What type of report must financial institutions file when suspicious activity is detected?

When financial institutions detect suspicious activity, they are required to file a Suspicious Activity Report (SAR). This is a crucial regulatory obligation designed to help authorities identify and combat financial crimes, including money laundering and fraud. The SAR provides detailed information about the suspicious activity, allowing law enforcement and regulatory agencies to investigate potential criminal behavior.

The requirement to file a SAR is rooted in the Bank Secrecy Act (BSA) and subsequent regulations. A SAR must be filed when a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activities or is intended to conceal these funds. This proactive reporting mechanism serves to protect the financial system and maintain its integrity.

In contrast, the other options do not fulfill this specific regulatory need. Financial Reports incorporate a broader range of financial data and are not strictly focused on suspicious activity. Transaction Reports could relate to any financial transaction and lack the targeted nature of a SAR. Compliance Reports often pertain to an institution's adherence to regulatory requirements and do not specifically address suspicious activities. Thus, SARs play a critical role in detecting and deterring financial crimes and are a mandated action for institutions facing suspicious situations.