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Law Commission: The SARs system is failing

24th Jun 2019
CEO Napier
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White collar crime

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.

Reform needed

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.

Replies (11)

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Jennifer Adams
By Jennifer Adams
24th Jun 2019 15:16

At the beginning of the year I had a look at SARS from an accountants view because the number of accountants reported as submitting SARS was so few (just over 1%) and members were posting queries that indicated that there was confusion all round (see article - "Should you bother submitting a SARS?''

"The National Crime Agencies Report of 2017 states that 6,693 SARS were submitted by accountants during the period Oct 2014 to March 2017: 1.06% of the total number of 634,113. Unsurprisingly the majority of SARS were submitted by banks (525,361 - 82.85%).

The ICEAW’s guidance confirms that accountants are not entitled to privilege (unlike lawyers), but what they do have is 'limited exemption'.

As Julian rightly says the system is confusing and "lends itself to misuse because some companies are treating the system as a tick box exercise". But it also takes time to complete the necessary documentation and then there is any follow up from the authorities. Dare I say... nonchargeable time.
It is also an area of which accountants may not be familiar and are therefore are possibly put off from reporting?

Thanks (1)
By Vaughan Blake1
24th Jun 2019 16:04

Cases where I was advised to make a report include:

Client 's Post Office held up by armed robbers. Police obviously involved and launched an investigation.

Client's bookkeeper fiddling the petty cash. Police involved and prosecution eventually made.

Mrs Miggins wool shop where the miscreant paid various knitters to produce knitwear for the shop. They had to buy the wool from her and this was deducted from the payments. However, when Mrs Miggins needed a new cashbook she wrote off all the balances owing to knitters from whom she hadn't heard for a few years as she had lost touch (presumed dead). Clearly a bad sort who should expect no mercy from the authorities!

If this system is going to work there needs to be some sort of differentiation between, entirely useless reports where the Police/HMRC are already on the case, Bob the Builder moonlighting tax evasion, larger scale tax evasion/possible terrorist funding.

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By Vaughan Blake1
24th Jun 2019 16:27

On another point, if Mr Dodger has a large scale tax dodge in play, what will he do with the money that would otherwise have found it's way to the Treasury? If this is spent on a nice house, nice furnishings,meals out with Mrs Dodger and the little Dodgees, then it finds its way back into the economy, VAT is paid, the recipient legit businesses employ people and pay taxes. Don't get me wrong, I am not in anyway condoning this, merely questioning the maths. Obviously, if the money is being spent on terrorist activities, then that is a very different matter.

Whilst in 40 years of practice I have seen many Bobs, I have never come across any Mr Dodgers or evidence of terrorist funding.

Thanks (2)
By raybackler
25th Jun 2019 11:42

If you find a £10 note in the street you should take it to the police. Most people would recognise that the cost of travelling to the police station, the paperwork involved for the police and the likelihood of anyone ever turning up to collect it, means it is not worth doing.

Under MLR though, there is no de-minimis limit and so you will always get SARs where modest amounts are involved and that is how you clog up the system. The categorisations are Money Laundering for criminal or terrorism purposes. A suspicion of £10 take from the till in a cash business, whilst illegal doesn't warrant reporting, but it has to be and then the SAR is ignored anyway. Why don't the authorities recognise the 80/20 rule like most normal people?

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Replying to raybackler:
By [email protected]
25th Jun 2019 14:08

raybackler wrote:

Under MLR though, there is no de-minimis limit and so you will always get SARs where modest amounts are involved and that is how you clog up the system.

Trouble is that's how money laundering works
Lots of small transactions that are untraceable

What's needed is a means by which the authorities can use and act upon the data provided
The quality of the data is obviously key!

And £10 taken from the till, whilst it is theft is it really money laundering? - that, IMHO needs to be filtered out.

Thanks (0)
Replying to [email protected]:
David Winch
By David Winch
25th Jun 2019 18:28 wrote:

And £10 taken from the till, whilst it is theft is it really money laundering? - that, IMHO needs to be filtered out.

Internationally the term "money laundering" is often used to refer to handling etc the proceeds of any SERIOUS offence. In the UK we use "money laundering" to refer to handling etc the proceeds of any offence.
However, the word "serious" refers to the nature of the offence - not the scale of it. Tax evasion is a "serious" offence. So the theft of £10 in connection with evasion of tax on that £10 would be a "serious" offence which would trigger money laundering implications.
I appreciate that is not the answer you wanted!
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Replying to davidwinch:
By AnnAccountant
25th Jun 2019 18:50

I don't think he was arguing that his example is currently outside the scope.

I took his comment to mean that perhaps the rules should be changed to reduce the required scope of SARs.

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Replying to AnnAccountant:
David Winch
By David Winch
25th Jun 2019 19:30

Yes, I read it that way too. The problem is that although internationally the norm is only to apply money laundering to the proceeds of a "serious" offence, the theft of £10 & associated tax evasion would always be regarded as a "serious" offence because of its nature.

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Chris M
By mr. mischief
25th Jun 2019 19:46

Coincidentally I was meeting with a local bank credit officer today. We discussed SARs, and it turns out I have done 2 in 10 years and she does at least 2 most days.

I asked her what sort of things gave rise to SARs and we agreed the majority of them were quite trivial, very unlikely to involve crime. But her bank policy is to file everything on a CYA basis. You can't get into trouble for filing a SAR, but you most certainly will for failing to file one that - with the benefit of hindsight, of course - you should have filed.

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By North East Accountant
26th Jun 2019 08:11

Is there ant decent (affordable) software out there for accountants to make filing a report more efficient?

Then they might get a few more.

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Replying to North East Accountant:
David Winch
By David Winch
26th Jun 2019 08:31

Serious consideration is being given to having separate portals for filing SARs by different types of reporting business. So a portal for banks, a different one for lawyers, another for accountants, one for estate agents, etc.
Each portal would be customised, including relevant guidance notes.
Of course it depends upon the NCA having the budget to develop the portals - so don't hold your breath!
When reporting remember to make clear whom you suspect, of what, why you suspect it (any objective evidence?), when you suspect it happened, where it happened and how.

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