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On 18 June the Law Commission – the statutory arms-length body charged with keeping the UK’s legislation in check – published its long-awaited report on the UK’s anti money-laundering (AML) legislation following an extensive 18-month consultation and review period.
This report, part of a long-standing (and much delayed) commitment by the government to overhaul the Suspicious Activity Reporting (SARs) regime, aimed to ‘improve the prevention, detection and prosecution of money laundering and terrorism financing in the United Kingdom’ by focusing on ‘systemic problems in the suspicious activity reporting process, in particular the “consent regime”, to ensure that it is proportionate and efficient’.
It was hoped – by public and private sectors alike – that the Law Commission’s consultation would offer some bold proposals for reform of a system that is widely agreed to be broken and not serving the original intentions of the regime. The reality has proved anti-climactic.
The Best Laid Plans
The SARs regime was established three decades ago to create a hitherto unprecedented informant network on money-laundering for law enforcement. It achieved this by placing a legal obligation on key nodes in the financial system – banking, legal services, accountancy and others in the ‘regulated sector’ – to report their subjective suspicions of money-laundering to the authorities through the submission of SARs.
While a noble cause, it is acknowledged that along the way the original policy intention has been distorted by the framing of the law and regulations. While a considerable proportion of these SARs provide critical and timely intelligence to support law enforcement’s aims, a proportion of the reporting is driven not by genuine concerns over money laundering, but by fears of regulatory or criminal sanction for non-compliance.
This over-zealous approach to reporting – so-called ‘over-reporting’ – has meant that the UK’s Financial Intelligence Unit (UKFIU), housed within the National Crime Agency, is dealing with over 400,000 SARs per annum, of which over 22,000 are the ‘consent’ requests, much maligned by the UKFIU – these are requests for tacit legal protection to complete potentially suspicious transactions. Despite changes to the ‘consent regime’ in the Criminal Finances Act 2017 to extend the moratorium period to allow law enforcement more time to consider these requests, they remain a considerable drain on the UKFIU’s paltry resources.
Many of these ‘consent’ requests are legitimate and offer law enforcement opportunity to intervene to freeze or seize assets where they would previously have been unaware of their existence. However, a great number are driven by conservative interpretations of the law or a lax approach to due diligence. This means that, according to the report’s summary paper, ‘essential resources are diverted from the investigation and prosecution of crime’ to deal with a flood of unhelpful information. In short, the signal is being drowned out by the noise.
Hopes were thus high that the Law Commission’s 200-plus-page report would provide some audacious proposals to tackle some of the problems inherent in the UK’s SARs regime, including the vexed issue of over-reporting. Yet despite the size of the document, there is a distinct lack of progressive recommendations, leaving this author deflated. But, is this a fair assessment of the Law Commission’s response?
First the Positives
First, it should be noted that the terms of reference of the Law Commission’s report, as agreed with the Home Office, were extremely narrow, largely confining it to exploring the operation of the consent regime. In that narrow regard, the Law Commission’s recommendation to retain the consent regime can be welcomed; while the UKFIU has been keen to shuffle this mechanism off the statute books for some time, due to the considerable administrative burden, the report sensibly recognised the value in having a legal mechanism in place to halt the transfer of funds prior to law enforcement action.
Second, the Law Commission provides a useful summary of the areas of confusion relating to key terminology within the UK SARs regime, which in part drives over-reporting. The Law Commission therefore makes some useful recommendations to issue statutory guidance in some areas. Clarifying concepts as ambiguous as ‘suspicion’ will do much to deal with an over-cautious interpretation of the law.
But the Review Missed an Opportunity
However, from here the high hopes for the review fade. The proposed establishment of a public-private ‘Advisory Board’ for the SARs regime is sound thinking, if properly empowered, but this proposal seems to kick many key issues down the road. For example, instead of coming down with a definitive view on key issues, such as minimum limits for reporting, decision-making on such issues is deferred to the Advisory Board.
Furthermore, it could be surmised that the Law Commission’s report was focused on, first, finding ways to drive down the number of SARs and, second, making SARs easier to process for the UKFIU. The Law Commission’s report of the ‘quality’ of SARs focused on data-rich SARs which are easy to process rather than SARs which contain meaningful intelligence for law enforcement. In taking this focus it is looking at the issue from the wrong end of the telescope; it is impossible to say how many SARs are ‘appropriate’ or how much data is adequate – what matters is that the intelligence is actionable.
Trapped Between a Rock and a Hard Place
But perhaps this approach is not surprising given that the Law Commission’s report is caught between two ostensibly opposing factions – the UKFIU and the regulated sector; both sharing an interest in reducing the numbers of SARs. On the one hand, the UKFIU is struggling to cope with ever-increasing numbers of reports; and on the other, the regulated sector has an interest in reducing the regulatory burden.
Rather than taking the role of a dispassionate observer, the Law Commission has attempted to walk a fine line between these two factions. In doing so an important voice seems to have been drowned out: that of operational policing. The review would have benefited from a greater voice from policing; the predominant ‘end users’ of the SARs. While larger forces were able to inveigle themselves into the process, the fragmentation of operational policing across 45 different police forces inevitably resulted in a lesser voice from this constituency.
A Drop in the Ocean
In short, the report is underwhelming. However, it is perhaps overly optimistic to expect a parochial review of a niche area of legislation to solve the problems of the complex ecosystem of legislation, regulations, systems and processes that underpins the UK’s AML regime. In fact, by commissioning the Law Commission to review a niche area of AML legislation the government has itself been guilty of kicking the can down the road.
The government has been promising a holistic overhaul of the entire SARs regime for the past four years. It has so far failed to deliver this. While it was fair to ask the Law Commission to be bolder in its response, it is not fair to expect it to do the government’s job.
Helena Wood is an Associate Fellow at RUSI.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.