On 18 June 2019, the England and Wales Law Commission published a report regarding the UK’s anti-money laundering (“AML”) framework (the “Report”). The Report follows a two-year consultation project aimed at improving the prevention, detection, and prosecution of money laundering and terrorism financing in the UK, and forms part of a much broader picture of reform of the AML framework. This includes, in particular, the announcement in January 2019 of a new UK Cabinet taskforce – the Economic Crime Strategic Board – to set priorities and direct resources pursuant to the UK Government’s Serious and Organised Crime Strategy, and publication of a House of Commons Treasury Committee’s report on Economic Crime (March 2019), and the government’s response (May 2019).
The Report makes 19 recommendations, principally concerning the suspicious activity report (“SAR”) regime under Part 7 of the Proceeds of Crime Act 2002. This alert highlights some key features of the Report’s findings and recommendations, and outlines the impact they may have on existing practices and the general direction of travel for the UK’s legislative framework on financial crime.
The recommendations focus on improving shortcomings in the current regime. The findings in the Report included the following two central themes:
- fragmented supervision of the anti-money laundering regime, resulting in “…a lack of uniformity across approved guidance” and misunderstandings amongst reporters. This arises out of the fact that there are 22 separate bodies responsible for AML supervision in the UK. The observation is consistent with a number of other recent reports regarding the UK’s AML framework, including a report issued by the Office for Professional Body AML Supervision (“OPBAS”) (March 2019) which noted inconsistent approaches across the various supervisory bodies to supervision, information sharing, and enforcement, and the FCA’s thematic review of money laundering risks in Capital Markets (June 2019), which noted a “…lack of specific industry guidance..” around when to file a SAR; and
- low quality “defensive” SARs with “…limited, or even no, useful intelligence”; due in part to confusion over reporters’ obligations, and concerns for potential criminal liability for failing to report a suspicion. The Law Commission found that 15% of SARs sampled as part of its review did not meet the “suspicion” threshold. Extrapolated, this suggests that 4,121 unnecessary SARs were filed between October 2015 and March 2017.
- Prescribed SAR form – the Law Commission believes that a standardised form will give reporters more confidence in articulating suspicions and ensure that it is easier for law enforcement to gain valuable financial intelligence from SARs. It is further recommended that the form would allow for a single SAR to be reported in respect of multiple transactions on the same account or for the same customer, rather than requiring separate SARs for each separate suspicious transaction.
- Guidance - guidance from the Secretary of State for the Home Office regarding: (a) what constitutes a “suspicion” and thus triggers the obligation to file a SAR; (b) the procedure for obtaining “appropriate consent” from the UK National Crime Agency (“NCA”) to proceed with a suspicious transaction; and (c) the scope of the “reasonable excuse” exemption. The Law Commission’s consultation observed a widespread call for clear and consistent guidance from one single authoritative source, which would assist reporters properly to understand and comply with their obligations.
- Advisory Board - an advisory board to oversee the SAR regime and allow it to be more responsive to new and emerging threats. It is envisaged that the advisory board will: (a) help produce the above statutory guidance, monitor the effectiveness of the SAR regime, and make further recommendations to the Secretary of State as appropriate; (b) analyse the quality of SARs; and (c) review whether the “suspicion” threshold for filing a SAR should have an objective element added to it.
- Ring-fencing – allow financial and credit institutions to ring-fence funds suspected to be the proceeds of crime, segregating them from “clean” funds, and to conduct transactions exclusively utilising the clean funds. This seeks to redress the potentially disproportionate position under the current regime where suspicion regarding individual transactions can result in (for example) the freezing of all the bank accounts of the individual or entity, indefinitely The Report recommends that certain aspects of the existing regime should remain as they are. It is particularly noteworthy that the Law Commission considered, but has not recommended any changes to, the consent regime as a whole (subject to continued review by the proposed advisory board) and the SAR regime’s applicability to all crimes (rather than to only so-called “serious” crimes). Thus, as the regime currently stands, an authorised disclosure to the NCA is still required for suspicions of technical, even trivial, potential criminality, which may involve little or no intelligence value.
The Law Commission also considered four wider areas of potential reform: (a) corporate criminal liability; (b) the extraterritorial jurisdiction of the UK’s AML regime; (c) a legal conduct overseas exemption (commonly known as the “Spanish bullfighter” issue, relating to an activity illegal in the UK but not illegal in the jurisdiction in which it occurs - an issue the Law Commissions highlights as “pressing”, especially, for example, given the recent growth of the cannabis industry); and (d) voluntary information sharing between regulated entities. However, the Law Commission made no recommendations in relation to these areas, which has led a number of commentators to the view that this was a lost opportunity.
All fixed now?
The Financial Action Task Force (“FATF”), in December 2018, said the UK “SAR regime requires a significant overhaul to improve the quality of financial intelligence available to the competent authority”. This sentiment was echoed in the House of Commons Treasury Committee’s Report on Economic Crime: “[t]he SARs reform programme is…an exceptionally important piece of work for the AML regime… Confidence in the SARs system, at present, appears to be weak outside the core financial services”. Time will tell whether the Law Commission’s recommendations provide the impetus for the overhaul needed.
The recommendations do propose some streamlining of the SAR regime (most notably, through the creation of a standardised SAR form). But on the thornier issues such as - “defensive” reporting, and guidance for reporters who understandably err on the side of caution in the face of potential criminal liability, it appears that these will fall to the Secretary of State and the proposed advisory board.