On July 20, 2018, the Law Commission opened a consultation on the reform of the anti-money laundering and Suspicious Activity Reports (SARs) regime in Part 7 of the Proceeds of Crime Act 2002 (POCA). The consultation closes on 5 October 2018.
The Law Commission sets out in its consultation paper a broad range of proposals to improve the SARs regime and mitigate its financial impact on the regulated sector (and in particular financial institutions, which together are estimated to spend £5 billion per year on anti-money laundering systems and controls1). In this briefing we analyse some of the most significant proposals
- The proposal to effectively raise the reporting threshold to require reporting only where there are reasonable grounds to suspect money laundering.
- The recommendation for practical guidance on the meaning of suspicion and on the ambit of the reasonable excuse defence.
- The proposed move away from individual liability for failure to report and the introduction of a corporate offence of failing to ensure suspicions of money laundering are reported.
Taken together, these proposals would lead to a significant and welcome shift towards a more practical and efficient SAR regime which we consider would best achieve its aims while reducing the current burden on the regulated sector.
SARs are the mechanism by which the private sector make disclosures to the UK Financial Intelligence Unit in relation to money laundering and terrorist financing. There are two types of disclosures: those required by law and those made in order to seek a defence against money laundering offences (Defence SARs, but commonly known as consent SARs).
High quality SARs can be a vital source of intelligence to law enforcement agencies but there are simply too many SARs filed under the current regime: according to the National Crime Agency (NCA) between October 2015 and March 2017, disclosures by credit and financial institutions accounted for 95.78 per cent of the 634,113 SARs submitted (disclosures by banks alone accounted for 82.85 per cent of the total)2. Of the 27,472 Defence SARs during that period, defence was refused in only 5.67per cent of cases3. In the past year, the volume of SARs has increased by 10 per cent, whilst the volume of Defence SARs has increased by 20 per cent4.
Raising the reporting threshold
The Law Commission’s most significant proposal is to effectively raise the reporting threshold to require reporting only where there are reasonable grounds to suspect money laundering rather than the current lower standard of a “more than fanciful” subjective suspicion (i.e. the Da Silva suspicion5). This proposal is designed to cut down on the number of defensive SARs. Together with the proposal to move away from individual liability for reporting (see below) it should help to reduce instances of individuals filing a SAR because money laundering cannot be ruled out and should lead to fewer and higher quality SARs.
The Law Commission does not suggest raising the threshold of suspicion in relation to the money laundering offences under sections 327 – 329 POCA because it considers the low level of suspicion necessary in order to facilitate prosecution of money laundering offences. Rather, a new defence for the regulated sector is proposed: where an individual has no reasonable grounds to suspect that property is criminal property, they would not commit an offence by not reporting their suspicion.
Raising the threshold is potentially more onerous for regulated entities as it places the onus on the reporter to have grounds that are objectively justifiable. Businesses in the regulated sector would therefore need to produce clear guidance and additional training to ensure that employees can make informed decisions as to whether or not to report their concerns. While raising the threshold of suspicion may create additional work for regulated entities in the short term, in the long term (and with clear guidance from the government) it should lead to fewer reports and resources being focused on substantive issues.
The Law Commission suggests amending POCA to include a statutory requirement that the Government produce guidance on the suspicion threshold. Similar requirements for statutory guidance are included in the Bribery Act 2010 and the Criminal Finances Act 2017. In both cases the guidance produced is designed to be of general application and includes commentary and examples.
Guidance on the suspicion threshold would ideally contain examples of factors capable of founding suspicion and those which should be excluded in the absence of any other aggravating factors. Clear, comprehensive and common sense guidance would be well received within the financial sector, particularly if it contains best practice in relation to the types of issues commonly encountered by major banks and if it is updated periodically to deal with particular issues as they arise. Such guidance should result in an improved quality (and reduced quantity) of reports.
Guidance on the reasonable excuse defence
The need to clarify terminology used in POCA is a common theme that runs throughout the consultation paper. In the absence of significant case law, the broadly drafted legislation combined with inconsistent sector specific guidance6 makes it difficult for reporters to understand their obligations. Particular uncertainty surrounds the defence of having a reasonable excuse for failing to make a required7 and/or authorised disclosure8. The Law Commission proposes issuing statutory guidance to indicate circumstances, such as where a transaction has no UK nexus, which may amount to a reasonable excuse not to report. The Law Commission also suggests extending the defence by drafting guidance to confirm that the following actions may amount to a reasonable excuse not to disclose
- Not reporting suspicions of non-imprisonable crimes or those crimes listed in a new schedule.
- Moving criminal funds internally within a bank or business with the intention of preserving them (i.e. ringfencing).
- Lodging a report with another law enforcement agency (for example, in relation to fraud).
Guidance to clarify the position on the nature and extent of the reasonable excuse defence would be a positive development for both individuals and entities within the regulated sector. It would also focus resources on reporting matters the NCA is likely to be interested in and that are more likely to disrupt money laundering activities, which is a key purpose of the legislation.
Moving towards corporate criminal liability
During pre-consultation discussions, stakeholders in the financial sector informed the Law Commission that the volume of SARs would reduce if individuals did not have personal liability for the criminal offence of failure to disclose. We agree that individual criminal liability tends to incentivise defensive reporting, particularly given the low bar for suspicion and the lack of clarity in relation to the reasonable excuse defence.
The Law Commission suggests the introduction of an offence for a commercial organisation to fail to take reasonable measures to ensure its employees or associates report suspicions of criminal property. The Ministry of Justice (MoJ) made a similar proposal in relation to its 2017 consultation on the law on corporate liability for economic crime9. The MoJ’s response to public feedback is outstanding; however, the failure to prevent model has had a significant impact on corporate culture in relation to bribery and the facilitation of tax evasion offences by creating a powerful incentive to put in place adequate procedures. We would expect a similar impact if the failure to prevent model was extended to apply to money laundering reporting obligations.
The Law Commission’s consultation paper raises a number of important issues with the current SAR regime and highlights the need for consolidation of the law and guidance in this area. There will be many in the regulated sector keen to take the opportunity to have their views heard before the consultation period ends on October 5, 2018.
Joint Home Office and HM Treasury, Action Plan for anti-money laundering and counter-terrorist finance (2016), para 2.1
National Crime Agency, Suspicious Activity Reports Annual Report (2017), pp. 12-13
National Crime Agency, Suspicious Activity Reports Annual Report (2017), fig I.
National Crime Agency, Annual Report and Accounts 2017-2018, pp. 21
 EWCA 1654,  2 Cr App R. 35.
For example, accountancy sector guidance confines a reasonable excuse for failing to disclose narrowly in terms of threats to personal safety or duress, whereas guidance to the legal sector suggests a reasonable excuse for failure to disclosure includes where: knowledge or suspicion is based on privileged information and legal professional privilege is not excluded by the crime/fraud exception; law enforcement is clearly already aware of the suspected criminal conduct or money laundering and the reporter does not have any additional information; the information is entirely within the public domain; and there is no UK nexus to the suspected criminality.
POCA 2002, ss 330, 331 and 332.
POCA 2002, ss 327(2)(b), 328(2)(b), 329(2)(b) and 328.
Ministry of Justice, Corporate Liability for Economic Crime: Call for Evidence (2017) Cm 9370
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