Opinion Economic Analysis by Sandro Joseph Azzam, Staff Writer

October 11th, 2020

On September 21st, 2020, Buzzfeed news’ investigative journalists shared a laundry list of over 2,500 documents from the US Treasury’s Financial Crimes Enforcement Network (FinCEN). These documents primarily constituted Suspicious Activity Reports (SARs) from the world’s largest banks. The ensuing leak implicated massive financial institutions such as Deutsche Bank, HSBC, Bank of New York Mellon and others in, what the headlines called, “a 2 trillion-dollar money laundering scheme.” This couldn’t be further from the truth…

The headlines read “XYZ bank moved money launderers’ funds for organized crime”, or “ABC bank allowed fraudsters to move millions around the world”, all based on the SAR leaks. This threw banking stocks into a downwards trend, which was quickly reversed with the coming to light of what evidence the claims were actually made on. The entire basis for these accusations was the aforementioned SARs, but what are they really?

Imagine a customer walks into a bank with 1 million dollars in cash. He walks up to the banker and puts a briefcase full of greenbacks on the desk and asks to open an account at the bank. While this might make sense in a vintage Bond film, banking regulations have made it practically impossible. When someone walks into the bank with massive amounts of cash, that raises question marks. Where did he get the money from? Is he trying to place the cash as part of a money laundering scheme? Are the banknotes counterfeit? Who is this person really? 

When depositing a sum greater than or equal to $10,000, banks are required by law to request a source of funds as the second step in money laundering is concealing this source. This is done to avoid what is called layering. Layering is the process of introducing “dirty” money into the banking sector and “cleaning it up” through laundering. 

This is why the banker, upon seeing the cash, fills out what’s called a Suspicious Activity Report. He pulls out a form on his own initiative, gives the necessary information and sends the form to the US Department of Treasury. What this SAR essentially does is tell the government “look, something shady is happening, and you need to know about it.”

Imagine another banker who keeps seeing the same exact customer walk in every few days. This customer deposits $9,990 at the bank every 2 days for a month, coincidentally just below the $10,000 threshold above which the bank needs to ask for source of funds. If the bank notices this behavior, it’ll start raising some eyebrows. Why is he specifically trying to avoid declaring his source of funds? 

The banker might notice that this is an attempt to do what is called structuring. It is another method used to launder money. When moving money to an account, depositors are required by law to provide a source of funds (for deposits up to $10,000) as stated earlier. This creates an easy loophole for launderers; deposit an amount slightly less than $10,000 multiple times. A smart and vigilant banker would notice what’s going on and fill out a SAR, which explains why Bank Audi in Lebanon has a total amount of $9,986 in SARs. The banker noticed what was happening and wanted to report it to the competent authorities.

Another event that may warrant a SAR is what is called smurfing. Two individuals must be identified in this scenario. The first, smurfer, is the person who opens an account for people. A launderer could hire hundreds of different smurfers to each open an account, usually in the low 4-figures. The smurfers deposit the launderers’ money into the account that they have opened and then sign a blank check to be sent to the launderer. The launderer then goes to the bank and cashes the checks. This way, the source of funds is not requested at any time and laundered money can enter the financial sector under a perception of legitimacy. If a banker picks up on this entire operation (because some genius walks into a bank with a stack of checks), then that also warrants a SAR.

Financial expert and Harvard Fellow Dan Azzi states: “A SAR […] is a voluntary report sent to authorities (sometimes in the US) when a bank detects a suspicious activity. A bank which has lots of SARs isn’t worse than a bank with no SARs — probably the opposite — it means it’s picky while the other guy is letting everything slide […] In short, lots of SARs is not a bad thing, it means they’re vigilant. The better question is what percentage of those SARS resulted in an investigation, and what percentage of those investigations resulted in a finding of guilt.”

Remember when we said that banking stocks tanked upon hearing the news? Well, you can credit the headlines like: “XYZ bank moved money launderers’ funds for organized crime.” The quick rebound of these stocks was mainly due to the deeper reflection and understanding of what exactly a SAR is. Banks use them to report suspicious behavior but they are not proof of wrongdoing or crime.