FDIC proposes exemptions from SAR requirements

one step forward or two steps back?

by Jem Shaw

The Federal Deposit Insurance Corporation, which insures most, if not all, of America's leading banks, has invited comment on a proposed rule that would modify the requirements for FDIC-supervised institutions to file Suspicious Activity Reports. At this stage it's an information and opinion-gathering exercise, and therefore an opportunity for those with genuinely innovative solutions to influence the way financial transactions are governed and executed in the future. It's encouraging to see FDIC effectively acknowledging that current SAR processes aren't fit for purpose; it's now in the hands of solution-providers to ensure that we fix the right problem.

So what is the right problem? In fact, what is the problem?

The truth is that SARs themselves give financial malfeasance a place to hide. Banks have an obligation to file them whenever the possibility of wrongdoing appears. But different jurisdictions have different requirements, often insisting on their own format for submission. This makes SAR submission a manual task, consuming unsustainable amounts of bank time. As highlighted in this post in November, none of the top five banks is succeeding to meet its 60 days requirement for filing, with Barclays averaging more than three years to get there.

But, once filed, there's a further delay while regulators process and rule on them. We're dealing with organised crime here; imagine calling the police to a bank robbery and crossing your fingers that they'll turn up in a couple of years. So, if malfeasance is detected, who gets punished? The criminals are long gone, but the bank pays share-killing penalties.

That's a problem. But it's not the right one, though I fear it's the one that FDIC is setting out to fix.

Compliance - and, don't worry, I'm not off on yet another shifting-the-blame rant* - has become a post-event elastoplast. At best, it stops the bleeding while doing nothing about preventing the wound. Onboarding endeavours to minimise the risk of malfeasance, but after that there's little prevention. Normal account monitoring detects crime after it's already happened. Then we begin the tortuous processing of deciding who's to blame, rather than bringing the criminals to justice**. Simplified Suspicious Activity Report processes may do more for the immediacy of reporting and resolution, but what we need to be focusing on is preventing the activity in the first place.

We can do this by proactively vetting each transaction, not by relying on general thresholds to alert us to a need for closer inspection. Tools exist to do this, and we've worked with major partners in KYC, shipping intelligence and market values to automate re-validation of every transactional party and reconcile every transaction against logical routes, invoice values and accounting/banking records. It's by compositing and analysing these factors that allow biz.Clarency to automatically pause any process that may be questionable. The transaction will continue only on the positive decision of a qualified MLRO, and this decision is recorded as part of the blockchain ledger. This brings compliance into the now. It prevents most fraud before it happens.

This makes a strong case for FDIC recognition of banks that apply a similar approach. However, our recommendation would not be an easing of SAR filing requirements. If an MLRO has sufficient grounds for suspicion to halt a transaction, then there are sufficient grounds for SAR submission. The change that needs to happen is that the filing should be as near as possible a one-click process. A properly planned and implemented blockchain, matched to transactional diligence, can provide an easily understood, chronological view of an account's conduct, right up to the moment of detection. If we establish a global standard for SARs, then not only does this become possible, but their interpretation by regulators and law-enforcement agencies can be greatly simplified.

We welcome and applaud FDIC's consultative approach to this question. We are making our submissions and hope that the Corporation will lend its considerable influence to the eradication of global financial crime.

* Though I'm sure there'll be another one along in a minute.

** Told you so.

Clarency 'C'

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