The findings of the Law Commission’s report point to sustained and long-term issues in anti-money laundering processes that have continued to go unaddressed for years, including concern about the low level of SAR reporting.
The Law Commission’s new report into the state of the UK’s anti-money laundering (AML) efforts is a moment for the whole sector to take stock and consider what it should do next.
The Commission spent 18 months reviewing the UK’s AML efforts at the behest of the government, with the aim of improving the prevention, detection and prosecution of money laundering and terrorist financing.
In its introductory summary, it concedes that “there is good reason to think that the current regime is not working as well as it should”.
Professor David Ormerod QC, criminal law commissioner at the Law Commission, has been especially forthright, declaring: “Money laundering is a blight on the UK’s economy and damages our international reputation.”
He also added that “we must have a regime in place that allows law enforcement agencies to investigate and disrupt money laundering at an early stage”.
On the surface of it, this is broadly how the current system is supposed to operate, with law enforcement, in theory, able to intervene as early as required, once they have been alerted to potential wrongdoing.
However, it is the means of reporting suspected criminality that is ultimately making the whole process unworkable.
Why the SARs system is failing
Key to the UK’s anti-money laundering efforts, and a focus of the Law Commission’s report, are Suspicious Activity Reports (SARs). These have spiraled out of control in recent years, with the number of SARs submitted annually now close to half a million — double what it was a decade ago.
Criminal Liability: Herein lies the flaw. With the threat of individual criminal liability hanging over senior officers for a failure to report suspicions, defensive filing is used. Therefore the volume of SARs submitted has become hugely inflated.
Low-quality data: Defensive reporting also produces low-quality SARs which are lacking in the meaningful, rich data that would help law enforcement officers reach accurate conclusions quickly.
The weight of inefficiencies: The whole system is sagging under the weight of inefficiencies as too many unnecessary, defensive or poor quality reports usurp the time and energies of law enforcement agencies away from the reports that require immediate action.
The current system is unworkable and needs reform in everyone’s interests. In its current form, the SARs system lends itself to misuse because some companies are treating the system as a tick box exercise.
A minority of firms believe that submitting SARs lends them a cloak of legitimacy, even if compliance activity remains weak. This leads to a number of SARs logged without particular merit.
This renders these SARs almost redundant as there are far too many to investigate. As the Law Commission has pointed out, many of them contain next to no useful information. When something genuinely criminal then gets flagged, it sinks into a sea of irrelevant material.
Something needs to be done
Quite rightly the Law Commission is saying something needs to be done. After all, money laundering in the UK has been a major problem for a long time now. Government estimates have previously suggested that anywhere between £90 and £150bn is laundered here every year.
Now the Law Commission has estimated the direct cost of this crime: £255 per household.
That means that we are all paying around £5 a week to subsidise criminals, who are exploiting weaknesses in modern banking networks and are emboldened by their profits.
Next best steps
But a series of high profile scandals across Europe’s banking sector in the last year or so show that regulators are finally taking a far harder line on institutions.
Every company has a compliance team using software that needs to be routinely and regularly checked to ensure it is calibrated in line with the company’s risk appetite, policies and procedures.
This is important. Firms are now being held to account over out-of-date or badly implemented risk policies, compliance operations and technology. And the fines are eye-wateringly high as regulators have run out of patience.
When it comes to SARs, this means that systems will have to be far more accurate in what is flagged; compliance officers far more circumspect in what they choose to report; and then finally, reports far more detailed to avoid being classed as low-quality.
This is at the heart of what the Law Commission has recommended — a new online SAR form designed through public and private sector consultation, and which would improve the quality of information contained within.
Failure to comply is no longer an excuse, and the appetite for mountains of red herrings has passed.