Criticisms of the current law
5.9 Based on the discussions with stakeholders that we had in the early stages of the project, we concluded in our Consultation Paper that some reporters struggle with understanding their legal obligations. POCA contains a number of complicated and knotty concepts including those of «suspicion» and «criminal property». Interpreting and applying them is compounded by the complexity arising from the two different types of disclosure under Part 7 of POCA.
5.10 We observed in our Consultation Paper that a large volume of disclosures are made to the UKFIU, a significant proportion of which are authorised disclosures requiring additional processing to reach a decision on consent. Between October 2015 and March 2017, the UKFIU received 634,113 SARs of which 27,471 were authorised disclosures (also known as consent or Defence Against Money Laundering («DAML») SARs). We now know that there has been a 20% increase in the volume of authorised disclosures since 2017.
5.11 We concluded that the use of the threshold of suspicion contributes to this large volume of disclosures in three ways. First the principal money laundering offences set a low threshold for criminality. As soon as a reporter has a suspicion that property is criminal in origin, they are at risk of committing an offence. By lodging an authorised disclosure, a reporter is afforded potential protection from prosecution. Moreover, a disclosure is required in the circumstances specified by statute if a reporter can identify reasonable grounds to suspect that another person is engaged in money laundering. In combination, this creates a low threshold for reporting.
5.12 Secondly, as the risk of criminal liability rests with the reporter not the commercial organisation, this contributes to a culture of defensive reporting. We observed that there was anecdotal evidence of defensive or over-cautious reporting. Reporters and nominated officers told us that their fears of individual criminal liability often overrode rational judgement in deciding whether or not to make a disclosure. Law enforcement agencies observed that the quality of disclosures was inconsistent and there was a significant proportion of reports which were of little intelligence value. Combined with the statistical evidence that demonstrates a large and increasing volume of disclosures, this was problematic and inefficient. A large volume of reports does not necessarily equate to the provision of good quality intelligence to law enforcement agencies.
5.13 Thirdly, the concept of suspicion itself remains ill-defined, unclear and inconsistently applied by reporters. This combination of factors results in both high volume and issues with the quality of disclosures.
5.14 The Government has recently echoed concerns about volume, highlighting the growth in the number of SARs and the opportunity for greater efficiency:
SARs are submitted by the regulated sector to alert law enforcement, at all levels, to activity that might indicate money laundering or terrorist financing. The number of SARs has doubled over the last ten years, and the efficiency of the SARs regime could be substantially enhanced.
5.15 In evidence to the Treasury Committee, the Minister of State for Security at the Home Office, the Right Honourable Mr Ben Wallace MP referred to the importance of ensuring that disclosures focussed on providing quality intelligence:
We are working together on SAR reform, because we both want quality not quantity of SARs to be made.That is why we are working together, financially and on policy, to come up with SAR reform that helps my NCA do its job, but also helps to lift some of the cost of that regulation from banks, because they are going to be doing fewer SARs but of better quality.
5.16 Donald Toon, Director of Prosperity at the National Crime Agency acknowledged that there are issues with the quality of reporting, with some SARs having no immediate value to law enforcement agencies:
It may well be that you start an investigation today and SARs that were submitted two, three, four or five years ago then become relevant. There is a series of issues here around the fact that the SARs database includes a very wide range of information. Some of it is absolutely critical now; some of it very firmly supports other investigations; some of it we think would be better not reported at all. Part of the SARs reform programme is to try to work through how we lose that which has no value without throwing the baby out with the bathwater.
5.17 While volume can indicate high levels of compliance with POCA obligations it does not necessarily follow that this is why a large number of reports are filed with the UKFIU. The quality is equally important in order to translate SARs into useful intelligence. There are, in general terms, two things a SAR can provide:
(1) raw data, such as a mobile telephone number, which may or may not be used in the course of an investigation; and
(2) detailed intelligence which may provide evidence of criminality.
5.18 Processing an authorised disclosure in order to investigate potentially useful intelligence requires significant resources. Recognising that, and the volume of such disclosures, we have sought to maximise the quality of each individual disclosure. By focussing on an increase in quality, our proposals are intended to have the following effects:
(1) to at least maintain the volume of raw data presented to the NCA and at best, to increase the amount of data provided by introducing a prescribed form for SARs;
(2) to increase the amount of detailed intelligence. This will occur as a result of our recommendations to provide statutory guidance on suspicion;
(3) to render the process more efficient by reducing the amount of input necessary by the UKFIU to process an authorised disclosure once lodged; and
(4) to reduce the number of unnecessary SARs which arise from confusion as to legal obligations or defensive reporting.
Impact on resources of NCA
5.19 Required disclosures require minimal processing. They are made available to law enforcement agencies and have the potential to be exploited as a useful source of intelligence. Required disclosures may trigger an investigation, enhance an existing investigation, or lie dormant unless and until they become relevant.
5.20 Authorised disclosures in contrast do require additional resources to process in all cases and as soon as they are filed. As they alert law enforcement agencies to criminal property which is about to be subject to some activity, they require an informed response within defined time limits. In practical terms, lodging an authorised disclosure effectively pauses any commercial transaction pending a grant or refusal of consent. This process requires significant resources from the UKFIU. As we observed in our Consultation Paper, on average 2000 SARs are received per working day by the UKFIU. Of this figure, on average 100 of these SARs will be authorised disclosures requiring a decision on consent.
Impact on individuals and businesses
5.21 During our initial fact-finding, we identified four significant issues with the suspicious activity reporting process which, in combination, have led to a large volume of disclosures, a significant proportion of which are of poor quality.
5.22 The money laundering offences in sections 327, 328 and 329 of POCA set a low threshold for criminality: suspicion. Authorised disclosures are therefore triggered on the basis of suspicion rather than a more carefully evaluated evidence-based judgement. Additionally, we found evidence that the test of suspicion is frequently misunderstood and inconsistently applied by reporters. This produces disclosures which are of low intelligence value and/or poor quality. Often this is compounded by confusion felt by many reporters as to their legal obligations. From our discussions with consultees, it was apparent that that there was little common understanding of the law as set out in POCA across the regulated sector. Individual reporters are at risk of personal criminal liability for their actions and this contributes to a defensive reporting culture.
5.23 As we outlined in our Consultation Paper, understanding what suspicion means is essential for those working in sectors where their duties create a risk that they will encounter criminal property. If the concept is ill-defined or misapplied it increases the risk that a reporter may personally commit a criminal offence, either by laundering criminal property or failing to disclose. Where reporters lodge SARs seeking consent where there is, in fact, no suspicion of criminal property, this has an impact on the UKFIU's resources. It delays the processing of more serious cases, as it can divert resources away from serious and organised crime or vulnerable people where matters may be time-sensitive. In addition, the reporter wastes time and resources in the private sector by lodging a report that is of no value. That burden is ultimately borne by customers.
5.24 The UKFIU have also noted that between April 2017 and March 2018, 2,015 authorised disclosures were closed for one of the following reasons:
(1) the reporter withdrew the request;
(2) consent had been requested in error;
(3) the reporter had failed to include a key piece of information but were uncontactable or had failed to submit the additional information in writing to the UKFIU within the notice period.
5.25 Each disclosure has a significant impact on its subject. This ranges from, at best temporary inconvenience to, at worst severe financial loss. Reputational damage can ensue and in some cases, the subject may find that their bank closes their account permanently.
Provisional conclusions
5.26 In light of all these factors, we provisionally concluded that the application of suspicion can be a complex exercise for reporters. Individuals need to consider both whether a disclosure is required and which type of disclosure is necessary in order to avoid potential criminal liability.
5.27 We noted in our consideration of the consent regime that there were a number of competing interests that needed to form part of any balancing exercise. In particular, the interests of those subject to reporting obligations, the UKFIU, law enforcement agencies and those who might be the subject of any disclosure. We outlined our aims to produce a regime which would promote the filing of more focussed and valuable SARs which were evidence-based and of greater assistance to law enforcement agencies. That would lead to fewer unhelpful SARs being filed. Furthermore, we aimed to ensure that the regime has a proportionate impact on individuals and businesses who may be the subject of a disclosure.