International Financial Crime

INTRODUCTION

The Suspicious Activity Report (SAR) is a piece of information which alerts the relevant authorities of any suspicious customer activity. This suspicious activity may be identical to money laundering or terrorist funding behaviour which may indicate an ongoing or just completed criminal or terrorist activity. Examples of such suspicious activity may include unusually large or frequent deposits/withdrawal from an account or the cash purchase of high value assets. These reports are generated by individuals or corporate persons operating in the UK regulated sector e.g. banking institutions, building societies, insurance companies and are sent to the UK Financial Intelligence Unit (UKFIU). The purpose and role of the UK Financial Intelligence Unit (UKFIU) is to have national responsibility for receiving, analysing and disseminating financial intelligence submitted through the Suspicious Activity Reports (SARs) regime which is under the Serious Organised Crime Office (SOCA). The reports themselves contain information regarding the subject of the disclosure (the customer/client), details of the transaction under suspicion and the reporter’s reason(s) for suspicion. This information is then processed by the UKFIU and where necessary, subsequently passed on to law enforcement agents for action. The UKFIU is a member of the Egmont Group, an international forum comprised of over 100 FIUs Financial Intelligence Units with the main objective of stimulating cooperation, particularly by sharing expertise, training and information exchange in the fight against money laundering and financing of terrorism. By virtue of its membership, the UKFIU may seek financial intelligence from other members in order to complement SOCAs efforts in its domestic and international operations and to act as the conduit to this resource for the wider UK law enforcement community.

The SARs regime in the UK can be traced to its early beginnings in 1986. At that time it was primarily concerned with the offence of drug trafficking and offered immunity from prosecution over a charge for money laundering to reporters who made disclosures of their suspicions to a relevant authority.From then on the regime has been shaped by subsequent domestic, regional and international regulations and statues. More significant to the sustained development of this reporting system would be the establishment of the Financial Action Task Force (FATF) by the Organisation for Economic Cooperation and Development (OECD) in 1989which is widely recognised as the foremost international body responsible for the formulation, review and recommendation of anti-money laundering and terrorist finance policy worldwide. The FATF subsequently published forty recommendations to its member countries concerning anti-money laundering policy including nine special recommendations on counter terrorist funding strategies. Of the forty recommendations, Recommendation 13 concerned the issue of mandatory reporting ans provided thus:

‘If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU)’.

This purpose of this paper is to offer a critical examination on the efficacy of the current reporting regime and consider the extent to which it complies with established international standards. A brief overview of the development of the domestic legislative framework for reporting requirements will be provided after which the evaluation of the regime’s efficacy will be considered along with some of the difficulties facing the current system. and in conclusion, consider some ideas or recommendations on how the system can be improved.

Development of Legal/Regulatory framework of the SARs Regime

The reporting requirement is an integral component of the various anti money laundering initiatives both domestic and international because of its very important role of providing information on suspicious activity from which money laundering activities can be detected, prevented and/or sanctioned. This means the development of the SAR regime in the UK will be more satisfactorily discussed in the context of the development of the domestic anti money laundering regulatory framework. Leong, in her article identified the apparatus of civil, criminal and regulatory law as being involved in the legislative and regulatory anti money laundering framework with the main actors being;

1. 1. the Government, which defines criminal offences, sponsors the primary legislation  and makes the money laundering regulations;
   2. the Financial Services Authority (FSA) which formulates regulatory rules to combat money laundering; and
   3. the Joint Money Laundering Steering Committee (JMLSC) made up of sixteen leading trade associations and chaired by the British Bankers Association. The committee’s purpose is to issue guidance on the interpretation and application of the money laundering regulations and on best practice. A task they have carried on since 1990.

As previously mentioned, the SARs regime has been present in the UK since the enactment of the Drug Trafficking Offences Act of 1986 which established the laundering of proceeds of drug trafficking as a criminal offence.Under this Act, the involvement of professionals in preventing the exploitation of the financial sector by drug traffickers was achieved through the offer of immunity from prosecution over a charge for money laundering to those who made disclosures of their suspicions to a relevant authority. This reporting system was promptly regarded as defensive or subsequent disclosure. A situation where disclosure was required only after the completion of the act as long as it was made of the disclosers own free will and as soon as it was reasonably practical to do so. Not a few commentators saw this sort of reporting requirement as illogical as it was difficult to rationalise the idea of allowing such a defense after the completion of all elements of the crime. The difficulty faced by the reporting requirements under this Act was in striking the balance between the risks of precluding critical information that could lead to subsequent arrests/convictions based on the absence of any incentive of immunity offered to the discloser, and the fact that the immunity offered did not in itself ensure the cessation of money laundering offences.

The Criminal Justice Act (CJA) 1993 as introduced gave rise to the implementation of the 1991 EC Directive on the Prevention of the use of the Financial System for Purpose of Money Laundering also known as the First Money Laundering Directive (1991) and although it was still narrowly focused on combating the laundering of drugs proceeds through the traditional financial sector, the scope of the directive was extended to impose certain obligations on financial sector firms. More significantly, Section 18 of the 1993 Act introduced a mandatory reporting requirement for professionals where in the course of their business, they become aware of or suspect that another person is engaged in drug money laundering. This was giving effect to provisions under the 1991 EC Directive which placed a duty to report suspicious transactions to the relevant national authorities either on request or on the institution’s own initiative without alerting the customer.

– 14.* Financial institutions, their directors, officers and employees should be:

1. 1. Protected by legal provisions from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.
   2. Prohibited by law from disclosing the fact that a suspicious transaction report (STR) or related information is being reported to the FIU.

The wording of Section 18 specifies a ‘person’ and indicates that contravention is not limited to institutions. This is confirmed by the criminal sanctions prescribed for non-compliance. This clearly showed an improvement from previous legislation which only provided for defensive disclosure as a preventive measure.

The Money Laundering Regulations (MLR) 1993 supplemented the CJA 1993 in further fulfilment of the UK’s obligations under the 1991 EC Directive and the main obligation to financial institutions with regards to the reporting requirement was under Regulation 14 which provided for the establishment and maintenance of internal reporting procedures. It particularly required the appointment of an internal Money Laundering Reporting Officer (MLRO) who would be responsible for receiving all internal reports of suspicious activity and thereafter making a judgement on whether the information received gives rise to sufficient suspicion or knowledge to warrant a further external report to the national authority. This requirement has been described as a form of quality control and relies heavily on the qualitative judgement of the MLRO.

The Proceeds of Crime Act (PCA) 2002 is the most important legislative action against money laundering because it consolidates updates and reforms the criminal law in relation to money laundering under a single legislation.The Act includes all previously recognised money laundering offences and some new ones under Section 7 that deals exhaustively with money laundering. Of more significance to our discussion on the reporting regime is the establishment of three ‘failure to disclose’ offences to include an offence for employees in the regulated sector; and offence for nominated officers in the regulated sector; and an offence for other nominated officers.The cumulative elements that constitute this offence are that the person who fails to disclose knows or suspects or has reasonable grounds to know or suspect that information received in the course of business in the regulated sector is the subject of money laundering activity and fails to disclose this to the relevant officer as soon as is practicable. This failure to report is punishable under sec 334(2)(b) on indictment, by a maximum of 5 years in prison and an unlimited fine.

Efficacy of United Kingdom’s SARs Regime

The main objective of a SAR regime or a reporting system in general is three fold:

1. 1. to act as a deterrent to money laundering and its predicate offences;
   2. facilitate the detection and subsequent sanctioning of money laundering and predicate offences after they have been committed; and
   3. disrupt the actual commission of these crimes while in progress

One may easily assume that determining the efficacy or otherwise of this system should normally be by direct comparisons drawn from the correlation between relevant variables e.g. growth in SAR filings over a given period and the arrest/conviction rate for predicate offences over the same period. Or by taking measurements of relevant statistics such as; total annual budget expended on SARs versus the total value of proceeds of crime recovered. Unfortunately, deriving a true assessment of the regime’s efficiency by measuring the impact of SARs on crime rate or in terms of cost benefit is not so straightforward. This is due to the inherently complex and sometimes not immediately appreciable nature of SARs which provides sufficient challenges in applying normal econometric methods. This effectively means that the method of just ‘running the numbers’ is not an adequate measure. Moreover, the goal(s) of the SARs regime require some manner of definition so as to give a proper idea of what is to be measured in terms of effectiveness. With reference to the objectives of SARs mentioned in the opening paragraph, it would seem that in determining its efficacy, we would need to measure the relationship between SARs and arrest/conviction rates for either or all of money laundering activities; predicate offences and maybe even value of recovered assets. These factors have earlier been identified as measurable indicators of a credible SAR regime.However, even though these are tangible figures that can actually be compared against reports, the correlation between them is not assured and so may not necessarily portray an accurate result. Certain factors may affect the number of filings recorded but may have no effect on crime statistics e.g. regulatory requirements that may trigger defensive reporting, or better SARs technology/system administration or training can boost reporters’ determination on what it consider suspicious. Another very important data stream that cannot be captured would be number of instances of money laundering or predicate offences that the mere existence of a SAR regime has prevented as it is practically impossible to tell what a criminal has decided not to do due to a greater risk of being detected.

This is not to say that efficacy cannot at all be measured but the specific value or benefit derived from SARs should be established in order to properly identify the appropriate yardstick with which to measure its efficiency. Fleming maintains the importance of a holistic networked view of all data streams as a more pragmatic approach in determining the actual impact of SARs based on the actual value added in terms of crime detection and on law enforcement in general. In making this determination of ‘value’ and ‘benefit’, the consideration of whether SARs reduces crime through deterrence or by facilitating detection after the crime has been committed is also critical in determining its effectiveness. Even when considering the impact on crime, there is still a further determination of whether this should be restricted to the effects of money laundering specifically, or crime in general.

These foregoing paragraphs are essentially intended to bring attention to the evident complexities involved in measuring the efficacy of the SARs regime in the UK and this paper does not propose to delve into a much detailed examination of those various factors that would inform a thorough enquiry, but will instead focus on an evaluation of the identified strengths and weaknesses and performance so far of the regime. This proposed evaluation will be based on the impact of SARs on law enforcement and in particularly, its performance towards achieving it goals in relation to money laundering with an effort to arrive at a practical determination of its efficiency.

There have been a number of reports concerning the domestic reporting regime and although useful information can still be gleaned off them, they are for the most part regarded as outdated. This is due to the fast pace of development and frequent change in the regulatory framework which has affected matters like process management, technology, supervising agency and the like. However there are basic constituents that have remained the same or have not undergone very significant change. The KPMG report of 2003 identifies the aims of the SARs regime to be: (1) Deter and displace money laundering and predicate offences; (2) Detect money laundering and predicate offences, identify the proceeds, and contribute to the investigation of these crimes; and (3) Assist in disrupting money laundering and predicate offences through depriving criminals of their assets, taxation and other interventions, including prosecution and conviction of offenders. (These aims have generally remained the same till date). The research attempted, among other things, to answer a specific question on whether the SARs contribute to crime reduction in a meaningful way. They achieved this by directly comparing statistical data on the proportion of reports that had been relevant to achieving the established aims of the regime. It also identified some of the problems faced by the regime which at the time included;

1. 1. lack of defined ownership
   2. growth in reports due to extension regulations to include more categories of professionals
   3. financial burden of reporting and compliance costs;
   4. poor reporting quality resulting in a huge number of reports that were of little or no significance
   5. timelines for processing of SARs (well exacerbated by 4 above)
   6. the unsatisfactory use of SARs by law enforcement agencies

Despite these existing issues (some of which have been dealt with by more recent developments), the research also identified successes with the regime using the available data which evidently showed that the SAR regime was very useful in providing assistance in criminal investigations carried out by the law enforcement agencies. The research also goes further to highlight a number of notable successes as recorded and noted the outcomes of what it deemed an effective SARs regime should achieve in the long term to include:

1. 1. A reduction in money laundering and predicate offences through identification and recovery of criminal assets.
   2. The protection and enhancement of the reputation of the AML achievements of the UK and its financial institutions.
   3. Identification of both immediate and long-term criminal trends and typologies, in particular in relation to serious, organised and volume crime in the UK.

A review of the SARs regime was under taken in 2006.Part 3 of that review considered the costs, benefits, strengths and weaknesses of the SARs regime

Compliance of the UK SARs regime with International Standards

The Financial Action Task Force (FATF) The FATF is an inter-governmental body, created in 1989, to develop and promote policies to counter money laundering and terrorist financing. It sets standards for national anti money laundering and counter terrorist financing programmes; evaluates the extent to which countries have implemented measures which meet those standards; and identifies and studies money laundering and terrorist financing methods and trends. FATF recommendations form an international benchmark for assessing the effectiveness of anti money laundering measures. You will find more information about FATF, its standards and typology reports at www.fatf-gafi.org.

The Financial Action Task Force (FATF) recommends that:

• • Countries should establish an FIU that serves as a national centre for the receiving (and, as permitted, requesting), analysis and dissemination of Suspicious Transaction Report (STR) and other information regarding potential money laundering or terrorist financing.
  • The FIU should have access, directly or indirectly, on a timely basis to the financial, administrative and law enforcement information that it requires to properly undertake its functions, including the analysis of SARs.