Suspicious Activity Reports - Less is More

SARs, or Suspicious Activity Reports, were effectively introduced as part of the Proceeds of Crime Act 2002 (“POCA”) and the Terrorism Act 2000. As a result of the UK Financial Intelligence Unit’s (“UKFIU”) guidance and the Criminal Finances Act, both introduced in 2017, there has been a substantial increase in the number of SARs made in recent years.

For those in the regulated sector, as soon as a suspicion arises, a SAR should be made. The test for suspicion is “more than merely a possibility” or more than “fanciful”, as defined in R v Da Silva [2006]. This low threshold, combined with the broad definition of “Criminal Property” contained within section 340 of POCA, has led to an increase of 10% in SARs filed from 2017 to 2018. This followed a 26% increase from 2016 to 2017. The UKFIU simply does not have the resources to manage this number of reports. 

As it stands, the making of a SAR is a no-lose for the submitter. There is no downside to being overly cautious, which contrasts with the five year custodial sentence that can be received for a failure to disclose an offence in the regulated sector under section 331 of POCA. This may be a factor that has led to 94% of SARs being made currently receiving consent (either explicitly or as a result of the 7-day consent period expiring). The position is also disproportionate in that the impact on the end client (i.e. the subject of the SAR) can be hugely detrimental and can include freezing their accounts and/or seeking restraint orders against them.

In light of these problems, the Law Commission produced a report on 18 June 2019 considering the potential solutions. The Commission found that the key problem was as shown in the statistics - there are simply too many SARs being made. Furthermore, a number of those that were made did not meet the appropriate level for suspicion and were not appropriately drafted. For example, only 52% of the SARs submitted clearly stated the grounds for making the referral.

The core recommendation of the Commission is the need for further guidance and clarification, coupled with the introduction of an Advisory Board to guide this process. In particular, the need for a greater understanding of the Da Silva test has been mooted as an area requiring development. In my view, this is the crux of the problem, as shown by the fact that 15% of SARs sampled as part of the Commission’s review were considered unnecessary as they did not meet the suspicion threshold. This equates to a staggering £5bn sum which is invested in core compliance by UK Finance Members per annum, much of which is done so unnecessarily. 

The UKFIU has already introduced a standardised online form to increase the quality of SARs and give greater confidence to those reporting their suspicions. The Commission has urged the Secretary of State to prescribe the form, which I anticipate will reflect the existing online form. The Commission also recommended for a single SAR to be reported for multiple transactions on the same account or related transactions, such as those relating to the same customer, instead of requiring the submission of separate SARs for each separate suspicious transaction. 

There were various measures considered to try and limit the scope of reporting, which were designed to enable the National Crime Agency (“NCA”) to properly concentrate their resources. However, the Commission ultimately concluded that SARs should continue to be made for all crimes, which means that the problem of focus remains.

In respect of the end client, there are thankfully measures proposed. The proposal is to introduce the concept of ring-fencing under POCA, to give banks more proportionate powers (rather than simply the freezing of assets). This will enable the reporter to continue transacting with a client in respect of its ‘clean’ funds while the funds suspected to be the proceeds of crime are segregated. The maker of the SAR will also benefit from this protection, reducing the risk of damages being claimed as they were in HSBC v Shah [2012].

The sum of the reforms is that they do go some way to mitigate the problems with the current regime, in particular the financial loss caused to the subject of the SAR. However, the reforms do not deal with the main issues, namely the scope of referrals and the low threshold for making one. It may therefore fall to the Courts to move away from the Da Silva test, but that may take some time.