Suspicious transaction

An STR is a report. A suspicious transaction is what the report is about — and the definition of it is the test every employee of a regulated entity is expected to apply.

The test is deliberately modest. It does not require proof, or even a belief, that a crime has happened. It asks whether a transaction, to a person acting in good faith, gives reasonable grounds to suspect proceeds of crime or terrorist financing — or simply looks unusually complex or economically pointless.

Two features make the definition wider than people expect: it includes attempted transactions, and it does not care whether the transaction was in cash.

The definition (Chapter 2, section 2.2.1). A transaction, including an attempted transaction, whether or not made in cash, which to a person acting in good faith:

1. gives rise to a reasonable ground of suspicion that it may involve proceeds of crime; or
2. appears to be made in circumstances of unusual or unjustified complexity; or
3. appears to have no economic rationale or bona fide purpose; or
4. gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism.

Any one limb is enough.

Recording. Rule 3(1)(D) requires a record of all suspicious transactions whether or not made in cash, including credits and debits into non-monetary accounts such as demat accounts, wire transfers and remittances.

Inside the regulated entity (IFSCA Guidelines, Chapter 10). Every employee who, in the ordinary course of employment, knows, suspects, or has reasonable grounds for knowing or suspecting that a person is engaged in or attempting ML/TF must promptly notify the Principal Officer. The entity identifies suspicious transactions in four steps: detect a suspicious indicator; ask the customer questions; review the customer's records; evaluate the information.

Reporting. The STR is submitted promptly on conclusion that a transaction, or an integrally connected series, is suspicious; the Principal Officer records his reasons, and there must be no undue delay in arriving at the conclusion. Each day of delay in reporting, or in rectifying a mis-represented transaction, is a separate violation. Robust software must throw alerts when transactions are inconsistent with the risk categorisation and updated profile of customers.

Beyond financial institutions. Lawyers, notaries, accountants and other service entities shall report suspicious transactions when they engage in a financial transaction for a client in real estate, managing client money or securities, managing accounts, organising contributions for companies, or creating, operating or managing legal persons or arrangements.

Illustrative; the tests and steps are the workbook's.

Meridian Insurance Brokers (IFSC Branch) places a policy for a Mauritius company. The premium of USD 180,000 arrives from three payers the client has never mentioned: USD 60,000 each from companies in two other countries and a private individual.

Step 1 — detect. Payments received from unknown or unassociated third parties is a product/transaction high-risk factor in the Guidelines. The relationship manager, who has reasonable grounds for suspecting, notifies the Principal Officer the same day.

Step 2 — ask. The client says the three are "business partners" but will not name the arrangement. Questions are asked about the payments, not about any suspicion or report.

Step 3 — review. The client's declared business is ship chartering with annual turnover of USD 400,000; no record links it to the payers.

Step 4 — evaluate. Two limbs of the definition are met: the arrangement is of unjustified complexity and has no evident economic rationale.

Report. The Principal Officer concludes the transaction is suspicious on 9 May, records his reasons, and files the STR through FINGate 2.0 promptly. Had he sat on it, each day of delay would be a separate violation. The client is not told, and the risk rating he now carries is kept confidential to avoid tipping off.

Chapter 2 (Prevention of Money Laundering Act, 2002), section 2.2.1, carries the four-limb definition; Chapter 3 carries Rule 3(1)(D) and Rule 8; Chapter 5, section 5.5, carries the IFSCA internal-reporting and four-step identification process; and Chapter 7 shows the failures — Way2Wealth closing alerts without filing STRs, Paytm failing to file for 34 beneficiary accounts, Bybit charged under Rule 3(1)(D) and 8(2). Expect the four limbs, the "attempted" and "whether or not in cash" words, and the four steps in order.

• Attempted transactions are included, and so are non-cash transactions.
• Any one of the four limbs is enough. Unusual complexity or no economic rationale can make a transaction suspicious without any evidence of a crime.
• The standard is a person acting in good faith with reasonable grounds — not proof, and not certainty.
• The timing is worded differently in the workbook. Chapter 2's summary and Rule 8(2) in Chapter 3 say the STR is furnished not later than seven working days on being satisfied the transaction is suspicious; the IFSCA text in Chapter 5 says promptly on conclusion, with no undue delay. Promptly is the operative instruction; seven working days is the outer statutory limit.
• "Ask the customer questions" is not tipping off. The four-step process includes questions; disclosing the suspicion or the report is what is prohibited, and the customer's risk rating and its reasons are kept confidential for the same reason.
• Employees report to the Principal Officer, not directly to FIU-IND.