RiskTech Forum

Wolters Kluwer: All change for SARs: Police need banks to be more helpful and more focused

Posted: 1 February 2016  |  Author: Nick Kochan  |  Source: Wolters Kluwer


The SARs regime is set for a major shake-up this year, although details as yet are sparse. What is clear is that the National Crime Agency (NCA) that administers the regime is overwhelmed by the 380,000 reports that have landed on its desk over the past year. The Home Office review – expected to be announced early in 2016 – is aimed at cutting down the number of reports, raising the quality of the material that each report contains and ensuring quicker responses by law enforcement to material that the regulated sector provides. To make better use of Suspicious Activity Reports (SARs), the Home Office is set to bring the Financial Conduct Authority (FCA) more closely into the SARs creation process. At the same time, the NCA says it is going to focus the efforts of banks and other regulated institutions and companies on the fight against 250 criminals identified as the country’s most dangerous money launderers.

The review will acknowledge that the system set up under the Proceeds of Crime Act 2002 as a way of channelling intelligence from the regulated sector to the investigating arm of law enforcement is ‘no longer fit for purpose’ for the battle against money laundering and terrorist financing. The number of reports each year has mushroomed – from some 20,000 when the system was launched to 380,000 today – while law enforcement resources have been greatly curtailed to respond to them. The NCA does not disclose how many SARs give rise to a criminal prosecution for money laundering, but one well-placed source estimated the number was no greater than 2%.

One factor explaining the growth in SARs issued by the regulated sector is fear of banking regulation and regulators. Some 80% of all SARs issued originate from banks, it is widely believed that banks fire-off reports as an instinctive defensive measure. Law enforcement agencies resent this, saying that their scant resources are being wasted by those misusing the system for their regulatory compliance rather than for their intended purpose of investigating and prosecuting financial crime.

Government has woken up to the problem and launched three reviews. A review of the SARs regime was carried out in February 2015 by the Home Office and will be published this year; HM Treasury published a money-laundering and terror-financing risk assessment in October 2015, which dealt extensively with the role of SARs; while the UK’s Cabinet Office is evaluating the system under its Cutting Red Tape programme. No one can say that SARs are not being thoroughly scrutinised.

Nigel Kirby, the deputy director of the Economic Crime Command at the National Crime Agency (the agency that administers the SARs regime on behalf of the Home Office), has outlined some specific changes that are under current consideration. These include the revision, and possible abandonment, of the consent system; the introduction of a de minimis barrier on reportable transactions; and an extension of the current system of consultation and information-sharing between law enforcement and banks. The current period for investigation of a SAR before law enforcement is required to lift the freezing order may also be extended. Police handling of SARs is likely to be speeded up with the introduction of more powerful computing systems. Underlying all this is a plan to give the regulatory system of financial institutions a role in overseeing bank systems for the submission of SARs.

One way to lighten the load on the Financial Intelligence Unit (FIU), which the NCA supervises, would undoubtedly be to abandon or vary the consent system where law enforcement have seven days to respond to a bank’s request to perform a transaction on which it has filed a SAR. The UK’s FIU received no less than 14,155 consent requests from regulated entities last year and gave consent to 93% of those making the request. Banks were allowed to go through with the transaction in all but 1000 cases. Kirby says that this arrangement is not working. ‘Law enforcement doesn’t have and never will have resources to look at 14,000 SARs in seven days. If we do decide to withhold consent, we have to go for restraint in 31 days and have a criminal investigation into money laundering. Those 14,000 SARs are not decided by law enforcement, they are decided entirely by industry…they decide that they are suspicious of those transactions and they want our permission to do it. That means that we have to throw our resources at it.’

Police say the consent is being treated by banks as no more than an insurance policy against later discovery of money laundering, where they could face redress. Kirby agrees, ‘There needs to be some alternatives to the consent system. It is pointing the authorities in the wrong directions yet we have to come up with answers. Some (financial institutions) have a genuine belief, they have suspicions and they are meeting their requirements. Some members of industry are using it for their due diligence purposes. You need a system to explore the underlying data that is indicative of money laundering and then work with the industry and say these are the areas that we need to look at. It is not serving anybody as effectively as it should because the system is outdated.’

More sophisticated computing that can examine intelligence submitted in SARs needs to be introduced to make the system work, he says. ‘Better technology needs to be introduced to match SARs against other data, to match them against algorithms. We need to spend more time with industry, mining and analysing the bigger bulk of SARs together with other data. We should not be looking at individual SARs but patterns of SARs and data mining. The SAR contains information and intelligence and is not just a bureaucratic report. We need the technology, but we also need to shift our resources so that we are analysing and looking to identify the highest risk and greatest opportunity, rather than being process driven by industry.’ The NCA has admitted its computer system is in need of considerable upgrading although a spokesman said this would not happen until the findings of the Home Office review had been announced. ‘It is inefficient, it requires maintenance, it is not fit for purpose and needs to be replaced.’ This was highlighted by Keith Vaz, the chairman of the Home Office select committee which quizzed Keith Bristow, the director general of the NCA when he faced the committee on 8 December. Vaz said, “These latest reports regarding the National Crime Agency are deeply concerning. It is essential that any databases used by an organisation as important as the NCA are impenetrable and fit for purpose.” The NCA admitted in its 2015 accounts that its policing work is affected by ‘sub-optimal’ systems and equipment.

Police should make better use of industry’s computing power and resources, when handling intelligence provided by SARs, said one former money laundering reporting officer. ‘Law enforcement wants to get rid of the consent process because they feel the banks have abused it. But they should be going back to banks if they don’t produce enough information and get them to work on it. If the consent system is abandoned, it is more likely transactions involving dirty money will occur and bad men will get away with it. To abandon the system would be mad’.

Law enforcement have taken such an approach, says Sam Sittlington, a former police investigator from Northern Ireland, and now an academic, but banks have been less than cooperative. Sittlington, who has researched police attitudes to the SARs system, says ‘The police say they don’t get enough information and they constantly have to ask the banks for more. They say the banks are not using their initiative to give them sufficient information. The banks haven’t the time to do that. It is also question of whether banks have the motivation to assist the authorities.’

Another route to lightening the load posed by the SARs regime on the authorities would be to eliminate transactions that pose minimal to zero suspicion. The forthcoming Home Office review is expected to take steps to prevent such reports. Banks will be relieved from reporting small amounts, or recurring amounts that pass through the bank’s systems frequently, where the provenance is well established. Banks, for example, are known to have issued a SAR disclosing a direct debit payment for a utility bill of the family of a customer who has been charged with dishonesty. Such information serves no useful investigative purpose and merely adds to the load on FIU systems. Any decision about the future of SARs would be assisted by the disclosure of more information about their content and usefulness, says Jonathan Fisher QC. ‘There needs to be a cost benefit analysis undertaken of the regime before anything drastic is undertaken. At the moment, we simply don’t know how useful it is.’ In fact Fisher believes that the system may be of greatest benefit to HMRC who use information on SARs to prompt tax investigations, even if no criminal investigation is forthcoming.

The sheer volume of SARs could be reduced greatly by the introduction of a minimum level per transaction requiring to be reported. Reporting smaller suspicious transactions would be possible but not mandatory. Kirby says, ‘There should be a conversation about a de minimis level. We have a de minimis level for cash seizures but not one here. You should never be stopped from submitting a SAR of any amount, however small. But you should not be compelled to file a SAR when the amount falls below a certain amount. There may be cases where the aggregated amount is material and therefore reaches the serious materiality of a SAR.’

The revised SARs system – once introduced – is likely to stress the need for the provision of information that assists a police investigation. SARs based on automated modelling of suspicious transactions are of little value, says Ken Whatmore, a former policeman who is today a consultant to banks. ‘Much effort has gone into modelling. Banks are producing operational models and systems for examining and reporting suspicion. This has created an environment of quantity not quality. Law enforcement doesn’t want a mass of useless information. They want nuggets of useful information. The human factor is essential in understanding suspicion.’

The effectiveness of investigations of a suspicious asset – especially where an offshore company is shown to own it – would be increased if today’s 31-day period they have to investigate a SAR before a criminal charge must be brought were extended. Jonathan Benton, the head of the newly-created International Corruption Unit says this is an imposition which trammels complex corruption investigations. ‘It is very difficult to do what we need to do in the 31 days we have available to us. We need ways to deal with grand corruption, which is large scale and very complex. We are conducting hundreds if not thousands of Egmont enquiries where we are asking Financial Intelligence Units around the world to check the beneficial ownership of the assets. A whole host of our investigations will have 20 or 30 different jurisdictions. This system has to change.’ Such an extension would be resisted by lawyers acting for clients whose assets have been frozen. They argue it would infringe the owner’s property rights.

The key to a revised SARs regime is greater communication between the NCA, the banks and the regulator. Kirby advocates the expansion of the Joint Money Laundering Intelligence Taskforce (JMLIT), a forum set up in 2013 to bring law enforcement, regulators and banks together under a secure roof. Ten banks are currently working with the NCA in such a taskforce, but Kirby now envisages that that number could be greatly increased. ‘We need to industrialise the connection with the banks. We need to involve all the banks and the regulated sector more widely in the JMLIT. There needs to be greater transparency in the regulated sector about the kind of information we are interested in so that we get useful SARs. Some aren’t useful and it is a waste of industry’s time and our time. We need a better dialogue with industry so we can say this is what is useful.’

The element in the new-look SARs system is likely to be a greater role for regulators as monitors of its effectiveness. Kirby says, ‘Cognisance should be taken by the regulator of those institutions that work together with us truly trying to prevent money laundering by putting in useful SARs. SARs should be used as way of checking that the bank or an industry is using the system as it is intended. They are not used in that way at the moment. We are discussing a situation where the regulators are sighted on SARs so that they can make a judgement on industry’s compliance with regulations. Banks that keep out black money should be rewarded by having to face less compliance. They should not have to produce SARs that don’t matter and don’t make a difference. We have to work with people that identify what it is that matters so that we get quality reporting about entities rather than individual transactions.’