Policy paper

Response to Law Commission review of the SARs regime

Published 12 February 2024

Background

In 2017 the Home Office asked the Law Commission to review limited aspects of the anti-money laundering regime in Part 7 of the Proceeds of Crime Act 2002 and the counter-terrorism financing regime in Part 3 of the Terrorism Act 2000.

The Law Commission was asked to consider whether there is scope, within the existing legislative framework, for reform of the system of voluntary disclosures known as the “consent regime”.

Law Commission’s findings

In 2019, the Law Commission published its report. It makes 19 legislative and non-legislative recommendations covering:

• exemptions form the substantive money laundering offences
• the use of suspicion as a threshold for information sharing
• statutory guidance
• data exploitation

This document outlines the government’s response to the 19 recommendations and responds to each recommendation chronologically.

Recommendation 1

We recommend that the consent regime is retained.

Response: Accept

The consent regime serves an integral purpose in helping business prevent economic crime, balancing the needs of law enforcement with those of reporters and their customers. Moreover, the consent regime is an important component in helping the UK meet its international money laundering obligations.

With the rising volume of required (SARs) and authorised disclosures (Defence Against Money Laundering or DAMLs) submitted each year (the number of DAMLs submitted for example increased by 80% between 2018/19 and 2019/20), and evolutions in technology and criminal methods, we are conscious of the need to make continual improvements to the regime. In January 2023, the government increased the lifestyle threshold under section 339A of POCA from £250 to £1000 for acts in operation of an account (such as mortgage payments) to reduce burdens on reporters. The Economic Crime and Corporate Transparency (ECCT) Act achieved Royal Assent on 26 October 2023; measures within it will further improve the efficiency and effectiveness of the regime. The government has also published guidance to reporters on the operation of the new clauses, and its expectations of the regime more generally.  

Recommendation 2

We recommend that further analysis on the quality of SARs is conducted at regular intervals in consultation with an Advisory Board.

Response: Partially Accept

An in-depth analysis of SARs was conducted in 2021 to inform the measures in the ECCT Act.

In addition, the UK Financial Intelligence Unit (UKFIU) regularly review the quality of SARs submitted, as well as conducting more targeted analysis across the SAR dataset as a whole: including sector specific reviews of SAR quality. Where issues around quality are identified these are fed back to reporters and regulators, as required.

In response to the Law Commission report recommendation, the SARs Advisory Group was established in May 2021 to address the need for a continuous improvement mechanism to improve the effectiveness and efficiency of SARs reporting on an ongoing basis and beyond the scope of the SARs Reform Programme. The Group is comprised of Anti-Money Laundering regulated private and public sector representatives and meets bi-annually to identify and prioritise recommendations in SARs reporting and utilisation proposed by members. The Advisory Group will be reviewed annually to assess the ongoing requirement for the group.

To date, within the scope of work assigned to the Group, a number of priorities for the AML sector have been identified including the dual reporting requirement around Fraud and SARs for reporters. Initial root cause analysis has been undertaken and a case for further analysis to provide an evidence base to support recommendations for change is under consideration.

Complementing the SARs Advisory Group, the SARs Reform Programme delivered its Feedback and Engagement project, which developed regular events, seminars, webinars and feedback mechanisms with the AML Regulated Sector, to improve their knowledge of money laundering, emerging threats and improve the quality of SARs being submitted. This feedback and engagement mechanism will remain in place and the quality of SARs will be reviewed regularly and rectified through further engagement. 

Recommendation 3

We recommend that POCA is amended to impose an obligation on the Secretary of State to issue guidance covering the operation of Part 7 of POCA so far as it relates to businesses in the regulated sector. In particular, guidance should be provided on the suspicion threshold, appropriate consent and reasonable excuse to assist the regulated sector in complying with their legal obligations.

Response: Reject

Whilst we recognise the broad scope and interpretation of POCA by reporters, this in part reflects the varied nature of businesses that constitute the AML regulated sector. The government views it as entirely appropriate that regulators are able to issue sector specific guidance.

Where there is genuine confusion around a concept or process within Part 7, the Secretary of State can already issue guidance, or a Home Office circular, to provide clarification, as has been issued in relation to “Circular 004/2021: money laundering and suspicious activity reports” and s330 “Failure to Report”. Guidance for the AML regulated sector is already approved by HMT and drafted by expert industry bodies and supervisors. This guidance includes information on how regulated firms should meet their requirements under POCA, including SARs reporting. The government is not of the view that a statutory amendment to POCA imposing a duty on the on the Secretary of State to issue guidance covering the operation of Part 7 is either desirable, or necessary.

Recommendation 4

We recommend that an Advisory Board is created, the constitution of which should include relevant experts such as representatives from the reporting sector, law enforcement agencies, Government and other relevant experts. Its role should be:

1. to assist in the production of statutory guidance;

2. to consult on monitoring the effectiveness of the reporting regime and to make recommendations to the Secretary of State as appropriate.

Response: Partially Accept

This recommendation is contingent on Recommendation Three (imposing an obligation on the Secretary of State to issue guidance covering the operation of Part 7 of POCA so far as it relates to businesses in the regulated sector) which the government has rejected. As set out in the earlier justification, the government is not of the view that a statutory amendment to POCA imposing a duty on the on the Secretary of State to issue guidance covering the operation of Part 7 is necessary to improve the efficacy of the regime.

Recommendation 5

We recommend maintaining the “all-crimes” approach to reporting suspicious Activity.

Response: Accept

Maintaining an all-crimes approach ensures that the process of submitting SARs remains as simple as possible for the regulated sector. In addition, as the Law Commission recognises, it places the burden of assessment and triage, where necessary, on law enforcement agencies as those best placed and most qualified to pass judgement. This is particularly relevant in cases where a reporter may not have access to, or sight of, all of the information relating to a predicate offence.

Recommendation 6

We do not recommend that an amendment should be made to the Part 7 of the Proceeds of Crime Act 2002 to define suspicion.

Response: Accept

We agree with the Law Commission’s analysis that introducing a statutory definition of suspicion is unwarranted and likely to be unworkable in practice.

Recommendation 7

In accordance with recommendation 3, we recommend that POCA is amended to require the Secretary of State to issue guidance on suspicion.

Response: Reject

For reasons set out above, the government does not believe that it is necessary to amend POCA to issue guidance on its operation. For instance, in 2019 the NCA issued good practice guidance to reporters on “The SARs Regime Good Practice – Frequently Asked Questions – Defence Against Money Laundering (DAML)”, which included reference to caselaw (R v Da Silva). In 2023, the NCA issued an updated document entitled: Guidance on Submitting Better Quality Suspicious Activity Reports (SARs), which provides further advice for reporters.

Recommendation 8

We recommend that the Secretary of State should introduce a prescribed form pursuant to section 339 of the Proceeds of Crime Act 2002 for Suspicious Activity Reports.

Response: Partially Accept

The SARs Reform Programme is at the heart of improving the performance of the anti-money laundering (AML) system.  We are undertaking significant technology improvements to the reporting system including the delivery of a new SARs digital service, which has delivered (in March 2023) an improved service for the 14 largest SARs reporters to submit their SARs in bulk and a new online portal for all remaining reporters to submit SARs safely and efficiently.

Once fully implemented with the delivery of enhanced tools for law enforcement users, the new SARs digital service will; enable the AML regulated sector to more efficiently submit higher quality SARs, improve law enforcement access and analysis of the data, and disrupt more money laundering, terrorist financing and high harm offences.

The SARs Reform Programme also made tactical improvements to the DAML SARs reporting process, enabling better prioritisation of risk and high harm cases, halving the processing time to less than 3 days in some scenarios. As set out above, the delivery of the Programme’s Feedback and Engagement Project has also assisted the regulated sector to improve their knowledge of money laundering, emerging threats and improve the quality of SARs being submitted.

Recommendation 9

We recommend that an Advisory Board should undertake a review as to whether to increase the threshold after further empirical research on the quality of required and authorised disclosures is completed.

Response: Reject

Noting the mixed views from consultees on raising the threshold to “reasonable grounds to suspect”, we do not support such a move at this time. Measures in the ECCT Act will reduce the volume of ‘low quality’ DAMLs submitted. Guidance on submitting SARs already exists to assist reporters with submitting quality SARs.

Recommendation 10

In accordance with recommendation 3, we recommend that statutory guidance is issued on appropriate consent within Part 7 of the Proceeds of Crime Act 2002 and arrangements with prior consent in accordance with section 21ZA of the Terrorism Act 2000.

Response: Reject

We believe that the UKFIU’s DAML FAQs and appropriate sector guidance already provide suitable advice to reporters on the meaning of “appropriate consent”. We do not believe that it is the concept of consent that affects the quality of SARs. Nonetheless, in light of the amendments to the DAML regime in the ECCT Act, the government has issued guidance to reporters on applying the exemptions, which may provide further clarity to reporters.

Recommendation 11

We recommend that the existing regime in respect of low value transactions should be retained and conclude that introducing a minimum financial threshold would be undesirable.

We recommend that the Advisory, inboard, in drafting statutory guidance to assist those in the regulated sector in complying with their obligations under Part 7 of POCA, should consider addressing low value transactions.

Response: Reject

In January 2023, the government increased the threshold below which certain institutions can carry out a transaction without committing a money laundering offence to £1000, in order to reduce the volume of low value DAMLs. Further exemptions for the whole AML regulated sector on exiting and paying away property below £1000 were introduced as part of the ECCT Act. Guidance in relation to these exemptions has been issued in order to reduce over-cautious reporting and the numbers of unhelpful disclosures.  

Additionally, as set out in the earlier justification, the government is not of the view that a statutory amendment to POCA imposing a duty on the Secretary of State to issue guidance covering the operation of Part 7 is necessary to improve the efficacy of the regime.

Recommendation 12

We recommend that the Advisory Board should explore including appropriate reporting routes within statutory guidance to assist reporters on complying with their obligations.

Response: Partially Accept

In March 2023 the Government issued guidance on dual reporting as a result of the resumption of measures contained within the Immigration Act. Additionally, measures in the Act will go some way to clarify reporters’ obligations. Where further examples of dual reporting obligations have been evidenced, the government will explore how guidance could be used to resolve this.

Recommendation 13

We recommend that reporters should be permitted to submit one SAR for multiple transactions on the same account and for multiple transactions for the same company or individual and that this may be addressed in statutory guidance assisting reporters on how to comply with their obligations under Part 7 of POCA.

Response: Partially Accept

Reporting multiple transactions within DAMLs can be complex for reporters.  The government will explore whether guidance could be used to clarify the position regarding suspicion related to multiple transactions from the same account or company.

Additionally, there is a concern that reporters may wait until they have all the information before submitting a SAR (rather than submitting multiple SARs as more information comes to light) so any guidance in relation to this would need to make clear reporters’ POCA obligations to make disclosures as soon as practicable.

Further to this, the Law Commission raised a question on whether blanket consent could be given by the UKFIU for future similar transactions are expected (i.e., monthly mortgage payments). However, under s339a of POCA, the £1,000 threshold amount for acts done by deposit-taking body in operation of an account (such as mortgage payments) under which firms do not need to submit a DAML already provides ‘consent’ under these circumstances. Therefore, we agree more exploratory work would need to be done to understand how this would work in practice and alongside existing measures.

We would also need to explore if this could be exploited by criminals i.e., if they understood a payment could be made regularly every month without suspicion.

Recommendation 14

We recommend that banks should not have to seek consent to repay funds to a victim of fraud and that this may be addressed in statutory guidance to assist the reporter in complying with their obligations. We recommend that the obligation to lodge a required disclosure should remain.

Response: Partially Accept

Existing guidance from the UKFIU in 2020 [“SAR Glossary Codes and Reporting Routes”] makes clear the UKFIU view that a DAML is unnecessary if a reporter is returning money to a victim of crime [and they will not be carrying out an activity which falls within s327-8 of POCA].

However, we understand this is a complex issue and are already considering whether further guidance could be issued to simplify the process of victim repatriation.

Recommendation 15

We recommend that the current approach to authorised disclosures on international criminality is maintained.

Response: Accept

Recommendation 16

We recommend amending sections 327, 328 and 329 of the Proceeds of Crime Act 2002 (“POCA”) to provide that no criminal offence is committed by an individual where:

1. they are an employee of a credit or financial institution;

2. they suspect or know that property in their possession constitutes a person’s benefit from criminal conduct;

3. the suspicion or knowledge relates to some but not all of the property in their possession;

4. the property which they suspect constitutes a person’s benefit from criminal conduct is either:
   (a) transferred by them into an account within the same credit or financial institution;
   or
   (b) the balance is not allowed to fall below the level equal to the value of the suspected funds;

5. they conduct any transaction in the course of business in the regulated sector (as defined in Schedule 9 of POCA); and

6. any transaction is done with the intention of preserving criminal property.

Response: Partially Accept

Through the ECCT Act, we have provided clarification on the handling of mixed assets where only part of the assets are suspected to be criminal proceeds. This exemption enables businesses to allow customers proportionate access to the non-suspicious proportion of their assets and provide clarity to banks on ringfencing funds.

Recommendation 17

We recommend that statutory guidance is issued on the operation of the ringfencing provision proposed by recommendation 16.

Response: Accept

The government intends to issue guidance on the operation of the mixed-funds clause within the ECCT Act.

Recommendation 18

We recommend that POCA is amended to create a provision allowing for funds to be released by a judge sitting in the Crown Court for reasonable living expenses when an application for an extension to the moratorium period is made.

Response: Reject

Although the government recognises the need to avoid economic harm to the customer, this proposal would not be the most appropriate way to avoid this. One issue raised is that the extension of a moratorium period effectively means a customer could have their funds frozen for a substantial period of time. In principle, this amendment could prevent economic harm to the customer, but it is uncertain what additional demands this might place on banks and courts (i.e. by adding to the reporting burden).

Recommendation 19

We recommend that further research is conducted into the utility of targeted reporting and that a cost-benefit analysis is undertaken to ensure proportionality within the reporting regime.

Response: Accept

As part of the targeted engagement for the ECCT Act, the government consulted on the use of Geographic/Tactical Targeting Orders; and the amended Information Order power. For reasons of proportionality the government decided not to proceed with a Geographic/Tactical Targeting Order power but did introduce new flexibilities around Information Orders that go some way to addressing the issues identified in the Law Commission Report.