If your job is looking for needles in a haystack, the last thing you want is a group of people standing by with pitchforks, throwing extra bales onto the pile.
Yet that seems to be the situation the UK’s Financial Intelligence Unit (FIU) has found itself in when it comes to the current anti-money laundering regime.
The number of suspicious activity reports (SARS) being submitted to the FIU has shot up in recent years, putting serious strain on resources and forcing a restructuring of the entire unit in order to keep pace with demand.
In cooperation with the Home Office, the Law Commission has now launched a consultation to investigate the causes of the problems, and to canvas options for reforming the current regime.
Under the Proceeds of Crime Act (POCA), regulated entities including banks and financial institutions, and professionals such as real estate agents are obliged to report knowledge or suspicions of money laundering to the FIU.
These SARs are assessed by the FIU, and entered into a database which is accessible to law enforcement agencies and international financial intelligence units. SARs are a vital source of information for money laundering investigations, but as is often the case, too much information can be as bad as too little.
A high proportion of low quality SARs (for example reporting information which is incomplete, irrelevant or not realistically likely to be connected to money laundering) can make it much more difficult for investigators to find the needles under all that hay.
The number of SARs filed with the FIU has increased dramatically in the last year alone. The FIU’s 2016-17 Annual Report records a 24% jump in the number of SARs filed in comparison to the previous year.
This is only the latest in a year-on-year trend of accelerating growth in the number of reports.
According to the Law Commission, the FIU now receives an average of 2000 SARs per working day
A major contributor to this is a huge spike in the number of defences against money laundering (DAML) requests being filed.
A DAML is a type of SAR, previously known as a consent SAR, which essentially creates a legal defence to allow a reporting entity or individual to proceed with a transaction about which they may have suspicions.
After submitting the DAML report to the FIU, the reporter needs to wait for seven working days while the FIU assesses the report.
If the reporter does not hear back from the FIU within that period, under the Proceeds of Crime Act the reporter is deemed to have received “appropriate consent” to continue with the transaction.
This time limit places a significant strain on the FIU’s staff, especially when the reports submitted are of low quality, for example with incomplete or incorrect information.
Senior FIU managers spend 20-30% of their time assessing DAML requests, and the explosion in the number of reports has caused a subsequent blow-out in processing times, from an average of 4.7 days in the previous period to 6.2 days.
Over 94% of DAML requests either received consent or were deemed to have received consent due to the time limit expiring in 2016-17.
“The current system does not lend itself to prioritisation either for the reporters or the investigators,” says Tony Woodcock, Partner at Stephenson Harwood. “Its width inhibits the deployment of resources to serious domestic and international investigations or criminal conduct.
“It is inefficient in that it should concentrate on those offenders and offences which are the most serious, of which fraud and corruption are the main examples in my view, and which are likely to lead to the confiscation of substantial funds.”
A widespread criticism of the current regime is that it encourages so-called defensive reporting – that is, it incentivises reporters to submit a DAML ‘just in case’, even when the actual likelihood of money laundering or financial crime is low.
In its consultation paper, the Law Commission observes that: “The low threshold for criminality combined with individual criminal liability incentivises defensive reporting.
“Individuals in the regulated sector are at risk of personal criminal liability for their actions which includes where they have been negligent in their failure to report… risk averse professionals and employees will report rather than risk prosecution for a failure to do so.”
The Commission also notes that there is confusion amongst reporters about what their obligations are, and in particular that the definition of what constitutes ‘suspicion’ is unclear and inconsistently applied.
“The risks of breaking the law on the basis of low threshold definitions such as “suspicion” and “reasonable cause to suspect” and the reputational consequences of breaking or being thought to have broken the law are high and prompt a risk averse approach,” says Tony Woodcock. “It is easier to manage a customer through the moratorium period than to run the risks of failing to make a report.”
Despite these flaws, however, the Law Commission found strong support from stakeholders for the DAML regime.
“The regime serves a clear and valuable purpose. Law enforcement agencies gain investigative opportunities created by authorised disclosures.
“Those with reporting obligations recognised this benefit and felt that the authorised disclosure exemption should be retained due to the protection it provides from criminal liability.”
Tony Woodcock agrees, saying “The regime is valuable because it permits the capture of intelligence which might otherwise be lost. It also encourages vigilance on the part of those who have to manage transactions.
“In the face, for example, of knowledge of payments made from the proceeds of substantial international corruption, the financial sector should not be allowed to sit back and become complicit in the making of profit.”
The Law Commission is consulting on a number of possible measures to improve the operation of the regime, and reduce the number of low quality reports.
This includes providing statutory guidance on the definition of “suspicion”; focusing on accounts where there are reasonable grounds to suspect property is criminal property; the creation of a new power to require additional detail and record keeping requirements targeted at specific transactions; and questioning whether liability for failing to prevent a criminal offence should rest with commercial organisations rather than individual employees if an employee fails to disclose a suspicion.
Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.