Law Commission Report
The report makes a series of recommendations, some of which are about aspects of the current system that should not change, as well as elements which should. Unsurprisingly, it highlights much that is wrong with the current system, which UK Finance estimates costs UK banks over £5bn a year in compliance costs and which enforcement agencies say overwhelms them with a huge number of reports, many of which contain little useful information.
Between April 2017 and March 2018 463,938 SARs were filed, of which 22,691 were “authorised disclosures”, that requested consent to deal with property suspected to be the proceeds of crime, rather than just “required disclosures” where a person working in the regulated sector suspects another to be money laundering. It is the authorised disclosures which create the most work for the National Crime Agency, as they trigger a 7 day period in which the agency must either give or withhold consent for the transaction to proceed. The report notes that further information is required in 12% of these cases and 10% are considered “seriously deficient” in the information provided.
Assessing the quality of SARs
To assess the usefulness of SARs under the current regime, the authors reviewed a “statistically significant” sample of 536 authorised disclosures and 100 required disclosures. The authors noted that the contents varied widely, with some containing unnecessary and worthless information, while others lacked the key information required for the authorities to act. 22% of the authorised disclosures and 9% of the required disclosures related to transactions worth less than £1,000. 98% of authorised disclosures that identified a predicate offence related to a suspicion of a “serious crime”, defined as those offences set out in Schedule 1 to the Serious Crime Act 2007 or Schedule 2 to POCA, or punishable by way of a maximum penalty of more than 1 year’s imprisonment.
In the authors’ view, 15% of the SARs containing authorised disclosures did not show a suspicion of criminal activity that met the standard set down in the case of R v Da Silva, of “a possibility, which was more than fanciful, that the relevant fact existed”. If a test of having “reasonable grounds for suspicion” was applied (one of the consultation’s proposals), only 32% of authorised disclosures would have met this. Some form of objective ground for suspicion was cited in only 49% of authorised disclosure SARs.
Despite these findings, the report does not recommend a change in the test that triggers the requirement to file a SAR from suspicion to reasonable grounds for suspicion, nor a limit in the value of transactions that trigger the requirement to file a SAR. Instead, it recommends ongoing analysis of the quality of SARs by an Advisory Board to assess whether the changes that are recommended in the report lead to an increase in quality.
One of the main subjects of the consultation was whether further guidance is required on the Proceeds of Crime Act and the SARs process. Current guidance is scattered across numerous publications from a variety of bodies and is, in places, contradictory. The report notes that where people face personal criminal liability for failing to comply with a complex piece of legislation, this is unsatisfactory.
In our consultation response we recommended the creation of a statutory obligation upon the Secretary of State to provide guidance on POCA in the same way as is provided in section 9 of The Bribery Act. This has been adopted by the Law Commission. Concepts identified by the Law Commission as requiring authoritative guidance are having “a suspicion”, the defence of having a “reasonable excuse” for having failed to file a SAR and what effect “appropriate consent” has on the actions of someone dealing with potentially criminal property.
- the requirement to make authorised disclosures seeking consent to deal with suspected criminal property should remain
- the requirement to file a SAR should not be limited to situations where a “serious crime” is suspected – all crimes should be covered
- a prescribed form should be created for SARs to increase uniformity and ensure the right information is provided
- the creation of an Advisory Board constituted of public and private sector experts to carry out ongoing review of the quality of SARs filed
- statutory guidance to include guidance on the meaning of having a suspicion and “reasonable excuse”, as well as the effect of receiving “appropriate consent”, to be drafted in consultation with the Advisory Board
- credit and financial institutions be protected from committing a potential money-laundering offence if the transaction they process is carried out to ringfence the proceeds of crime
- no UK nexus to be required in relation to the predicate offending before the UK’s money laundering system is engaged, and
- consent not to be required for banks repaying customers who have been the victims of fraud.
Some will undoubtedly see the Law Commission’s report as relatively limited in the scope of its recommendations, as it concludes that much of the current system should remain as it is. The report recommends that the consent regime should stay, no de minimis value should be applied, no limit should be introduced as to the types of predicate crime it should catch and its international scope should remain unchanged.
No immediate recommendation is made as to the possibility of “pre-suspicion” information sharing between financial institutions. Simmons & Simmons’ consultation response argued for this to be enabled and our views as to how it would be compatible with the GDPR are cited in the report, but the authors conclude that more consultation is needed before a legislative gateway can be created to allow this.
Nonetheless, what is proposed is significant. The approach the authors adopt is to improve the quality of SARs through a single authoritative source of guidance on key concepts, a prescribed form for all SARs and monitoring by an Advisory Board. The constitution of this body will be of key importance and the UK financial industry will need to ensure it has the right representation there. The recommendations will require some new legislation and the statutory guidance is likely to take some months to create. Any changes will also need to be integrated with work being carried out under the Government’s Serious and Organised Crime Strategy 2018 that included a wholly new IT system for managing the SARs process. Change may not be as swift or dramatic as some would like, but the need for change is strongly recognised and the measured and incremental approach may ultimately prove to be the right one, particularly against a political backdrop where compliance officers may shortly have other major changes to contend with.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.