Retaining consent
1.49 Although it was not within the scope of our Terms of Reference to consider removal of the consent regime, we did ask consultees for their views on the system. In our Consultation Paper we set out the arguments in favour of, and the issues created by, the consent regime. We asked consultees whether they believed that the consent regime should be retained. If not, we asked whether consultees could conceive of an alternative regime that would balance the interests of reporters, law enforcement agencies and those who are the subject of disclosures.
1.50 The overwhelming majority of consultees who replied to this question did not think that the regime should be removed or replaced altogether. This confirmed our own perception that the system serves a useful function, but is in need of improvement.
1.51 In light of our analysis and the overwhelming support amongst consultees, we recommend retention of the consent regime with improvements to render it more efficient and effective.
Recommendation 1.
1.52 We recommend that the consent regime is retained.
The need for a balanced regime
1.53 The disclosure regime is required to perform a difficult balancing act between the interests of law enforcement agencies, reporters and those who are the subject of a SAR (for example, the bank customer whose account is frozen). Northumbria University's Financial Compliance Research Group response summarised the competing interests which must be balanced:
We believe there to be a fundamental tension between the objectives and requirements of those tasked with submitting SARs and those seeking to make use of the information contained within them. The challenge of the proposed reforms will be to deliver a system that achieves objectives that may not be mutually compatible, namely, to be less burdensome and costly for the regulated sector but to provide maximum usefulness to law enforcement.
1.54 Many stakeholders we met with were concerned that the balance is not currently being struck correctly.
1.55 In our Consultation Paper we recognised that obliging those with a reporting obligation to file a SAR whenever they have a «suspicion» means that the trigger for reporting is a light one. In principle this provides considerable benefit to law enforcement agencies, as it maximises the amount of information they are likely to receive. However, there is currently no means of ensuring that the burden of reporting is proportionate to the gravity of the offence, the value of the criminal property and the benefit to law enforcement agencies of this intelligence. This is problematic as resources are finite. The burden on those who are obliged to file reports is substantial. The burden on those whose accounts and transactions are frozen pending review is also very significant. It undermines the aim of achieving a truly risk-based approach.
1.56 In our Consultation Paper we identified a number of pressing problems which arise from the operation of the disclosure regime:
(1) Complying with reporting obligations is expensive. UK Finance (formerly the British Bankers' Association), a trade association representing the banking and finance industry operating in the UK, estimates that its members are spending at least £5 billion annually on core financial crime compliance.
(2) The burden on the reporters is compounded since there are common misunderstandings and a lack of clarity around reporting obligations, these arise because of the complexity of the provisions and the absence of a single definitive source of guidance on the law. This can result in wasted time for both the reporter and for those processing SARs.
(3) Defensive reporting arises from the risk of personal criminal liability for either a money laundering offence or a failure to provide information to the authorities. It can also arise from concern of being criticised by a regulatory body. This is exacerbated when reporters lack clarity concerning their obligations. Defensive reporting or reporting where it is unnecessary creates a larger volume of poor quality reports.
(4) Reporting and assessing authorised disclosures is a resource-intensive process, requiring analysis and administration by both the reporter and the UKFIU. Poor quality authorised disclosures and those which are unlikely to be of assistance to law enforcement divert resources and attention away from their ability to tackle serious and organised crime.
(5) Disclosures can have severe consequences for the subject of the report. Because a transaction is paused while the UKFIU reaches a decision on consent the subject will in all likelihood be unable to access their funds for that period of time.
Quality or quantity?
1.57 In the Consultation Paper we highlighted concerns from a cross-section of stakeholders that there were problems with the quality of disclosures made to the UKFIU. While there is an understandable desire among those working in law enforcement to maximise the amount of intelligence and raw data they receive, a large volume of SARs does not guarantee quality of intelligence. As the Proceeds of Crime Lawyers Association («POCLA») noted in its response:
the danger of casting the net this wide, is that valuable resources are deployed trawling through low grade material, allowing the larger fish and their associated predators to escape detection.
1.58 This concern has been echoed by Ben Wallace MP, the Minister of State for Security at the Home Office, who explained to the Treasury Committee that SARs reform was designed to deliver «quality not quantity of SARs».
1.59 We have had clear confirmation from law enforcement agencies that SARs are a vital source of intelligence. High quality SARs - in other words SARs which are data rich, and are submitted to the UKFIU in a format which is easy to process - can provide evidence of money laundering in action. Furthermore, they are one of the primary methods of sharing information to produce intelligence for law enforcement agencies to investigate and prosecute crime more generally. All SARs may provide raw data, such as a name or phone number, which may assist in the investigation and prosecution of a crime. Inferior quality SARs, in other words SARs which contain little or no data or are submitted in an inadequate format, are inevitably less valuable. They are more time-intensive to process, can contribute to delay in the system and may ultimately remain of little value to law enforcement agencies.
1.60 Our focus throughout this project has been on identifying measures which can assist to strike the right balance between the quality of intelligence provided in disclosures and the burdens on those who submit and assess reports to improve the overall efficiency of the system. We are also concerned to ensure that the effect of a SAR on its subject is considered.