Contributors
Following the Law Commission's appointment in 2017 to review specific aspects of the UK's AML regime, specifically the relevant provisions in POCA and the Terrorism Act, and its detailed Consultation Paper of 2018, the Commission has now published its recommendations. Emma Radmore looks at what it is suggesting.
Recommendation 1: keep the consent regime
The Law Commission's remit did not specifically include considering whether to retain the consent regime, but it had its own views on the pros and cons of the system and asked consultees whether they thought there could be a better alternative. Respondents tended to agree with the Commission's views, and definitely did not think it should be removed. So the recommendation is to keep it, with an acknowledgement that things (as yet unspecified) could be done to make it more efficient and effective.
Recommendation 2: regularly analyse SAR quality
Most respondents felt the balance is not currently right between the interests of enforcement agencies, SAR reporters and SAR subjects. The "suspicion" reporting trigger maximises the amount of information law enforcement receives, while placing substantial and significant burdens on those who report and those whose accounts and transactions are frozen. Worse, law enforcement has only finite resources to investigate SARs anyway. High quality SARs are essential, and the raw data from a SAR can help in many investigations. But SARs with no data or in an inadequate format take significant time to process and may ultimately be of no use anyway.
A separate SARs reform project is underway, and the Law Commission has sought to align its work to that. It focused mainly on the number of authorised (or defensive) SARs, but struggled as there is little or no information to assess evidence of their utility. DAML SARs are rising, recently significantly, and the percentage of refusals (at least under POCA) is only around 5%. There is clearly something wrong there, and FATF has also recognised this.
The Law Commission analysed a significant sample of DAMLs to assess how the "suspicion" test is being applied in practice, assessing each SAR against 12 criteria. Among the more concerning findings was that "reasonable grounds to suspect" was present in only around half of the authorised disclosures. Other findings included that just over 20% of SARs related to amounts below £1,000 and in a similar number of cases reporters could not show their suspicion met the "Da Silva" test ("a possibility, that was more than fanciful, that the relevant fact existied").
All in all, the research provided insight into the effectiveness of the consent regime but did not benefit from the views of law enforcement. The Law Commission thinks this would be valuable, and that this type of analysis should take place regularly and on a larger scale.
Recommendations 3 and 4: require Government guidance on POCA for regulated sector; Create Advisory Board to make guidance and monitor reporting regime
A firm recommendation for statutory guidance that would cover some of the key concepts, and addressed to the regulated sector, would jointly reduce the burden on the sector and lead to greater consistency in reporting – and would supplement and complement other existing guidance. There are in fact a few sets of unofficial, non-statutory guidance issued by the UKFIU aimed at improving the quality of SARs and the reporting process. But neither these, nor even Treasury approved guidance have the force of law, although approved Treasury guidance must be taken into account by a court.
The Law Commission notes, forcibly, that many sub-sectors within the regulated sector have several, sometimes conflicting, pieces of guidance available to them. It is bad enough to require firms to consult multiple sources, but is even worse when those sources do not present a common understanding of critical parts of the regime. One obvious example is the differing interpretations of "suspicion". There is little evidence that supervisors collaborate or consult each other when producing guidance.
Moreover, since the guidance is non-statutory, this limits its usefulness – not least it provides no safe harbour for those who comply with it. The Law Commission had called for statutory guidance from the Secretary of State, which would have been consulted upon, covering (i) the suspicion threshold, (ii) what is a "reasonable excuse" for not making a disclosure and (iii) the process of making an authorised disclosure and appropriate consent. An overwhelming of respondents agreed, and agencies including the NCA and FCA also said they would be open to statutory guidance. They wanted a single source of guidance and a safe harbour for reporters.
After considering various options, the Law Commission feels the Bribery Act model would best fit the bill. Studies showed that, while only around a quarter of SMEs were aware of the guidance, only 3 who had read it did not think it was useful. The Commission also feels the best way to get all the correct input, and thereafter proper oversight and updating, is to set up an Advisory Board.
The Advisory Board set up in response to Recommendation 3 would have the key purpose of advising the Secretary of State and would include representatives from the reporting sector, law enforcement agencies, Government and other appropriate members.
Recommendation 5: keep "all crimes" approach
The current "all crimes" approach, which has the benefit of meaning a reporter does not have to identify the specific crime committed, but the drawback of thereby making its scope huge, exceeds FATF and EU standards. This has also led to a perhaps disproportionate burden on the legal sector, which makes many DAML SARs resulting from minor or regulatory offences that are, technically, money laundering. Many of these SARs are, practically, a waste of everyone's time, but to get around it the "all crimes" approach would need in some way to be modified or in some way allow notifications of all technical money laundering, while allowing enforcement agencies to put their resources to the genuinely serious crimes. There was some support for keeping the "all crimes" approach for the predicate offences, but watering this down to "serious crimes" for SARs, which could be achieved by extension of the "reasonable defence" provisions. But this would be hard to manage, and hard to decide how to limit the crimes.
The Law Commission's research showed, however, that in pretty much all cases where the predicate offence was identified, it was a serious offence. It commented that, although one third of the SARs in its sample did not identify a predicate offence, they would probably have needed to be filed in any scenario. So, in fact, it is hard to say with certainty that there is currently a disproportionate burden on those who make technical SARs. All in all, then, the "all crimes" approach is not perfect, but any alternative has significant disadvantages.
Recommendations 6 and 7: do not define "suspicion" in POCA; But do amend POCA to require guidance on suspicion
As the orginal paper explained, the threshold for predicate offences is one of "suspicion" whereas the "required disclosures" under ss330-331 have a threshold of knowledge, suspicion or reasonable grounds to know or suspect money laundering. There are good reasons for this distinction, but many reporters do not understand the test of suspicion and it is not consistently applied. The Law Commission reviewed a sample of SARs, and concluded that, on the face of it, around 15% do not meet the Da Silva test. Some reporters believed they understood the relevant tests but in fact did not.
Two thirds of respondents felt that an ordinary word such as "suspicion" should not be defined, although the CPS thought it would be useful and went so far as to suggest a definition. But the Law Commission concluded that amending POCA to define a suspicion was unwarranted and would be unworkable. It would be much better to provide statutory guidance on the suspicion threshold. Reporters tend to adopt a cautious, rather than a risk-based, approach to the suspicion test, and courts have backed reporters even in cases where there were no reasonable grounds to make a report, if the reporter genuinely held a suspicion. Respondents welcomed the idea of a single statutory and authoritative source of guidance. The recommendation is that the Secretary of State should be required under POCA to issue guidance.
Recommendation 8: introduce standard SAR form
In conjunction with the discussion on guidance goes the problem of how actually to submit a SAR. The Law Commission recommends that, additional to the guidance, the Secretary of State should develop a standard form for a SAR. Following responses, however, it acknowledges that one size probably does not fit all, and the form could be tailored as appropriate to individual reporting sectors.
Recommendation 9: review need to increase reporting threshold after further study
The Law Commission had considered changing the reporting threshold to "reasonable grounds to suspect" for the "failure to disclose" offences, and the merits of adopting a cumulative test involving subjective suspicion with objective reporting grounds for the others. It saw merit in different standards for required and authorised disclosures resepectively. It thought this could reduce the amount of low quality SARs. But respondents were completely divided. The Law Commission has concluded that to make a change involves a delicate balancing act, and, what is more, one in which the position of the subject of the SAR is also taken into account. The Law Commission still believes a change to the threshold would be appropriate, but thinks more analysis is needed to provide definitive evidence on what changes should be made. So it will start with the guidance already recommended and then look at how that affects disclosures, before taking further steps.
Recommendation 10: issue statutory guidance on consent/prior consent under POCA/TA
The Law Commission notes the uncertainties of the current regime and the effects of consent whether granted or deemed – in particular that consent does not "clean" dirty property, so further or related conduct would require further consent. It toyed with merely amending the wording of the legislation, but decided this was not the way forward. Instead, it is proceeding with its recommendation that there should be statutory guidance on what is appropriate consent. Not least, respondents welcomed clarification on what the term actually mean. The guidance should be produced under the oversight of an Advisory Board. The Law Commission recommends the guidance cover appropriate consent under POCA and prior consent under the TA.
Recommendations 11 and 12: keep existing regime on low value transactions, but give guidance; Consider including reporting routes in guidance
Some respondents to the consultation said that it would be good to be able to take a common sense approach on the value of reporting – for example in relation to low value transactions, or where funds are moved internally within a bank for administrative reasons. So the Law Commission had suggested statutory guidance on circumstances that might amount to a reasonable excuse for not disclosing. Generally, this would not cut down on required disclosures, only on authorised ones. It looked at a sample of SARs, and found that around 50% of them were either for low values or were the subject of duplicate reporting, while another nearly 10% referred only to matters in the public domain. Ultimately, though, the Law Commission understands that introducing a minimum threshold for transactions would not be desirable and is proceeding with its recommendation that the Advisory Board draft statutory guidance and, in doing so, considers how to address low value transactions.
The guidance should also consider how best to address issues like duplicate reports, and reports relating to internal transfers of funds. Where there is no new information being provided, the Law Commission feels that the new prescribed form for a SAR should cater for reports that add little or nothing to publicly available information.
Recommendation 13: allow one SAR for multiple transactions on same account or same company/individual
Respondents overwhelmingly supported the ability to make just one SAR where multiple transacions on one account are suspect, and the Law Commission was not persuaded out of this recommendation by NCA's contention this would slow down the making of SARs. That said, it did raise the question of whether a blanket consent would always be appropriate. Statutory guidance could help reporters comply with their obligations.
Recommendation 14: banks to repay fraud victims without need to seek consent
Most respondents agreed that banks should not need to make a SAR to get consent to repay fraud victims. Again, the Law Commission says that statutory guidance should address this, looking at when repayment could be made without making an authorised disclosure, while ensuring that required disclosures would still be lodged – so intelligence would not be lost, but banks would not need to ask for consent.
Recommendation 15: keep current approach to authorised disclosures on international criminality
The Law Commission makes no recommendations in respect of historical reports, agreeing there may be value in them. And it positively recommends the current approach to disclosures of criminality that has no obvious UK nexus – saying that it is hard to argue that there is genuinely no such nexus.
Recommendations 16, 17 and 18: allow ringfencing of suspect funds; Produce statutory guidance on ringfencing; Allow judge to release funds when moratorium extended
One major problem for banks is that once there is a suspicion, a SAR has the effect of freezing all funds in the account until consent is given. The phrase "in whole or in part and whether directly or indirectly" has contributed to this. The Law Commission suggested, and now recommends, that, despite case law that suggests that the pooling of legitimate and illicit funds transforms the whole into criminal property, there is still uncertainty. Add to this the new extended moratorium, and many banks were taking a pragmatic approach to what funds they could continue to use in any event – but this was a risk. The solution is to amend POCA to provide an exemption for credit and financial institutions if they ringfence suspected criminal property in line with set criteria. This should be supported by statutory guidance, and an explicit power should be introduced for funds to be released by a Crown Court judge that would allow for reasonable living expenses, if an application is made to extend the moratorium.
Recommendation 19: research targeted reporting
The Law Commission had looked at when information sharing might be appropriate or otherwise. In principle it sees the benefits of sharing, but thought sharing pre-report was usually likely to be inappropriate. There were a number of reasons for this, including the likelihood of commercial agreements terminating and the difficulties of assessing what would be appropriate or acceptable. The Law Commission ended up making no recommendations in this area. Its final recommendation surrounded thematic or targeted reporting. While nothing should replace individual reports, it sees the benefits of thematic reporting that, say, focuses on a particular location or market.
What next?
Much work remains to be done. First, the Government must respond to the recommendations. And this is only one part of the reform agenda – for instance, it does not even begin to touch the increasing call for the expansion of corporate criminal liability. In particular, the Law Commission wonders whether the extent of corporate criminal liability might obviate the need for individual criminal liability or narrow its remit, and whether the failure to prevent or vicarious liability options might be preferable to the strict liability offence with the due diligence defence. It sticks to its position that personal liability for a deliberate failure to report is appropriate, but questions whether it is right that this should extend to negligent failures.
Respondents also sought clarity on territoriality and the application of the "legal conduct overseas" exemption.
