The Law Commission has published a consultation paper (Consultation) on the suspicious activities reports (SARs) regime under the Proceeds of Crime Act 2002 (POCA).
The current UK SARs regime requires certain businesses and banks to make ‘required disclosures’ to the UK Finance Intelligence Unit (UKFIU) (overseen by the National Crime Agency (NCA)), where a person knows, suspects or has reasonable grounds to know or suspect that a person is engaged in money laundering. If a required disclosure is not made, the person who ought to have reported is liable for prosecution for a criminal offence. There are also what are known as ‘authorised disclosures’, whereby a disclosure regarding money laundering is made to obtain consent to proceed with a transaction, to fit within a statutory exemption (this is also known as the ‘consent regime’). SARs are the mechanism for making these disclosures under POCA.
The industry and regulators have had reservations for some time about the effectiveness of the current SARs regime, particularly in regard to the high volume of SARs being made, inadequate resourcing in the UKFIU to appropriately review, consider and distil the intelligence being provided and the resultant costs and delays involved in the current process for market participants.
The Law Commission were tasked with looking at this area by the Home Office in 2017, with the aim of improving the prevention, detection and prosecution of money laundering and terrorist financing in the UK. The Consultation has been produced following various fact-finding meetings with stakeholders, and sets out proposed changes to the regime.
In high level terms, the Law Commission does not advocate a wholesale removal of the current consent regime (although consultees are invited to submit their views on the current system), but it does suggest a number of changes or enhancements to make the regime work more effectively.
Following fact-finding meetings with stakeholders, the following practical difficulties are identified in the Consultation:
- The large volume of disclosures to the UKFIU. On average, the UKFIU, overseen by the NCA, receives 2,000 SARs per working day, with 100 seeking consent to proceed with a financial transaction, whereas there are a mere 25 staff dedicated staff.
- The low intelligence value and poor quality of many of the disclosures that are made in accordance with the present legal obligations;
- The misunderstanding of the authorised disclosure exemption by some reporters;
- Abuse of the authorised disclosure exemption by a small number of dishonest businesses and individuals;
- Defensive reporting of suspicious transactions leading to high volume reporting and poor quality disclosures;
- The overall burden of compliance on entities under duties to report suspicious activity; and
- The impact of the suspension of transactions on reporting entities and those that are the subject of a SAR.
A number of legal issues are also identified in the Consultation:
- The “all-crimes” approach whereby any criminal conduct which generates a benefit to the offender will be caught by the regime as “criminal property” and the consequent impact of this on the scope of reporting;
- The terminology used in Part 7 of POCA and the meaning of appropriate consent;
- The meaning of suspicion and its application by those with obligations to report suspicious activity;
- Fungibility, criminal property and issues arising from mixing criminal and noncriminal funds;
- The extent to which information should be shared between private sector entities;
- The wide definition of criminal property which applies to the proceeds of any crime and has no minimum threshold value; and
- What should constitute a reasonable excuse within Part 7 of POCA.
Chapters 5 to 13 of the Consultation identify what the Law Commission consider to be the critical issues with the current legal structure, and identify some proposed solutions. These include:
- Consulting on alternatives to the “all crimes” approach, including three variants of a “serious crimes” approach. The Law Commission’s provisional view is that a change to the serious crimes approach could prove problematic and undesirable.
- Considering the meaning of ‘suspicion’ and how to ensure the threshold is understood and applied consistently, including consulting on whether the term should be defined in statute or whether guidance on indicative factors of suspicion should be published. The Law Commission’s provisional view is that formal government guidance would be the better approach.
- Considering whether the thresholds for reporting and fault should be made more objective through a ‘reasonable grounds to suspect’ test. The Law Commission’s initial view is that the fault threshold should not be changed, but a defence should be added for when a person has no reasonable grounds to suspect. The Law Commission’s provisional view is that no change should be made to the terrorist financing regime.
- Considering the issues arising from the mixture of legitimate and criminal funds. The Law Commission’s view is that there should be a statutory defence for banks who ring-fence suspected criminal funds.
- The Law Commission’s provisional view is that the Government should issue statutory guidance on the types of issues that would constitute a ‘reasonable excuse’ for failing to make a disclosure, to reduce the volume of low intelligence SARs and enhance the intelligence value of the remaining SARs.
- The Law Commission propose that there should be government guidance on the term “appropriate consent” under POCA, and invites the views of consultees in this area.
- Consulting on whether pre-suspicion sharing between private sector institutions is necessary desirable or appropriate and, if so, how it can be squared with the General Data Protection Regulation. The Law Commission’s view is that there are strong arguments against allowing the sharing of data at a lower threshold than law enforcement agencies without external scrutiny.
The Consultation is open until 5 October 2018.