• Home
  • Insights
  • SARs: a need for change, but in which direction? - the Law Commission consults

22 Aug 2018

SARs: a need for change, but in which direction? - the Law Commission consults

Linkedin

The SARs regime serves a crucial purpose but the high volume and often low quality of reports runs the risk of bringing the system to its knees. The Law Commission has published a Consultation Paper to address the various issues in relation to this topic with a view to presenting its recommendations to the Government in due course. This alert examines the key topics raised in the Paper, and sets out the various proposals that the Paper puts forward. 

The context

In December 2017, the Home Office asked the Law Commission to review and make proposals for reform on limited aspects of the UK anti-money laundering ("AML") and counter-terrorist financing ("CTF") regime with a view to making the Defence Against Money Laundering regime (the "consent regime") more effective. The consent regime refers to the process whereby an individual who suspects that they are dealing with the proceeds of crime can seek permission to complete a transaction by disclosing their suspicion to the NCA through means of a "required disclosure" or an "authorised disclosure".

On 20 July 2018, the Law Commission published Consultation Paper No. 236 on Anti-Money Laundering: the SARs Regime (the "Paper"). The Paper is the latest effort to reform the SARs regime since the government made a commitment in its Action Plan for AML and CTF in April 2016, and could signify a drastic reform to an area which has otherwise become cumbersome, inefficient, and most importantly ineffective.

The problem

The Paper reports that, on average, 100 SARs seeking consent to proceed with transactions are received by the NCA each working day, which are handled by 25 members of staff.  Law Commissioner Professor David Ormerod QC has stated that "…the reporting scheme isn't working as well as it should. Enforcement agencies are struggling with a significant number of low quality reports and criminals could be slipping through the net", and that such "noise" distracts attention from the most serious or urgent cases.

In addition to the burden on the NCA, other pressing issues exist in the form of the enormous compliance burden placed on the regulated sector which must operate within the SARs regime, and also the risk of severe financial loss to businesses and individuals who are the subject of a disclosure.

The Paper

The Paper welcomes responses to its 38 questions. Its intention is to initiate conversation and debate to bring about effective reform with a view to helping banks and businesses provide better information to law enforcement agencies, and help refocus limited resource and attention on the most suspicious, and potentially criminal, activity.

The proposals put forward by the Paper include:

  • statutory guidance on (i) what to look for, and a set format for submitting SARs; and (ii)how the suspicion threshold should be applied, detailing the factors capable of founding a suspicious or reasonable grounds for a SAR, with a non-exhaustive list, and factors that should be excluded;
  • asking whether new tools could help enforcement like US-style Geographic Targeting Orders;
  • a new power for the NCA to require additional detail and record keeping requirements targeted at specific transactions;
  • cutting back on low quality reports by focussing on accounts where there are reasonable grounds to suspect property is criminal property, a departure from the previous position of only requiring "suspicion" (the Paper considers this topic in great detail which cannot be examined in its entirety in this alert, this topic will likely form part of one of our breakfast seminars in due course);
  • legal protection for banks which choose to lock into an account the suspected criminal funds but leave the rest of the account open to trade thereby minimising the risk of severe financial loss for those who are the subject of a disclosure;
  • providing detail as to what amounts to a defence of ‘reasonable excuse’ for not making a SAR (such as lodging a report with another enforcement agency in relation to the same matter); and
  • asking whether commercial organisations, rather than the individual employees, should be liable for failure to prevent a criminal offence when an employee fails to disclose a suspicion.

Views are also invited on the topic of a "serious crimes" approach; the regime currently dictates that the money laundering offences apply in relation to property derived from any crime, regardless of its seriousness. This means that minor offences and regulatory breaches that carry a criminal consequence are caught. The Paper acknowledges that a departure from the status quo could be problematic, but welcomes views all the same.

Failed efforts

This is not the first attempt to revamp the money laundering reporting scheme since the enactment of the Proceeds of Crime Act 2002. As reported in our alert on the Important Changes to the SAR regime, in October 2017 Sections 10-12 of the Criminal Finances Act 2017 came into force permitting law enforcement agencies (including the SFO and the FCA) to put transactions which are the subject to a SAR on hold for an additional six months whilst matters disclosed in the relevant SAR are investigated.

Our analysis at the time suggested that the significant ramifications of this extended period of delay may reduce the number of SARs submitted, but the proposals suggested in the Paper suggest that the Criminal Finances Act 2017 did not go far enough and that further measures to reduce the "noise" are necessary.

Closing remarks

It is anticipated that many responses will be received by the Law Commission before the 5 October 2018 deadline and it seems that the success of this process will ultimately be determined by the ability of the Law Commission to digest the varying responses and put forward a coherent and workable solution to the Government. As we suggest in this alert, the Paper grapples with many (often competing) complex points of law, and so those who operate within the SAR regime will await the Law Commission's proposals with bated breath.

Linkedin

KEY CONTACT

Tony Woodcock

Tony Woodcock
Partner

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

Richard McGarry

Richard McGarry
Associate

T:  +44 20 7809 2983 M:  Email Richard | Vcard Office:  London