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Law Commission publishes money laundering and terrorist financing measures

Out-Law News | 26 Jun 2019 | 2:33 pm | 2 min. read

The Law Commission has made a series of recommendations designed to improve the quality of reporting by banks and other companies of cases of suspected money laundering and terrorist financing.

The Law Commission said the creation of an advisory board to ensure the effectiveness of the regime, coupled with statutory guidance to reduce uncertainty, would cut wasted time and improve the UK’s ability to tackle money laundering and terrorist financing.

Currently banks and corporates are required to file suspicious activity reports (SARs) on cases of suspected money laundering and terrorism financing to the UK Financial Intelligence Unit (UKFIU).

A consultation carried out by the Law Commission last year revealed that there was concern by a number of stakeholders that the quality of SARs is low, although a high-quality SAR is a “vital source of intelligence” for law enforcement agencies. The number of SARs submitted has doubled over the last 10 years, with a record 470,000 reports received in the year to 31 March 2019.

The Law Commission said the low quality of the reports was contributed to  by the broad definition of “criminal property” in section 340 of the Proceeds of Crime Act, requiring that suspected laundering of the proceeds of any criminal conduct must be reported.

It said there was also a lack of clarity in the definitions of key terms, increasing the risk that the law is misunderstood or inconsistently applied by those with reporting obligations. The threat of individual criminal liability for officials for a failure to make a disclosure also encouraged defensive reporting.

However the consultation confirmed there was no need to scrap the current regime. Instead, in a review published recently (224 page / 2.8MB PDF), the Law Commission said the core of the system should be retained but made more efficient and effective.

It made three main recommendations. It said an advisory board of experts drawn from the public and private sector should be created to oversee the regime, draft guidance, and advise the government on improvements and how best to respond to emerging threats.

A new, standardised online SAR reporting system should be designed through public and private sector collaboration to make the reporting process easier to navigate and promote greater consistency in the information that is provided to UKFIU in an easy to read, accessible format, the Law Commission recommended.

It also said statutory guidance should be issued by the government to reduce confusion around a number of key legal concepts and ensure reporting entities understood their legal obligations to report suspicious activity.

In addition, the Law Commission recommended allowing "ringfencing" of suspected criminal property by a credit or financial institution in certain circumstances.  The practical effect of submitting a SAR is that whole accounts are frozen, not just the allegedly criminal property element, which can cause difficulties for both banks and account holders whilst a decision on consent to proceed is awaited, and even after that. This recommendation will give some comfort, particularly to banks, allowing for a more proportionate response to the reporting of suspected criminal property, enabling transactions on legitimate funds to continue, whilst prohibiting the use of those under suspicion.

Earlier this year the House of Commons Treasury Select Committee said the UK's approach to combatting fraud, money laundering and other economic crime should be the subject of more frequent and broad review. The committee said there should be more SARs made by those outside the financial system, and the SAR system needed to be as “as robust and simple to use as possible”.