Suspicious Activity Reports: can the system be fixed?

Over 380,000 Suspicious Activity Reports (SARs) were submitted last year to the UK Financial Intelligence Unit (UKFIU) and logged to ELMER, the Unit’s internal SARs database. Yet ELMER is a system designed to process a mere fraction of those SARs (20,000 a year) for law enforcement agencies. The Home Affairs Committee’s latest report on Proceeds of Crime, published 15 July 2016, has lambasted the heavy overloading of ELMER, describing the system as “a futile and impotent weapon in the global fight against money laundering.” The Committee recommends the implementation of a robust replacement by 31 December 2016.

Reporting obligations

Businesses operating in the regulated sector need no introduction to SARs. Under the Proceeds of Crime Act 2002 (POCA), they are required to submit a SAR if they know or suspect, or have reasonable grounds to know or suspect, that another person is engaged in money laundering; and that information came to them in the course of their business in the regulated sector. Tandem obligations to submit SARs exist in relation to terrorist financing offences under the Terrorism Act 2000. More generally, individuals and businesses with concerns about proposed transactions or other activity may submit a SAR with detailed information to request consent to proceed, thereby providing a defence against money laundering and terrorist financing offences.

Industry distrust of the SARs system

The volume of SARs submitted has escalated each year, rising 11.9% in 2014 and 7.8% in 2015. The UKFIU is supposed to analyse SARs to extract strategic and tactical intelligence and make them available to law enforcement agencies for investigation. According to the Committee’s report, however, the private sector perceives that investigative resources stretch only to detailed review of the 15,000 SARs annually requesting consent.

Moreover, the consent SARs that are reviewed have been criticised. The UKFIU has blamed processing delays in part on the provision of inadequate information when individuals and companies report and request consent for potentially suspicious activity out of an abundance of caution. From October 2014, the UKFIU has simply closed cases on receipt if the SAR requesting consent lacks reasons for suspicion or a statement regarding criminal property. This outcome is unsatisfactory for submitters, who must then choose whether to do business without a criminal liability safeguard.

Recommendations of the Home Affairs Committee

The Home Affairs Committee has acknowledged the lack of industry confidence in the SARs system and has called, with urgency, for a robust overhaul of ELMER. It is encouraging that the Committee recognises the needs of businesses using the SARs system, and recommends the consultation of SARs users, as well as investigators, in designing ELMER’s replacement.

The Committee has recommended a six month timeframe for replacing ELMER, which appears optimistic in light of Brexit’s burden on the reform agenda. Nevertheless, the high degree of urgency assigned to this task does indicate a renewed commitment to the SARs system and its assistance in developing intelligence on money laundering.

Conclusions

We view the recommendations of the Home Affairs Committee on SARs as a timely and constructive call to replace existing SARs infrastructure for the benefit of both industry and investigation agencies. Individuals and companies submitting SARs need reassurance that consent requests will be promptly and carefully considered. Frequent submitters of SARs will need to participate in the reform of ELMER to ensure the UK gets an efficient and effective regime for the reporting of suspicious financial activity.