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Regulatory update: Suspicious Activity Reports (SARS) Annual Report 2017

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Background

On 11th October 2017, the National Crime Agency (NCA) released the Annual SARs Report, which spans 18 months (October 2015 to March 2017). Future reports will cover a 12-month period (April to March).

The publication comprises of; key statistics, the main report covering the UKFIU’s contribution to money laundering, and the NCA’s Strategy for 2017-2018. The SAR regime is focused on tackling money laundering and terrorist financing, but the regime extends to all forms of criminality, such as fraud against vulnerable people, tax evasion and corruption.

In everyday terms, a SAR is a document produced by a bank or other regulated institution and submitted to the NCA when it has grounds for knowing or suspecting money laundering or terrorist financing. The report highlights that there has been a notable increase in SARs that are longer and more complex, driven by international dimensions, complex structures, high-end money laundering and trade-based money laundering. SARs can offer immediate opportunities for authorities to stop crime and arrest offenders, while others represent useful intelligence.

Key points from the publication:

Part 1: Statistics

SARs have been increasing yearly: The overall number of SARs received in the 18-month period was 634,113, which equates to a 10% rise pro-rata. March 2017 saw the largest number of SARs recorded in a month, with 43,290. This was a marked increase of 7,406 from the previous March.

Increase in defence against money laundering (DAML) requests: The total number of DAML (formerly known as ‘Consent SARs’) requests over an 18-month period was 27,983; an increase of 24% pro-rata. As a result of the DAML requests, 56.5 million of assets were denied to criminals.

Sector breakdown: Banks remain the main source of SARs (83% of all SARs) increasing by 9.5%. The remaining top five include building societies, credit institutions, money service remitters and other financial institutions. There has also been a 38% increase in suspicious activity reporting by casinos – possibly due to the Gambling Commission and UKFIU providing workshops to casinos to improve SAR quality and knowledge on customer due diligence.

Politically Exposed Persons (PEPs): The NCA disseminated 72 PEPs SARs in 2014 / 15. This jumped to 1,205 SARs in the following year. Overall, 1,955 SARs were disseminated in the 18-month reporting period.

Part 2: Main report

New term, ‘defence against money laundering’ (DAML) introduced to replace ‘consent SARs’: Some reporting firms misinterpreted the term 'consent' as permission to undertake certain transactions or activities. The NCA articulated that the ‘consent’ process is not a substitute for the risk-based approach required to fulfil legal and regulatory obligations. The misinterpretation undermines AML / CTF efforts, and therefore the terms DAML and defence against terrorist financing (DATF) were introduced for purposes of disambiguation. The NCA have directly engaged with reporters by email to improve reporting behaviour and increase understanding of the SARs mechanism. A post-implementation review of the DAML process will take place to include sector-specific feedback on cases closed, including where a decision could not be made due to a lack of KYC / CDD.

Turnaround of DAML requests: 48% of all SARs were dealt with by the UKFIU and not referred to law enforcement agencies (LEAs). Complexity, missing key information and the growth of DAML requests all contribute to longer average turnaround times, which moved from 4.7 to 6.2 days.

Analysis and engagement: In 2016, a forward work plan was created to help with engagement and analysis. Over the reporting period, eight bulletins have been created on volumes and trends in order to identify good / poor practice, red flags and typologies. The high-risk areas identified were trade-based money laundering, professional enablers, corruption, the property market, accountancy, legal and charity sectors. The UKFIU aims to improve engagement such as more webinars, the flag-it-up campaign and feedback through case studies.

SARs reform: In April 2016, the Government published an action plan to reform the SARs regime. The Criminal Finances Act has made changes by extending the moratorium period, gifting new powers to UKFIU to request additional information and an increase in information sharing. The NCA and Home Office are collaborating with a reform programme to implement more changes.

Vulnerable persons and glossary codes: The UKFIU is maximising the value of SARs by using keyword searches and fast-tracking matching cases to LEAs. Glossary codes assist the UKFIU to identify vulnerable persons, instances of modern slavery and child exploitation. In the reporting period, 3,424 vulnerable person packages were disseminated to LEAs.

HMRC increasing the use of SARs: HMRC have an aim to identify undeclared assets and hidden income overseas to recover unpaid taxes. HMRC will continue their work with the NCA by cross-referencing with data matching tools drawn from SARs, third party data and HMRC data. HMRC will continue to expand capabilities through information exchange, interest markers and enhanced data to improve risk assessment.

Terrorist Financing: The Terrorist Finance Team identified 2,026 TF related SARs, which were passed to the NTFIU and Counter Terrorism Unit (CTU). The process involved a targeted review of 26,655 SARs.

FATF Mutual Evaluation: The UKFIU are supporting HM Treasury and the Home Office with preparations for the upcoming evaluation with assessors visiting in early 2018.

Strategy for 2017 -2018

The new UKFIU / SARs regime will improve the analysis and exploitation of SARs to identify economic crime threats. The SARs database will be more directly available for LEAs and the fast-tracking of SARs relating to vulnerable persons. The UKFIU will contribute to the CONTEST strategy and promote the National Financial Intelligence Centre.

What this means for firms

The continuing rise in SARs is an indication of the current workload in AML compliance. The majority of the SARs are produced within banking. However, there are emerging trends rising in financial institutions across the industry in particular credit institutions.

The quantity of SARs must not be considered an indication of compliance. Over-reporting to mitigate regulation risk is undermining the SAR Regime and is resource-intensive for firms. The NCA has identified the issue and is targeting specific sectors to improve SAR reporting quality.

The Criminal Finances Act provides LEAs with new powers and time to investigate financial crimes. However, firms need to be aware of their role in the new Act. The introduction of DAML / DATF to educate reporters shows that there is uncertainty around the risk-based approach concept and customer due diligence requirements. 

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