UKFIU’s SARs Annual Report 2019

The latest SARs Annual Report, covering the period April 2018 to March 2019, shows another "record" year in the number of SARs submitted. In particular, defence against money laundering (DAML) requests¹ grew by over 50%. At the same time, the UKFIU has been taking steps to address the longstanding growth in SARs and concerns around inadequate reporting quality. Investment in staff and IT, the use of new powers under the Criminal Finances Act 2017 and greater attention to feedback on defective SARs were areas of focus, while further reforms of the SARs regime are in prospect. Despite this progress, however, the overall picture appears to be of the UKFIU falling further behind the unabating growth of SARs. This is reflected in increased response times in dealing with requests.

Key considerations arising from the report include:

• Continued increase in reporting: The volume of SARs increased again this year, by 3% to 478,437. DAML requests were up 53% to 34,543 on the previous year, a very substantial rise that follows a 20% year-on-year increase in 2017/18. It is the DAML requests that create the most work for the UKFIU. The increase in reporting continues a long-term trend, which has seen a doubling of both general SARs and DAML requests since 2006/7. We expect this trend to persist into 2020 as regulated firms continue to take a cautious approach to reporting. Time will tell whether plans to improve the quality of suspicious activity reporting (see below) will reduce the flow of SARs being submitted due to a misunderstanding of the relevant requirements. These account for 15% of authorised disclosures according to a Law Commission report published in June 2019.
• Limited diversification in reporting sectors: Credit and financial institutions continue to submit the vast majority of SARs (96%), although the UKFIU notes an increase in reporting by challenger banks and fintech companies. Reporting by regulated professional services firms remains low, but such firms may need to be wary of increased scrutiny in 2020. For example, in October 2019, the Solicitors Regulation Authority (SRA) reported that 83% of law firms it had contacted were not compliant with money laundering regulations. As a result, the SRA is stepping up its monitoring, engagement and guidance on money laundering and has made clear that it will take enforcement action against firms that fail to comply promptly.
• Increased asset recovery: £132m was "denied to criminals" as a result of DAML requests (refused and granted), an increase of 154% on the previous year. The UKFIU attributes this increase to two changes made under the Criminal Finances Act 2017: (i) the introduction of Account Freezing Orders (AFOs), a new tool for law enforcement agencies to freeze bank and building society accounts; and (ii) a new process by which the National Crime Agency (NCA) can extend the moratorium period, during which property subject to a SAR cannot be dealt with pending consent from the NCA, to up to six months (the moratorium period was 31 days under the previous regime). We expect the use of these powers, though still relatively new, to continue. See our previous article on the introduction of AFOs and powers to extend the moratorium period under the Criminal Finances Act 2017.
• Decreased referral of DAML requests to law enforcement: The UKFIU made a decision on 70% of DAML requests without referral to law enforcement for a recommendation, up from 58% in 2017/18. Taken together with the dramatic rise in DAML requests, this may raise concerns that the UKFIU’s approach results in part simply from the high volume of requests. However, the UKFIU defends its approach on the basis that it allows law enforcement to focus on the highest priority cases. It states that it may be appropriate when, for example, there is no immediate risk of dissipation of assets, there is unlikely to be law enforcement interest or assets are likely to be impossible to recover.
• Resource improvements: The UKFIU is beginning to take steps to address criticisms that it is insufficiently resourced. Headcount has increased from 80 in March 2018 to 118 in April 2019, although this still means over 4,000 SARs per officer are being submitted each year. As part of the UK Government’s current Economic Crime Plan, the UKFIU is also upgrading its IT capabilities. This investment is welcome, but it remains to be seen whether it will deliver significant net performance improvements given the ongoing growth in SARs. Continued investment in building the UKFIU’s resources is a key strategic priority for 2019/20.
• Further reforms: The Government’s Economic Plan also includes proposals to deliver greater feedback and engagement on SARs as part of an effort to improve the quality of reporting. Those proposals are to be achieved through improved IT and increased outreach. Meanwhile, the Government is considering the recommendations made by the Law Commission in its June 2019 report on the SARs regime. See our previous article on that report. The Government is under pressure to reform the SARs regime, after a report by the Financial Action Task Force published in December 2018 found that the regime needed a “significant overhaul to improve the quality of financial intelligence available”.

The 2019 Annual Report should not cause reporting entities to make any immediate changes to their compliance and reporting practices. Despite some ongoing improvements to the UKFIU’s capabilities and powers, there is little reason to expect SARs to be processed with any greater expediency in the near term. In fact, response times increased in 2018/19 (to 5.12 days on average, up from 4.32 days the previous year) and growing reliance on extending the moratorium period will mean that some transactions may need to be put on hold for several months while they are being investigated. Longer term, however, there may be greater scope for optimism, as the UKFIU continues to roll out its operational transformation programme and the Government grapples with the wide-ranging reforms to the SARs regime proposed by the Law Commission.

¹Authorised disclosures seeking consent to proceed with a transaction where there is a suspicion that it involves criminal property.