31 Oct 2017

Important changes to the SAR regime

Linkedin

On 31 October 2017 Sections 10 – 12 of the Criminal Finances Act 2017 (the "Act") will enter into force, making the most significant changes to the money laundering reporting regime since the enactment of the Proceeds of Crime Act 2002.

The changes allow law enforcement agencies to put a transaction, which has been reported in a Suspicious Activity Report ("SAR"), "on hold" for an additional six months whilst matters disclosed in the SAR are investigated.

Firms in the regulated sector will also be able to voluntarily share information with other regulated firms, in connection with suspicions of money laundering, with a view to submitting a "joint SAR" or "Super SAR" if necessary.

Extension of the moratorium period

At present the National Crime Agency ("NCA") can withhold consent to a transaction proceeding for an initial seven working days, starting with the day after a SAR is submitted, ("the notice period") and then a further 31 calendar days ("the moratorium period") if consent is refused during the notice period.

From 31 October law enforcement agencies (including the Serious Fraud Office and Financial Conduct Authority) will be able to apply to the Crown Court to extend the moratorium period by a further 31 days, on up to six occasions. The Court may only grant an extension where it is satisfied that an investigation is being conducted diligently and expeditiously, further time is required and the extension is reasonable.

Subject to obtaining the necessary approval from a judge in the Crown Court, law enforcement agencies will be able to withhold consent to a transaction proceeding for up to 186 days beyond the end of the initial moratorium period.

Contesting extension proceedings and tipping off

Where a law enforcement agency applies to the Crown Court to extend the moratorium period, notice of the application must be served on the firm that made the SAR.

Once in receipt of notice of an application to extend the moratorium period a firm will be able to inform its customer / client of the existence of the application to extend the moratorium period without committing the tipping off offence. Whereas this provision is necessary and welcome, it is important to note that the extent to which the tipping off provisions are disapplied for the purposes of extension proceedings is strictly limited. The firm is permitted to disclose "only such information as is necessary for the purposes of notifying the customer or client that an application…has been made". It must follow, therefore, that the firm cannot disclose the content of the SAR to the client, or even the basis for its suspicion.

Any "interested person" (most likely the firm making the SAR and its client) may be represented at the extension application hearing. However, the relevant law enforcement agency can apply to have an "interested person" excluded from the hearing, and / or to have information withheld from such a person, if certain conditions are met.

Practical implications – fewer SARs?

It is entirely conceivable that complex or time-critical transactions or corporate deals will collapse on account of any extended delay.

Given the potentially significant consequences that could flow from an extended moratorium period, firms and – more likely – their clients will likely seek to contest any extension proceedings vigorously. One foreseeable consequence of submitting a consent SAR in the future, therefore, is potentially protracted litigation around the necessity of extending the moratorium period and the duration of any extension.

Given the consequences of submission of a SAR will be considerably more severe (strained or lost client relationships; litigation in the form of extension proceedings; the potential collapse of corporate deals) firms may be slower to make SARs, and decide against submission in marginal cases.

As the Criminal Finance Bill proceeded through Parliament Ben Wallace (a Home Office minister) told the Public Bill Committee that one intention behind the reforms to the Proceeds of Crime Act was to ensure fewer SARs are submitted – telling MPs "we want quality not quantity".

Given the new, powerful disincentives to submit SARs, it seems that this imperative behind the Act will be met.

Super SARs – sharing information in the regulated sector

Also in force on 31 October 2017 are provisions in the Act creating a statutory gateway for firms in the regulated sector to share information in connection with suspicions of money laundering.

Regulated firms will be able to disclose or request information, on a wholly voluntary basis, where to do so may assist in identifying whether a person is engaged in money laundering. Firms are protected from any claims of breach of confidence, and will not contravene data protection legislation, when sharing information in good faith under this new gateway.

Where information sharing has taken place, the Act envisages a "joint disclosure report" or "Super SAR" being submitted by the entities which have shared information. The Act provides that any information sharing between regulated sector businesses must be notified to the NCA when the information sharing begins.

Practical implications – useful or unduly ambiguous?

Despite the intention behind the new information sharing gateway – receipt by the NCA of one, composite SAR regarding a particular transaction, as opposed to several SARs from each regulated entity involved – it may be that firms will be slow to initiate sharing of information around suspicious activity.

The Act is unclear as to the timing for sharing / requesting information, and the threshold which must be met in order for a request / disclosure to be initiated. One of the technical requirements in the Act is that a disclosure request must be "made in connection with a suspicion that a person is engaged in money laundering" and must "set out the grounds for suspicion". However, if suspicion already exists, then a SAR will need to be filed; requesting or disclosing information from or to another regulated firm will serve no useful purpose.

If – as must be the case – the threshold for sharing / disclosing information is lower than suspicion, or even reasonable grounds for suspicion, a further conceivable problem arises if institutions, having shared information, disagree as to whether a SAR is necessary or should be submitted. In practice, it seems unlikely that a firm, in possession of sufficient information to initiate or engage in the information sharing process, will ultimately decide against making a SAR, particularly if one institution which has been party to the process deems submission of a SAR necessary. A further conceivable difficulty may arise in agreeing the wording of any joint SAR. 

As a result of the ambiguity of the legislative requirements for utilisation of the gateway, and the potential difficulties around reaching consensus with one or more other institutions, it seems unlikely that the number of "Super SARs" received by the NCA will be as significant as the Government might have intended.

Linkedin

KEY CONTACT

Tony Woodcock

Tony Woodcock
Partner

T:  +44 20 7809 2349 M:  +44 7825 625 903 Email Tony | Vcard Office:  London

Alan Ward

Alan Ward
Senior associate

T:  +44 20 7809 2295 M:  Email Alan | Vcard Office:  London