Zia Ullah, Head of the Firm’s Corporate Crime & Investigations practice, and Ruth Paley, Of Counsel, take a look at the Law Commission’s report into SARs reform published this morning, and consider the implications for the regulated sector. Whilst the recommendation to enable ring-fencing of criminal property will be widely welcomed, many of the other more fundamental changes initially consulted upon have not been adopted.
The Law Commission has today published its long-awaited report into the Anti-Money Laundering requirements for the reporting of suspicious activity. Key recommendations include:
- The creation of an Advisory Board created to oversee drafting of guidance and to measure effectiveness of the regime, and ways to improve it
- Retention of the consent regime, with overwhelming support from respondents for this course
- roviding clearer guidance on key statutory concepts including suspicion, consent, reasonable excuse and ringfencing
- Prescribing the form of a SAR with better use of technology to help reporters make more effective disclosures
- All crimes approach to be preserved
- Amendment to POCA to create an exemption to allow criminal property to be ring-fenced
With a focus on improving the consent regime for suspicious activity reports (SARs), this report is the result of a year-long project commissioned by the Home Office, which asked the Law Commission to analyse and address issues with the consent regime, and to make recommendations to improve the prevention, detection and prosecution of money laundering in the UK. The review has focused on Part 7 of the Proceeds of Crime Act 2002 (POCA) and in particular, on those provisions dealing with a failure to report suspicions of money laundering and terrorist financing.
The UKFIU received and processed 463,938 SARs between April 2017 and March 2018, amounting to a 9.6% increase on the volume of SARs in 2016-17.
Launching its consultation in July 2018, the Law Commission published a detailed series of proposals for reform. Areas for consultation included:
- The provision of statutory guidance to SARs reporters including, practical guidance on the meaning of suspicion and a clearer definition of the reasonable excuse defence.
- a new power to require additional detail and record keeping requirements targeted at specific transactions
- raising the reporting threshold to require reporting only where there are reasonable grounds to suspect money laundering.
- legal protection for banks which choose to lock into an account the suspected criminal funds but leave the rest of the account open to trade
- asking whether the regulated firm, rather than the individual, should be liable for failure to prevent a criminal offence when an employee fails to disclose a suspicion
The Commission received 56 consultation responses and performed its own independent analysis of SARs including a statistically significant sample of authorised disclosures.
Today’s proposals at a glance
- Advisory Board: the Commission’s overarching recommendation was for a new Advisory Board to be created to oversee the drafting of guidance, to continue to measure the effectiveness of the reporting regime and to advise the Secretary of State on ways to improve it. A Board with responsibility for the oversight of the regime will make the anti-money laundering regime more responsive to new and emerging threats, by bringing together experts in both the public and private sectors.
- Consent: As expected, the consent regime will be retained, ‘with improvements to render it more efficient and effective.’
- Guidance: The Commission’s view was that misunderstandings and a lack of clarity around reporting obligations can result in wasted time for both the reporter and for those processing SARs. Key statutory concepts are to be better explained, including notably ‘suspicion’, which will assist reporters in understanding and applying the Da Silva test (“The defendant must think that there was a possibility, which was more than fanciful, that the relevant fact existed.”) ‘Appropriate consent’ should be clarified, as should ‘reasonable excuse’ in order to address inconsistency across different industries.
- Prescribing the form: a new online form, will direct reporters to provide law enforcement agencies with essential information. Coupled with guidance, a prescribed form will enable reporters to be more confident articulating the basis on which they formed a suspicion.’
- No limitations on scope of reporting: The Commission considered whether there was merit in reducing the scope to eliminate those with little intelligence value by: (1) limiting the scope of reporting all crimes to just serious crimes as defined; and (2) extending the circumstances in which a reporter may have a reasonable excuse not to make a disclosure. However it concluded that it would be desirable to maintain the status quo for the ‘all crimes’ approach because the intelligence value of suspected criminal property will not necessarily correspond with how serious the crime is, or how valuable the intelligence is.
- Ringfencing: The Commission has recognised that the practice of freezing entire bank accounts, regardless of the value of the property that is suspected to be criminal, can have severe economic consequences for an individual or a business. It has recommended that POCA is amended to create an exemption to allow criminal property to be ringfenced by credit and financial institutions, allowing for a more proportionate response to the nature of the (suspected) criminality.
- Release of funds: The Commission has also recommended the addition of a provision allowing for funds to be released by a Crown Court Judge when an application for an extension to the moratorium period is made.
- No thematic reporting: The Commission considered whether it would be appropriate to recommend the introduction of new powers for thematic reporting or Geographical Targeting Orders. Such reporting mechanisms would remove the reporter’s discretion to assess suspicion, instead requiring reporting if certain specified criteria are met. For example, an obligation to report may be triggered if a transaction occurs in a prescribed geographical location. The Commission did not feel that the case for change had yet been made out and therefore recommended further research into the utility of targeted reporting be undertaken.
Sensible and welcome though they are, few would describe these proposals as ground-breaking. There is some surprise in the regulated sector that the Commission has not been more bold, and at the lack of fundamental proposals to improve a regime which, many have long argued, is producing low-quality SARs which place an unmanageable burden on the UK FIU.
The Commission’s independent analysis of the SARs sample found ‘a substantial variance’ in the quality of SARs, with clear evidence that some reporters misunderstood their legal obligations under POCA. Around 15% of authorised disclosure SARs did not meet the threshold of suspicion. If these findings were extrapolated, approximately 4,121 SARs would have been submitted unnecessarily. This issue is no doubt intended to be addressed by the new ‘guidance’ recommendations.
However, notwithstanding the possibility was trailed in the consultation document, the Commission made no recommendation to raise the threshold to require ‘reasonable grounds’ to suspect for reporting. This is surprising given the Commission’s analysis of the SAR sample which found that reporters only articulated reasonable grounds to suspect, by demonstrating one or more objective grounds, in 52.4% of the sample it analysed. This represents a substantial proportion of authorised disclosures which are lodged without objective grounds in support. The Commission’s decision not to recommend the introduction of a ‘reasonable grounds’ test is therefore being viewed by some as a missed opportunity to implement a more ordered and logical approach to reporting – where the case law suggests that suspicion need be neither reasonable, well-founded nor rational, many have questioned the value of reports which, on that basis, could in theory be unreasonable, ill-founded and irrational.
Interestingly, consultation responses in respect of proposals for a move towards liability for the corporate, instead of the individual, for failure to disclose a suspicion, were finely balanced. Of 37 consultees who responded to the relevant question, 16 (43%) were in favour of a new offence whereby a commercial organisation would be criminally liable for their employees’ or associates’ failure to report suspicions of money laundering, and 19 (51%) were opposed. The Commission observed that there is ongoing consideration by the Government as to the introduction of a new ‘failure to prevent’ model, (in respect of which, out of 36 consultees who responded to the relevant question, 18 (50%) were in favour and 16 (44%) were opposed). The Commission decided that in view of the responses received, and the work ongoing by other parts of Government following the MOJ consultation, it would not recommend any changes at this time.
It has long been argued by those who are obliged to report suspicious activity that the volume of SARs would reduce if employees and Money Laundering Reporting Officers were not motivated by the desire to protect themselves from personal liability for the criminal offence of failure to disclose. There will be many who are disappointed by the Commission’s fence-sitting in this regard, in declining to express a firm view on the merits of that approach. In the meantime, progress on failure to prevent (whether money laundering or economic crime more widely) continues to be described as glacial.
The Home Office’s SARs reform programme
Separate to the Law Commission’s work, the Home Office has already instituted a SARs reform programme which focuses on the process by which SARs are received – the reforms have already seen the National Crime Agency increase FIU staffing by 50%. A further wishlist of process improvements over the next three years have recently been unveiled by the NCA’s SARs Reform Lead, Tim Wright, including: increased resourcing in the FIU for reporter engagement, analysis, international investigations and law enforcement engagement; a new SARs reporting portal with the capability for sector-specific submissions including meaningful guidance; better use of intelligence with SARs reporters being brought into a ‘reinforcing circle’ of improved analysis; and better IT tools for law enforcement, bringing new technologies to bear in the fight against organised crime. Many of these, particularly the push for guidance and a new portal, dovetail harmoniously with the Law Commission’s recommendations and it is worth a quick review of the key changes proposed under this programme:
What’s being retained?
The Home Office intends that the SARs regime will continue, and that the UK distributed model involving a central Financial Intelligence Unit (FIU) with a coordinating role will be retained. The ‘all crimes’ approach will not be modified and there will be no introduction of a ‘de minimis’ threshold.
What changes are proposed?
A single set of priorities will drive SARs reform over the next three years. These include proposals in the following key areas:
- a significant increase in resourcing building on the current increase staff for the UK FIU. This, Tim Wright said, had come at a cost with officers being moved from serious and organised crime roles to deal with the ‘continued and aggressive’ growth in Defence Against Money Laundering (DAML or so-called ‘consent’) SARs. The further posts will allow for greater analysis and support and engagement for reporters and UK and international law enforcement colleagues;
- the current SARs reporting website will be replaced with sector-specific portals, which will be more ‘meaningful’ to the different sectors with obligations to report, such as lawyers, financial institutions, accountants and estate agents. These portals will contain intuitive fields for more targeted reporting, with improved and sector-relevant guidance embedded in the form. The NCA hopes to deploy specialist staff with dedicated expertise in each of these sectors to support the different types of reporting required under the SARs regime;
- SARs analysis will be undertaken using better IT tools, with the current systems ‘not fit for purpose’. New technology will allow for SARs data to be interrogated alongside custody suite data, criminal records and other datasets to allow law enforcement to derive better value from the information provided;
- the FIU will ensure better communications with local police forces who view SARs as primarily relating to fraud, with a tendency to consign the intelligence to ‘the difficult pile’;
- new intelligence-sharing improvements will be implemented, so that all parties in the SARs reporting process part of a reinforcing circle, with Wright telling key stakeholders at a recent industry event that they were currently ‘not getting the value out of the SAR reporting process to help manage risks’ and that he was keen to deliver better information to industry to enable firms to improve their own SARs reporting;
- testing a new approach to transaction reporting for financial institutions regarding transactions where no suspicion attaches, so long as the loss of privacy that would attend access to that data was worth it in terms of law enforcement outcomes; and
- Testing new approaches to ‘consent’, which while it has value to reporters and law enforcement alike, is virtually unique to the UK and causes significant burdens on both as well. How well this proposal will land in view of the Commission’s recommendation that the consent regime be preserved, remains to be seen.
It is intended that these proposals would be introduced as part of a phased approach, with law enforcement tools replaced and new technologies implemented first, followed by the creation of the new portals, with FIU workflow and database services being enhanced, and bulk reporting to follow. The Home Office is currently seeking a budget for this programme of improvements, which it is estimated could be achieved within two years of commencement. The NCA’s enthusiasm and commitment to improving the current system is clear, and Wright has spoken compellingly of the need for change. However, until the budget is established, work cannot begin, and so the regulated sector may face some delay before these new measures begin to improve the picture on the ground.