Corporate Crime analysis: The government has pledged to reform suspicious activity reports (SARs) to ensure UK enforcement agencies and IT systems are prepared to effectively prevent and tackle money laundering and terrorist financing. Max Hobbs, solicitor, and Neill Blundell, head of corporate crime and investigations practice at Macfarlanes, consider the strength of the UK’s existing SAR regime and suggest what changes practitioners can expect from the reform programme as we enter 2020.

What was the background to the SARs reform programme announced in the Economic Crime Plan 2019?

During 2018, the Financial Action Task Force (FATF) undertook an assessment of the UK’s anti-money laundering (AML) and counter terrorist financing (CTF) regime and produced its mutual evaluation report in December 2018. This was very positive, concluding that the UK had the strongest AML/CTF regime out of all the countries that had been reviewed at that time. However, the mutual evaluation report was also clear that ‘the SAR regime needs a significant overhaul’ in order to improve the financial intelligence available to UK authorities.

The Economic Crime Plan 2019–2022 explicitly acknowledged this and described how the ‘SARs Transformation Programme’ would fundamentally reform the SARs model and deliver better IT, enhanced feedback and a reformed UK Financial Intelligence Unit (UKFIU). This was fully set out as Actions 30-32 in the published list of agreed actions in the economic crime plan.

This specific programme for reform also came against a backdrop of ongoing change of the SARs regime. For example, the National Crime Agency (NCA) SAR Annual Report 2018 described how the NCA was working with the Home Office on a SARs reform programme which was needed as ‘a matter of urgency, as the current IT is old and reaching the end of its life’.

The SARs reform programme is therefore both a response to a long-standing and widely acknowledged need for reform, as well as to a specific call for action by FATF at the end of 2018.

Why was reform necessary? How does it feed into the government’s wider economic-crime and asset recovery goals?

Reform is broadly necessary in order to handle the vast (and increasing) number of SARs being submitted and improve the value of the intelligence contained within them. As noted above, there is also the very real fact that the IT infrastructure in place to deal with SARs appears to be increasingly unable to cope with the demands it is being put under.

To quantify that a little, in 2017/18 the UKFIU received 463,938 SARs (a 9.6% increase on the previous year) and then in 2018/19 the UKFIU received 478,437 SARs (a 3.13% increase on the previous year).

A Law Commission report was published in June 2019—based on work carried out during the preceding 18 months or so—looking at issues with the SARs regime. This highlighted various reasons why the numbers of SARs are so high and why the quality can be so low. In particular, the way the law is currently drafted results in many SARs being submitted defensively or over-cautiously in order to create a defence against committing a criminal offence, rather than actively providing helpful information to the authorities. In many cases, it is also clear that the legal requirements to submit SARs and the information that should be included in them is not well understood.

In terms of the UK government’s goals—there has been a new focus on fighting economic crime and, in particular, using asset recovery powers to achieve this. For example, the powers of account freezing/forfeiture orders introduced as part of the Criminal Finances Act 2017 are beginning to have a significant impact in combination with the SAR regime. The SAR Annual Report 2019 found that in 2018/2019 a total of £131,667,477 was denied to criminals as a result of defence against money laundering SARs and related action by the authorities. This is an increase of 153.66% on the previous year.

What steps have already been taken and what is the future of this programme likely to look like?

The reform programme is long-term and appears to be ambitiously planned. Costs of approximately £100-150m have been estimated for the SARs transformation programme (focused on the IT aspect of reforms). The first phase of the planned IT overhaul is due for completion by December 2020. At that point, the target operating model for the future will be agreed.

In the shorter term, the UKFIU has already increased its headcount from 80 to 118 to help cope with demand and a new suite of IT systems is in development. Many recommendations made in the Law Commission’s report will also be delivered in due course, such as specific guidance on the suspicion threshold, appropriate consent and reasonable excuse, to assist those who are unsure of whether they need to submit a SAR. We can also expect new prescribed forms of SARs to be produced, which will allow for more efficient reporting and analysis.

In summary, there are many changes due in 2020 that will alter how the SAR regime is understood and used and there will be continuous IT investment and change, hopefully to the benefit of both submitters and the UKFIU.

How effective is the current system for combatting money laundering and how is this likely to change after we leave the EU?

As noted above, the conclusions of FATF’s mutual evaluation report in 2018 were very positive and the UK is recognised as having good systems in place for combatting money laundering. However, there is clearly room for reform and improvement—serious and organised crime is estimated to cost the UK at least £37bn each year and an integral part of that is money laundering.

It is very hard to predict how the UK’s departure from the EU may impact on this process. The terms of the UK’s withdrawal appear to be set, but the terms of a future trading relationship are not, and that may bring more complications. It was noted in the UK’s Economic Crime Plan 2019-2022 that ‘as the UK prepares to leave the EU, it is possible that criminals will seek to exploit changes created by the UK’s departure’ and the UKFIU noted in its most recent annual report that it is ‘planning for Brexit outcomes’, but there is not much detail more detail given in support of either these statements.

In reality, the current drive to combat money laundering in the UK shows no sign of abating and it would be surprising indeed if the UK’s departure from the EU resulted in any lessening of the focus on this area or a decrease in the UK’s effectiveness.

Originally published on LexisLibrary and LexisPSL in January 2020.