has made it clear that certain triggering events constitute the appearance of mortgage loan fraud. Perpetrators seem to invent new scams all the time. Indeed, FinCEN continues to issue reports periodically about the most current methods to commit mortgage fraud.
Some salient schemes:
