Part Two: "For a Few Days More" - Reform of the Suspicious Activity Reporting Regime
The UK1 Criminal Finances Act 2017 (the “Act”) represents a further significant development in the approach to the investigation and prosecution of financial crime in the UK. The new offence of failure to prevent the facilitation of tax evasion and changes to the regime for suspicious activity reports will require entities which carry on business in the UK to take a yet more active role in the detection and prevention of potential financial crime, and to further examine and update their compliance policies and procedures. New unexplained wealth orders may also place onerous requirements on individuals and companies to explain the source of their assets in the UK and beyond.
This OnPoint – the second of a Dechert “trilogy” on the Criminal Finances Act 20172 – focuses on the reform of the suspicious activity reporting regime, which heralds the greatest change to the criminal finances regime since the enactment of the Proceeds of Crime Act 2002.
In order to minimise the risk of serious disruption to their day-to-day business, entities in the UK regulated sector must be prepared to take a more considered approach to analysing whether a suspicious activity report is genuinely required, rather than routinely filing suspicious activity reports as a “belt and braces” measure.
Reform of the Suspicious Activity Reporting Regime
Under the current money laundering regime, where an organisation in the regulated sector (e.g. a financial services firm, accountancy firm or law firm) suspects that it may be involved in a possible money laundering offence3 it is obliged to submit a suspicious activity report (“SAR”) to the National Crime Agency (“NCA”), seeking consent to proceed with the relevant transaction. It is an offence to fail to report money laundering but, in the event that a transaction involves the proceeds of crime, consent from the NCA to proceed with the transaction provides an absolute defence to money laundering offences for the reporting organisation and its officers.
If the reporting organisation alerts a relevant individual - for example, the person suspected of laundering money or a close associate of his or hers - that it has made a relevant disclosure to the NCA or that an investigation into the suspected money laundering is either in progress or pending, it will commit a “tipping off” offence. The reporting organisation therefore cannot make any disclosure to a third party, including a client, that might prejudice an investigation.
The reporting organisation obtains such “consent” to proceed with a transaction:
a) Through express consent from the NCA; b) Through silence from the NCA for 7 working days from the day after submission of the SAR; orc) Where the NCA refuses to give consent but is then silent for 31 calendar days from the refusal. This 31 day period is known as the “moratorium period”, which is intended to allow law enforcement agencies time to gather evidence to determine whether further action, such as restraint of the funds, is appropriate.
The Home Office believes that the current moratorium period does not allow sufficient time to develop evidence or obtain information required to undertake proper analysis and make an informed decision on whether to investigate the SAR. This is even more acute where investigators need to obtain evidence from overseas authorities, or to undertake complex asset-tracing enquiries.4
To address those perceived deficiencies, the Act introduces two new powers for law enforcement agencies in relation to the SARs regime:
a) A power to extend the moratorium period to allow agencies further time for investigation; andb) A power to obtain further information from the reporter of the SAR or another person carrying on a business in the regulated sector.
a) A Power to Extend the Moratorium Period to Allow Agencies Further Time for Investigation
On application to the Crown Court from a “senior officer” at a relevant agency,5 the Court may extend the moratorium period in increments of 31 days, up to a total of 186 days (approximately 6 months) from the end of the initial 31 day moratorium period.
The Court may extend the moratorium period where it is satisfied that:
a) An investigation is being carried out in relation to a relevant disclosure (but has not been completed);b) The investigation is being conducted diligently and expeditiously;c) Further time is needed for conducting the investigation; andd) It is reasonable in all the circumstances for the moratorium period to be extended.
An extended moratorium period could pose significant risks to the conduct of business. For example, a SAR submitted by a bank or advisor in the context of a corporate transaction, or by auditors preparing end of year accounts, which results in an extended moratorium period lasting months, could derail the transaction entirely, and leave professional advisors “holding the baby”. This is likely to cause considerable practical difficulties for regulated entities submitting SARs. For example, a bank or law firm that has submitted a SAR will be able to neither proceed nor explain to their client why they cannot take action as instructed. The longer the moratorium period is extended, the more difficult this will become.
Notably, the party that has submitted the SAR and anyone representing that person may be excluded from any part of the relevant court hearing, and the officer applying to extend the moratorium may apply for an order that specified information on which he or she intends to rely be withheld from the submitter of the SAR and his or her representative(s). The fairness and practicality of extensions will largely depend on the rigour of judges, who may have little experience of such applications or the corporate context.
The need for an applicant to establish that the investigation is being conducted expeditiously and that an extension is reasonable should in theory prevent applications for extensions as a matter of course where little investigation has been done in the initial period. However, such terms are always open to interpretation and raise questions: for example, what degree of expedition is reasonable in the context of scant resources? Such questions, and the increased stakes for regulated entities and clients unable to progress transactions, are likely to result in an increase in litigation regarding applications to extend the moratorium period.
b) A Power to Obtain Further Information
An authorised NCA officer may apply to a magistrates’ court for an order requiring the reporter of the SAR or another person carrying on a business in the regulated sector to disclose information to the officer. The application must: (a) specify or describe the information sought under the order; and (b) specify the person from whom the information is sought.
The court may make the “further information order” where:
- The information required to be given relates to a matter arising from a SAR;
- The information would assist in investigating whether a person is engaged in money laundering or in determining whether an investigation of that kind should be started; and
- It is reasonable in all the circumstances for that information to be provided.
A magistrates’ court may also make such an order where the NCA has received an “external request” from an authority of a foreign country, which has responsibility in that country for carrying out investigations into whether a corresponding money laundering offence has been committed.6 The further information order cannot require the respondent to disclose information protected by legal professional privilege and the information provided by the respondent cannot generally be used as evidence against him or her in criminal proceedings. An application for a further information order may be heard and determined in private. The application is made to the magistrates’ court with a right of appeal by any party to the Crown Court.
If a person fails to comply with a further information order, the magistrates’ court may order the person to pay an amount not exceeding £5,000. It is unclear what lengths the respondent of a further information order will be required to go to in order to obtain information which is the subject of an order. Will respondents be expected only to provide information which is readily accessible? Or will they be expected to search for information to which the NCA believes they have access? The Act does not specify what action will be “reasonable in all the circumstances”, and this is likely to cause uncertainty and disputes in relation to further information orders. For example, in the context of a corporate merger or acquisition, would a respondent be expected to trawl through documents in a data room to identify information which might reasonably be expected to be contained somewhere in the documents? Could a respondent even be expected to request information from a client, who may be the subject of the order itself? (This would seem unlikely, given the risk of tipping off the client in such circumstances and the additional conflict of interest this would create.) Firms in the regulated sector should seek advice regarding how to respond to further information orders.
Sharing of Information Within the Regulated Sector
The Act also includes provisions which allow for the sharing of information between entities in the regulated sector.
A person in the regulated sector (“A”) may disclose information to one or more other persons carrying on a business in the regulated sector where:
a) The information on which the disclosure is based came to A in the course of carrying on its business in the regulated sector;b) Either an NCA authorised officer or (at least one of) the person(s) to whom the information is to be disclosed has requested that A make the disclosure;c) Before A makes the disclosure, the required notification has been made to an NCA authorised officer (see below for a description of the “required notification”); andd) A is satisfied that the disclosure of the information will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering.
A person may disclose information to A for the purposes of making a disclosure request if, and to the extent that, the person has reason to believe that A has in A’s possession information that will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering.
The disclosure request must: (a) state that it is made in connection with a suspicion that a person is engaged in money laundering; (b) identify the person (if known); (c) describe the information that is sought from the recipient of the request; and (d) specify the person or persons to whom it is requested that the information is disclosed. Where the disclosure request is made by the person to whom the information is to be disclosed, the request must also (a) set out the grounds for the suspicion that a person is engaged in money laundering, or (b) provide such other information as the person making the request thinks appropriate for the purposes of enabling the recipient of the request to determine whether the information requested ought to be disclosed.
A “required notification” must be made to the NCA before the recipient of the request can disclose the information as requested:
- Where an NCA authorised officer made the request for the sharing of information, the person who is to disclose information must notify the NCA that information is to be disclosed under section 339ZB(1) of the Proceeds of Crime Act 2002 (“POCA”).
- Where the person to whom information is to be disclosed made the request, the person who made the request must submit the required notification, which must: (a) state that a disclosure request has been made; (b) specify the person to whom the request was made; (c) identify any person (if known) suspected of being engaged in money laundering in connection with whom the request was made; and (d) provide all such other information that the person giving the notification would be required to give if making the required disclosure for the purposes of section 330 of POCA.
An intra-entity disclosure made in good faith will satisfy the existing legal obligation to make a SAR disclosure (under sections 330 and 331 of POCA).7
The Act also provides for the making of joint disclosure reports to the NCA, and associated provisions which govern the inter-relationship between joint SARs and the provisions requiring disclosure.
This information-sharing model was piloted through the Joint Money Laundering Intelligence Taskforce, which the Government has lauded as a success. The above changes reflect a growing willingness on the part of law enforcement agencies in the UK to effectively “outsource” the detection and, in many cases, the initial investigation of, suspected financial crime. Indeed, the Home Office describes the SAR information-sharing changes as “transforming the relationship between public and private sectors […] helping to ensure that [regulated companies] provide the best possible intelligence for law enforcement agencies to investigate”.8 Banks and other firms in the regulated sector (and their designated Money Laundering Reporting Officers in particular) should therefore be prepared to take on a more active role in identifying sources of information relevant to determining whether a money laundering offence has taken place, and will need to be prepared to respond to requests for information received from other regulated firms.
Unlike a further information order, disclosures under the information-sharing provisions are voluntary and the Act does not provide any penalties for non-compliance with a request. However, firms will clearly be motivated to maintain good relations with the NCA and this will act as a strong incentive for firms in the regulated sector to do what they can to comply with such requests, particularly requests received from the NCA.
The Home Office’s motivation for the reforms to the SARs regime is clear: the NCA is inundated with SARs9 and the reforms are an attempt to reduce the burden on the NCA. The combined effect of the reforms should assist in this respect, and lead to improved information flows within the regulated sector, and between the regulated sector and law enforcement agencies. As the Home Office says, this should both (i) generate better intelligence for law enforcement agencies and (ii) help firms better protect themselves.
Regulated entities may previously have opted to take a cautious and formulaic approach to SARs, whereby they submitted a SAR whenever a warning sign appeared and waited for NCA “consent” (explicit or otherwise) as a means of legal protection. Whilst the Act does not alter the standard of “suspicion” for a protected SAR disclosure or the definition of “proceeds of crime”, under the new regime there is a risk that a lightly-reviewed SAR disclosure could lead a law enforcement agency to apply to extend the moratorium period to investigate the disclosure further. The delays that this would cause to the business of clients of the disclosing party, and the associated difficulties that the disclosing party (i.e. firms in the regulated sector) would face when trying to explain such delays to clients, are likely to encourage firms in the regulated sector to devote more resources to analysing transactions in context before they determine whether a SAR is required, in order to minimise the risk of serious disruption to normal business activity. The risk of disruption to business activity is also likely to make firms more willing to resort to litigation to challenge applications to extend the moratorium period.
Regulated firms will be able to use the new information-sharing provisions in the Act to help them determine whether a money laundering offence has taken place but will equally need to be prepared to respond to requests for information received from other regulated firms. Firms should invest in appropriate training to ensure their Money Laundering Reporting Officers are fully equipped to deal with these latest changes.
The changes to the SARs regime come at a time of heightened focus on the approach to financial crime in the UK, and the approach to money laundering in particular. The Money Laundering Regulations 2017 (“MLR 2017”) - which had been expected to come into force in June10- will require firms in the regulated sector to further review and update their policies, controls and procedures in relation to customer due diligence. The £163 million fine which the Financial Conduct Authority imposed on Deutsche Bank in January for serious anti-money laundering controls failings provides a clear incentive for firms to carefully consider their responsibilities in this area.