Unclear Whether Suspicious Transaction Reports Helping to Win the AML/CTF Fight

How do we know we are winning the counter-money laundering war? Are governments measuring the effectiveness of the anti-money laundering and counter-terrorism financing ("AML/CTF") regime from a global and jurisdictional perspective? Financial intelligence units ("FIUs") the world over say that suspicious transaction reports ("STRs") have been an essential tool in fighting money laundering and terrorist financing. Yet irrespective of hundreds of thousands of STRs being submitted to FIUs each year there appears to be little, if any, statistical confirmation from FIUs in the different jurisdictions on what percentage of STRs lead to investigations, prosecutions or convictions of money launderers.

Despite FIUs' reference to typologies with some examples, the STR-conviction correlation appears uncaptured. How then can governments or FIUs assess that STRs are helping to combat money laundering? 

Financial institutions need reassurance that their reporting efforts through STRs are working in the fight against money laundering and the nature of the STR information provided to enforcement agencies is effective. 

The Call to Arms: STRs

STRs have different names in jurisdictions such as suspicious activity reports ("SARs") in the United States or suspicious matter reports ("SMRs") in Australia. We all assume STRs provide law enforcement agencies with a paper trail to investigate money laundering schemes and other illegal activities. 

The push for great reporting from the banks intensified after 9/11 as did the importance of STRs in tracing financial crime and transactions to finance terrorism activities. The counter-money laundering strategy, on enforcement efforts, relies upon two themes, namely: the need for inter-agency coordination and cooperation and the reliability of information from financial institutions.

Direct Examples of STRs Leading to Prosecutions

There are a few direct examples showing STRs can lead to convictions but one has to search for the information and the direct correlation. Recently, the Singapore Corrupt Practices Investigation Bureau ("CPIB") announced its success in obtaining a conviction against a 66-year-old American, Philip Doehrman, a director of Quest Petroleum (Singapore) Pte Ltd, who was sentenced to five years and 10 months' imprisonment and his wife, Lim Ai Wah, for money laundering and conspiracy to defraud. 

This was from the information from an STR sent to the Singapore FIU.  It took eight years to prosecute from the time the STR was filed to the conviction of the American and Singapore citizens. 

Last week, STR information and weak money laundering controls led the Monetary Authority of Singapore ("MAS") to withdraw the licence of Swiss Falcon Private Bank. In relation to Falcon, the bank was penalised for not making STR reports back to 2013 in relation to 1 Malaysia Development Berhad (1MDB) transactions and corrupt fund flows to Malaysia. 

Little Direct Statistics and Information Linking STR with Convictions

Some FIUs provide typology examples of enforcement activities as a result of STRs reported, yet it remains unclear what percentage of STRs lead to success.

It is hard to find in FIU annual reports internationally the percentage of STRs leading to prosecutions or convictions. FIU reports also do not make suggestions to financial institutions how they can improve the quality of STRs. 

If one asks FIUs the reason for this, they may respond by asserting money laundering offences are usually not the main offence and part of other offences such as human trafficking, gambling, prostitution, fraud and theft. 

It is hard therefore for enforcement agencies to report back and link an STR to a conviction. FIUs may also argue that FIUs are unable to correlate STRs with convictions because they are unable to get feedback from enforcement agencies about the use of the STR information shared until many years later, as in the Doehrman's case. 

The Way the Data is Collected

This perceived gap showing the corrections of STRs and convictions means there exists an inability by FIUs to provide meaningful feedback to banks about the quality of STRs and the nature of the information provided. It also means from a general point of view there is a limited way to establish the effectiveness of STRs on the war on money laundering.

The Information from Some Major FIUs

Various FIU annual reports from the United States, Australia, UK, Singapore and Hong Kong, reveal STR filings have increased exponentially; however, it is not apparent investigations or prosecutions have increased, or been more successful, as a result of increased STR activity to FIUs. 

Fighting money laundering has become more about the collection of data where boxes are ticked rather than linking information to AML investigations and convictions. 

United States

The most recent annual report from the Financial Crimes Enforcement Network ("FinCEN") shows SARs increased by approximately 100,000 each year, from 1,326,372 in 2010 to 1,640,391 in 2013. 

The report also states there are approximately 94 SAR teams across the United States, involving investigators and prosecutors who reviewed 180,000 SARs in the second quarter of 2014. Yet, it is unclear in the report, what percentage of these reviews led to successful charges or convictions of individuals for money laundering.

Australia

In the annual report for 2013/14 of AUSTRAC, the FIU, it states "enforcement actions were taken against several reporting entities, particularly in the remittance sector". 

This included issuing infringement notices against remittance network providers for compliance breaches. AUSTRAC relies on the Australian Federal Police ("AFP") to initiate action for money laundering prosecutions but there is no information about what percentage of STRs led to investigations or convictions of money launderers, even though there has been an increase of 7.68 percent of transactions reported to AUSTRAC.

UK

The National Crime Agency ("NCA"), the responsible FIU, states SAR reports have increased annually. In the 2015 annual report, the total number of SARs received by the NCA increased by 7.82 percent on the previous year from 354,186 in 2013/14 to 381,882 in 2014/15. 

The NCA said in 2014/15, £43,079,328 was seized in relation to consent requests. The annual report gives a number of case typologies making it clear the NCA assisted other enforcement agencies internationally. Despite the extensive data in the report, it is unclear how many enforcement actions resulted from SARs submitted.

Singapore

The Suspicious Transaction Reporting Office ("STRO") is the central agency for receiving and analysing STRs. 

In its overview, it states: "STRs have been very successful in combating crime. CAD and other law enforcement agencies have successfully used financial intelligence from STRs to detect a wide variety of criminal activity, such as cheating, criminal breach of trust, forgery and securities trading malpractices, as well as money laundering and terrorism financing. STR information has also assisted investigators to detect and seize proceeds of crime."

Despite the information, however, there is no data that indicates what percentage of STRs led to criminal charges or convictions linking how STRs have been successful in supporting crime. 

Hong Kong

The Police and Customs and Excise Department operates the Joint Financial Intelligence Unit ("JFIU"). Its role is only to store reports about suspicious financial money laundering activities and does not conduct any investigations of its own. They instead pass on the information to other agencies. 

The JFIU has experienced rapid growth in STR filing. In 2012, it received 23,282 STRs which increased to 54,572 in 2016. There is no information about how this increase in information resulted in additional or successful criminal convictions by any agencies for money laundering. The emphasis by the JFIU appears to be on the collection of data and compliance by the relevant stakeholders.

Closing Thoughts

After considering a number of annual reports by the various FIUs internationally, it is unclear how governments can claim to be "getting the upper hand" against money launderers terrorist financing. To understand the effectiveness of the AML regime in each country is to know the number of money laundering anti-terrorist financing investigations stem directly from STRs reports (ie, the number of investigations, prosecutions, convictions, the number of frozen assets seized, the number of individuals arrested at airports and the quality of cooperation among financial institutions and regulatory enforcement agencies internationally).

Without this kind of information, annual FIU reports from the various jurisdictions may be insufficiently convincing to show the tide of money laundering and terrorist financing is subsiding. At the moment, the approximate correlation between STRs reports and convictions of money launderers or those involved in transfers for terrorists remains a mystery. If we do not know this information then we do not know whether governments are making progress in AML/CTF.

Jurisdictions: 

Niall Coburn is the Asia-Pacific regulatory intelligence expert for Thomson Reuters. He is a barrister and former director of enforcement at the Dubai Financial Services Authority and senior specialist adviser to ASIC. He is based in Brisbane, Australia.