Suspicious Activity Reports: The Law Commission’s Proposals

What is a SAR?

When Part 7 of the Proceeds of Crime Act 2002 (POCA) came into force on the 24th July 2002, it brought with it the suspicious activity report (SAR) regime. The purpose of this regime is to prevent, detect and assist the prosecution of money laundering activities. In essence, banks and select other professional firms such as accountants and insolvency practitioners are under a legal obligation to report the suspected laundering of the proceeds of any criminal conduct that they identify on the accounts of their clients and customers (solicitors may also be subject to the regime but the rules do not supersede information which is legally privileged) with a failure to disclose being a criminal offence.

 

How does the current regime work?

The current SARs regime operates by way of a ‘referral’ mechanism where the organisations subject to the regime disclose SARs to the UK Financial Intelligence Unit (UKFIU) who in turn forward the reports on to the relevant law enforcement body for further investigation. The threshold for reporting is reflected in the Da Silva suspicion ([2006] EWCA 1654, a suspicion which is “a possibility, which is more than merely fanciful, that the relevant facts exist”); arguably a very low threshold which is leading to a large number of referrals. According to the Law Commission, 463,938 SARs were made to the UKFIU between April 2017 and March 2018. The National Crime Agency (NCA) have reported similarly high numbers of SARs, outlining that 634,113 reports were submitted between October 2015 and March 2017. Each SAR needs to be examined by the UKFIU and other law enforcement agencies and the sheer number of reports being made is naturally creating a heavy burden (both financially and administratively) for the report receivers to bare. Equally, the organisations responsible for making the reports, and the individuals who work within them, are being placed under significant pressure to maintain compliance. One major concern held by the Law Commission is the quality of the SARs being submitted under the current system. It is believed that the reasons for the poor-quality SARs are twofold; defensive reporting by individuals to protect themselves from legal consequences and lack of guidance as to what information a SAR ought to contain.

 

What are the Law Commission recommending?

The consultation closed on 5th October 2018 and the Law Commission published its report on the SARs regime on 19th June 2019 making a total of 19 recommendations and outlining; “we identify four principal pressures for change: the low threshold for criminality, individual criminal liability, confusion amongst those in the profession as to their reporting obligations and the application of suspicion”.

In an attempt to reduce the number of SARs, the Law Commission recommend raising the reporting threshold through the application of a test of ‘reasonable suspicion’ (in contrast with a suspicion which is “more than merely fanciful”), and the introduction of additional guidance on the meaning of the term ‘suspicion’ and the parameters of a reasonable excuse defence. It is hoped that the implementation of a higher standard of suspicion will go some way in reducing the number of SARs. In this vein, the Law Commission have also developed the defence of ‘reasonable excuse’ for individuals who fail to make a SAR and have suggested statutory guidance on the types of scenario in which an individual would have a ‘reasonable excuse’ for failing to make a disclosure (e.g. making a report to another law enforcement agency or moving funds internally within a bank or building society). In order to tackle the poor quality of SARs currently being submitted, the Law Commission have proposed a standardised interactive online SAR submission form. The Law Commission also propose the formation of an advisory board made up of various individuals with experience of the SAR system who would be responsible for monitoring the effectiveness of the reporting procedure and feeding advice back to the Secretary of State on how to further improve the reporting system. The introduction of a corporate offence for companies who fail to fulfil their obligations under the SAR regime is a further idea put forward by the Law Commission in a bid to limit the individual liability of those employed by organisations subject to the reporting regime and thus reduce the number of ‘defensive’ SARs being submitted in conjunction with the raising of the suspicion threshold.

 

What effect will the proposals have?

The proposals will hopefully bring improved efficiency in the form of reduced SAR numbers and a higher quality in the SARs being made. There is of course an argument that the proposals increase the weight of the heavy burden that regulated organisations are currently operating under because the changes to the suspicion threshold will require a more in-depth analysis of each prospective SAR in order to assess whether the ‘reasonable suspicion test’ has been met. Some may also feel that the scope of the Law Commission’s proposals do not go far enough. Generally, the proposals appear to revolve around the construction of further guidance and refinement of practicalities within the current regime as opposed to a complete overhaul of the system. The Government are expected to provide an interim response to the recommendations made by the Law Commission. Only time will tell how successful the Law Commission proposals will be in improving this vital method of money laundering detection and ultimately, fulfilling the aims of the legislation.

 

Article written by Ellen Wright.

July 2019