Information sharing provisions in the context of the fight against money-laundering and counter terrorism finance (AML/CTF) are obsolete and unable to respond to current challenges and threats. The system of reporting suspicious activity needs urgent updating.
In 2017/2018, the UK will be subject to a mutual evaluation by the Financial Action Task Force (FATF), the global anti-money laundering and counter-terrorism finance standard setter. The UK’s procedures and practices will be under scrutiny including both the operation and effectiveness of the Suspicious Activity Reports (or SARs) regime.
The SARs Regime
The SARs regime is an ‘end-to-end system by which industry spots suspicious activity related to money laundering or terrorist financing’ and reports it to the UK Financial Intelligence Unit (FIU). It is governed by the Proceeds of Crime Act (POCA) and the Terrorism Act of 2000 along with the 2005 European Union Anti-Money Laundering Directive (currently being replaced by the fourth Money Laundering Directive).
Reporting suspicious activity has become an essential part of doing business for the ‘regulated sector’ , yet SARs reporting entities such as banks and policymakers have increasingly questioned the current regime, and in particular what impact the system has on detecting and deterring money laundering.
While it is worth noting that the financial intelligence in SARs is of wider use and not just for anti-money laundering purposes, previous research determined that whereas 89.8% of SARs undergo initial checks, only 66.8% are fully examined and, in fact, only 6.3% prompt further investigation and law enforcement action. Considering that in 2014 credit institutions alone submitted 291,055 SARs, applying this analysis suggests that in 2014 only about 17,463 SARs had some role to play in catching criminals. Moreover, it is expected the number of successful convictions would be even lower as only eleven cases are mentioned in the 2014 SARs annual report, and a direct correlation between SARs and arrests is not provided.
Other important concerns by private sector stakeholders include a lack of basic understanding regarding the purpose of the system, what it targets in particular and, to what extent the government has capacity, from an analytical and practical point of view, to process the information received. The UK regime also faces weaknesses in the form of out of date software, vague guidelines and data protection restrictions. As a result, the Home Office Call for Information represents an important preparatory step ahead of 2018.
What Can the UK Learn from Abroad?
In preparation for the UK’s FATF mutual evaluation, considering international information sharing systems may provide valuable input to the revision of the UK SARs regime. To this end, both instructive and cautionary tales are available. The most recent FATF evaluation of Spain provides a promising case, suggesting that additional feedback and risk guidance from law enforcers and regulators to reporting entities can go a long way in improving the quality of reporting. Germany too has been mentioned as an example of a country that holds a good compliance record in FATF reviews yet shows low numbers of SARs filings suggesting that there is no correlation between high levels of reporting and compliance.
However, there are still issues to be considered even amongst other countries. The Australian approach, for example, with its complexity and extensive requirement for reporting ‘threshold transactions’, ‘suspicious matters’ and ‘international fund transfer instructions’ suggests that more reporting does not equate to better protection. In fact, the latest FATF assessment affirmed that ‘AUSTRAC’s graduated approach to supervision does not seem to be adequate to ensure compliance’ and therefore the German simplicity or Spanish guidance may be better routes to follow to a more effective system. The UK’s reporting system is currently overburdened with SARs it is unable to process adequately; a possible reform could look to the Spanish case for guidance on how to guide the private sector into submitting priority SARs or, alternatively, to Germany that requires greater detail and prior investigation ahead of submission.
Solutions and a Stronger Regime
The on-going review of the SARs regime needs to deliver results. Whereas a profound transformation in legislation is unlikely due to international and European restrictions, plenty can be achieved by addressing the structural deficiencies of the SARs.
In line with international examples and feedback gathered through the Call for Information, the UK should consider three main points of action. Firstly, investment in new and updated technology that allows for more effective processing, sharing and feedback. Secondly, a greater focus on SARs quality rather than quantity is required, as well as a greater focus on demonstrating the wider role of financial intelligence aside from prosecutions and convictions. And finally, implementation guidance is required as it seems likely that some existing weaknesses could easily be solved through dialogue. The SARs regime and the broader stakeholder community would definitely benefit from a smoother, quicker and more efficient information sharing.
Inês Sofia de Oliveira
Associate Fellow, Centre for Financial Crime and Security Studies