Roughly half of SARs filed by UK financial institutions are of ‘low quality,’ banks need more guidance to prevent ‘defensive filing’
Nearly half of the hundreds of thousands of suspicious activity reports filed by United Kingdom financial institutions in recent years have little value to law enforcement, either too short without relevant information or too long with extraneous details, because they are more worried about getting dinged by regulators than creating rich relevant intelligence for investigators.
Those are some of the findings by the U.K. Law Commission in a report published Tuesday that reviewed 463,938 suspicious activity reports (SARs) between April 2017 and March 2018, a jump of 9.6 percent on the volume of SARs in 2016-17. The U.K. National Crime Agency (NCA), a critical customer of those filings, describe it as a “record number.”
The study, spearheaded the UK Home Office, uncovered that only 52.4 percent of the financial institutions reviewed by the commission could clearly and precisely detail objective and “reasonable grounds” for submitting SARs.
That is a problem because the overall number of SARs filed by institutions have more than doubled over the last decade, clogging up the system with reports that are filed “defensively,” meaning that the banks filed reports with little information in the narrative of the report as a shield against regulatory scrutiny – rather than taking the time to investigate the alert, understand the full picture and craft a report that could be the foundation of a criminal case.
To wit, reviewers noted that some 15 percent of the filings did not even meet the threshold of reasonable suspicion, meaning they have little to not value to investigative agencies that would be analyzed by the U.K.’s financial intelligence unit (FIU), similar to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
“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 believes there is a fundamental disconnect for institutions to understanding their requirements under the “criminal property” section under Sec. 340 of the Proceeds of Crime Act (POCA), compounded by a lack of clear, uniform guidance on SARs across the sectors of reporting entities and a misguided effort by entities to file the reports even when they are unsure if a potential breach of law has actually occurred.
“In our discussions with stakeholders early in the project, the Law Commission heard concerns that many of the SARs being submitted are of low quality,” according to the report.
“High quality SARs – in other words SARs which are data rich, and are submitted to the UKFIU in a format which is easy to process – can provide evidence of money laundering in action,” according to the commission.
Conversely, low quality SARs, “can require as much or more time to submit and process but contain limited, or even no, useful intelligence. The Law Commission conducted an independent analysis of a sample of SARs that had been submitted to the UKFIU and found that these concerns were well-founded.”
Unfortunately, much of the filing by banks and compliance officers was done out of fear, not a good faith effort to help law enforcement, because of the threat of “individual liability,” meaning that an AML officer making the decision could be fined or face jail time for choosing the wrong disposition of an alert.
“We also heard evidence that the threat of individual criminal liability for the relevant officials working in the reporting sector (eg bank officials and those in law firms and estate agencies) for a failure to make a disclosure encourages defensive reporting,” according to the commission.
“Overcautious reporting is more likely to produce low quality SARs, and even SARs which do not meet the threshold for reporting in the first place,” the report stated. “We also found both anecdotal and empirical evidence to support our provisional conclusion that a significant number of reporters misunderstood their legal obligations under Part 7 of POCA.”
Part of the issue, as well, is that institutions are struggling with the bifurcation of the current SAR regime, where “authorized disclosure” SARs are filed to the NCA when operations believe a transactions has touched criminal property while “required disclosure” SARs are a step higher, stating institutions have a concern the foundational financial activity is illegal.
The federal regulatory agencies are also partly to blame for the current uneven regime of examinations and enforcement.
“One of the reasons for this is that there is fragmented supervision of the anti-money laundering regime,” according to the report.
“Despite best efforts, this has resulted in a lack of uniformity across approved guidance with conflicting interpretations of the key principles underpinning the anti-money laundering regime. This lack of clarity adds to reporters’ confusion and misunderstandings when they are applying the principles of the regime.
The commission issued 19 recommendations, including an AML advisory board to issue more precise regulatory and investigative guidance and require institutions ensure there is a “possibility” of a crime that is not just whimsy, fantasy or highly unlikely.
“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,” (via the U.K. Law Commission). To read more analysis, click here.