Changes are coming in the UK’s regulatory climate, particularly around Suspicious Activity Reports (SARs).
The SARs regime describes the integrated system by which the financial services industry identifies suspicious activity related to money laundering or terrorist financing, and reports this to the UK Financial Intelligence Unit (UKFIU).
In the UK Anti-Corruption Plan, published on December 18, 2014, the Government committed to carrying out a review of the SARs regime to develop ways of better identifying money laundering and terrorist financing, and to prevent dissipation of corruption proceeds.1
When the Home Office ran a Call for Information (February 2015) on the operation of the SARs regime, several key concerns were raised. They are described below:
Consent Regime: The plan calls for the consent regime to be replaced by a restructured SARs regime, based on tiered reporting. Transactions where the bank has evidence of criminality, these would be subject to review by the National Crime Agency (NCA) prior to any action being taken.
United Kingdom Financial Intelligence Unit Capabilities/Level of Resources: The poor quality of SARs is often the result of a lack of knowledge by the reporting firm, which requires raising reports that are of little value.
Clarify “Tipping Off” Offence: Clarifications are needed within the Proceeds of Crime Act (POCA) regarding the “tipping off” offence. Sharing of information, even to assist in preventing or detecting crime, could be an offence.
Review the Moratorium Period: Financial services firms tend to view the moratorium as too long, or causing any transaction subject to it to fall through.
Focus on Accounts rather than Transactions: Some stakeholders, including those in law enforcement agencies, the financial sector, and the legal and accountancy sectors, have suggested it would be better for consent requests to operate on the whole account, rather than on each transaction.
Information Sharing Needed: The government review has highlighted the need for a better information sharing model between law enforcement agencies, regulators and the private sector.
Quality of SARs/Reduction in Volume: Failing to report suspicious activity can lead to severe penalties. This becomes a key driver for defensive reporting in situations where there is a lack of genuine suspicion—the NCA has been bombarded with low quality reports as well as reports where there is a lack of suspicion in what is being reported. This can mean a burden on the regime, and detracts from the focus.
Extra Information Added to the SARs to Aid Investigations: The NCA and the Federal Bureau of Investigation are particularly keen in wanting banks and other organisations to add internet protocol (IP) information along with emails onto SARs. They have found only 2 percent of SARs contain this information at the moment.
What does this mean to financial firms?
With the consent regime possibly out of the picture, firms will not be able to rely on the NCA for consent decisions when wanting to release or retain funds from a suspicious transaction. Some of the implications for the business could be:
- An increase in nominated officers required to take on more complicated decisions by SARs raised.
- Extra training for analysts and investigators to validate that SARs are correct, are of the highest quality, and that substantive information is collected (without “tipping off” potential criminals).
- Increased risk to firm. With more decisions taken by each firm, this could lead to more funds being released that could potentially become proceeds of crime.
- Increased risk adversity among firms, leading to tighter transaction monitoring for fear of being complicit, and greater risk of regulatory fines.
- More time taken to complete investigations when raising a SAR, given greater focus on accounts rather than transactions. This could lead to an increase in resources on the part of the firm.
- Possible extra training for investigators, if IP information, emails and other supporting documents are required.
- Training for teams on legal policies, data protection and other policies to facilitate proper information sharing. We have observed a number of agencies stress that proper information sharing can go a long way to aiding thorough investigations, and cracking down on high-level connections with criminal operations.
With the new Anti-Money Laundering (AML) Directive and the Foreign Account Tax Compliance Act (FATCA) evaluation coming soon, the government is determined to reform the SAR regime. Firms should take steps to prepare themselves, among other things, and having the appropriate quality of resources in place to tackle tough decisions. If such resources are not available, a good “plan B” might be to increase training among staff to ready them for the changes ahead.
- “Annex B: Findings from the Call for Information on the Suspicious Activity Reports (SARs) Regime”. Access at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/518057/Findings-from-call-for-information-on-suspicious-activity-reports-regime.pdf