LC: Anti-money laundering crackdown should be more focused on most suspicious activity

23 Jul 2018 10:34 AM

Anti-money laundering laws should be streamlined and strengthened to help law enforcement agencies to focus on serious crime, say the Law Commission.

Money laundering is estimated to cost every household in the UK £255 a year and allows criminals to profit from their crimes.

It is widespread, with between 0.7 and 1.28% of annual European Union GDP detected as being involved in suspect financial activity.

As a result, the government’s independent legal advisors have published a consultation paper – to help banks and businesses provide better information to law enforcement agencies and help refocus attention on the most suspicious activity.

Law Commissioner Professor David Ormerod QC said:

“The law requires banks and others to report suspicious financial activity to help fight against money laundering.

“This provides law enforcement with the means to investigate and protects honest businesses from inadvertently committing a crime.

“But the reporting scheme isn’t working as well as it should. Enforcement agencies are struggling with a significant number of low-quality reports and criminals could be slipping through the net.

“We’re determined to make the law work for everyone and find a balance which will tackle money laundering more effectively and help keep the UK at the centre of the financial world.”

How banks investigate money laundering

Criminals who want to spend the profits of their crimes often look to hide the source of their funds. This is called money laundering and once this dirty money is within the financial system, it can be hard to trace.

Intelligence from the private sector – when criminals first try and deposit funds into the financial system – is crucial to law enforcements.

Banks and other private sector businesses that handle money can be guilty of money laundering offences if they don’t investigate unexplained transactions.

Suspicious activity reports (SARs) are how banks report on money laundering and terrorism financing to law enforcement under the Proceeds of Crime Act 2002.

When a SAR is made this puts a hold on any transaction to allow suspicious activity to be investigated.

It is then analysed by the UK Financial Investigation Unit based in the National Crime Agency and any relevant law enforcement agency who may propose taking civil or criminal proceedings. The UKFIU will then decide whether or not allow the bank to make the transaction which made them suspicious.

The problems with the system

However, the system has a number of problems. These include:

• that significant numbers of low quality SARs may be making investigation difficult – between October 2015 and March 2017, the National Crime Agency received 27,471 suspicious activity reports seeking consent to proceed with a transaction
• an onerous compliance burden on the regulated sector –  UK banks say that they spend at least £5 billion annually on core financial crime compliance, including enhanced systems and controls and recruitment of staff.
• the risk of severe financial loss to businesses and individuals who are the subject of disclosure – they cannot be told why transfers of funds are delayed due to a “tipping off” offence

Proposals to streamline and strengthen enforcement

In a consultation paper published recently, the independent Law Commission has published plans for reform. Proposals include:

• statutory guidance on what to look for and a set format for submitting suspicious activity reports
• asking whether new tools could help enforcement like US-style Geographic Targeting Orders
• a new power to require additional detail and record keeping requirements targeted at specific transactions
• cutting back on low quality reports by focussing on accounts where there are reasonable grounds to suspect property is criminal property
• legal protection for banks which choose to lock into an account the suspected criminal funds but leave the rest of the account open to trade thereby minimising the risk of severe financial loss for those who are the subject of a disclosure providing detail as to what amounts to a defence of ‘reasonable excuse’ for not making a suspicious activity report
• asking whether commercial organisations, rather than the individual employees, should be liable for failure to prevent a criminal offence when an employee fails to disclose a suspicion

The consultation will run until 5 October 2018.

Further information

In the recent past, the Government has stepped up its work to tackle serious crime and corruption. Steps include:

• a new national economic crime centre within the National Crime Agency to coordinate the national response to economic crime
• the creation of new powers, including unexplained wealth orders (UWO), requiring those suspected of money laundering to declare their wealth
• new powers to seize a range of items including precious metals and stones and even works of art which have been gotten from the proceeds of crime

As part of this, in January 2018, the Home Office asked the Law Commission to begin a year-long project to analyse and address the issues with the consent regime in anti-money laundering laws. It’s task: to improve the prevention, detection and prosecution of money laundering in the UK.

In the UK, Part 7 of the Proceeds of Crime Act 2002 contains the UK legislative anti-money laundering regime.

Sections 327 to 329 of the Act create three principal money laundering offences:

• of concealing, disguising, converting, transferring, removing criminal property from England and Wales
• acquiring, using, possessing criminal property
• and entering into an arrangement that facilitates the acquisition, retention, use or control of criminal property on behalf of another person.

The consultation is available at: https://www.lawcom.gov.uk/project/anti-money-laundering/