20 Jun 2019
British financial institutions are filing high volumes of low-quality suspicious activity reports (SARs) and are in need of further guidance on their compliance obligations, according to a report published Tuesday by the Law Commission.
The study, which was conducted at the behest of the UK Home Office, concluded that only 52.4 percent of the firms reviewed by the commission could articulate objective and “reasonable grounds” for submitting SARs, despite the fact that the number of reports filed with UK authorities has doubled over the last decade.
“There was substantial variance in the quality of disclosures,” the report said. “At one end of the spectrum, SARs were unnecessarily long and contained irrelevant information which diverted the reader from identifying the essential information in the report. Other reports were incredibly brief and omitted essential information.”
The commission attributed the problem to a misunderstanding by reporting institutions of the broad definition of “criminal property” under Sec. 340 of the Proceeds of Crime Act (POCA), a lack of uniform guidance on SARs across various sectors and an effort by financial institutions and others to file the reports even when it’s unclear that they are obligated to do so.
Approximately 15 percent of the “authorised disclosure” SARs reviewed by the commission did not meet a threshold of reasonable suspicion and appear to be examples of so-called “defensive filing,” or reports filed to stave off regulatory trouble rather than to inform law enforcement officials of potentially valid instances of financial crime.
“If we assume that this proportion is representative across all 27,471 authorised disclosures submitted between October 2015 and March 2017, approximately 4,121 would have been submitted unnecessarily,” said the commission.
Under UK regulations, “authorised disclosure” SARs are filed to the UK National Crime Agency (NCA) whenever reporting entities suspect they have encountered criminal property while “required disclosure” SARs indicate that the reporting firms are more confident that the underlying financial activity is illegal.
To improve the regime, members of Parliament should consider amending POCA to clarify the legal definition of “suspicion” and enacting legislation that would allow financial institutions to limit SAR-related asset freezes to suspected criminal property rather than to entire bank accounts, the report advised.
The UK government should separately create an advisory board charged with issuing SAR guidance for all entities covered by anti-money laundering (AML) laws and regulations, the commission said.
The guidance should establish the so-called “Da Silva test” as an industry standard for understanding SAR obligations, according to the report. The standard, which has been adopted by UK courts, states that the threshold of suspicion must involve a “possibility, which was more than fanciful, that the relevant fact [or crime] existed.”
“The MPS agree that it would be beneficial for the UK to develop a single authoritative source of guidance, if it is developed by all actors,” the Metropolitan Police Service said in response to a Law Commission consultation last year. “It is apparent from engaging with individual reporters that many need assistance.”
UK Secretary of State Sajid Javid should also use his authority to require that SARs be filed via a new online form that, coupled with guidance, would give banks and other companies greater confidence that they are sufficiently describing their suspicions in an “easy to read, accessible format” for law enforcement officials, the commission advised.
The report additionally recommended permitting banks and other firms to file a single SAR for multiple transactions made with the same account or by the same company or individual.
As part of the study, the commission considered proposals on limiting the scope of reportable activity and implementing new reporting requirements, such as geographical targeting orders, but concluded that the steps were currently unnecessary.
The Law Commission, which as a statutory body was established to review legal issues within England and Wales, conducted its study independently of the ongoing SARs Reform Programme by the Home Office, NCA and UK Finance, a trade association. The reform initiative is expected propose operational changes to the UK SARs regime, including improvements to its IT systems.
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