6.1.1 Decline in number of legal sector SARs

The SRA AML Report in 2016 stated that generally there was compliance with the reporting regime under POCA 2002.²¹ Notwithstanding this overall portrait of compliance, the SRA went on to express concern with regard to the decline in the number of SARs submitted by the sector.²² For example, SARs submitted by solicitors over the years fell from 6,460 in 2007/8 to 3,328 in 2013/4 (albeit with a slight increase to 3,461 in 2014/5, constituting under 1% of all SARs).²³ More recent figures for the 2017/8 period show a further decline to 2,402.²⁴

The legal sector is not the only sector in which there has been a decline in the number of SARs, however, and the NCA data for the accountancy sector also demonstrates a significant decline in SARs submitted by that sector, from 7,354 in 2007/8 to 4,834 in 2013/4, rising to 5,036 in 2017/8.²⁵ Accountancy sector representatives link this overall decrease to a better understanding ‘of what is and what is not reportable.’²⁶ Concerns abide too with regard to the low levels of reporting seen in the estate agency sector.²⁷

This decline in the number of legal sector SARs does, however, sit in contrast to an overall national increase in the numbers of SARs submitted year on year, with a ‘record number’ of SARs (463,938, of which 22,619 were DAML SARs) submitted between April 2017 and March 2018.²⁸ The majority of these were lodged by banks (80.08%).²⁹ That said, increases in SARs submissions from the banking sector have previously been attributed to awareness raising and regulatory pressure as opposed to increases in criminality.³⁰ It has also been suggested that the banking industry can be too ‘trigger happy’ when filing SARs, particularly given the scope for automated reporting in the sector.³¹ Nevertheless, the concern over the decline in number of legal sector SARs is one which has been raised in the National Risk Assessment 2015 and 2017, and elsewhere, then echoed in the FATF UK mutual evaluation report in 2018, which stated that lawyers, accountants and trust and company service providers were underreporting.³² FATF noted that this might be a result of ‘lacking and inconsistent supervision’ across the legal and accountancy sectors.³³ The SRA suggests there may be issues surrounding a firm’s AML policies and procedures, or the understanding of fee earners.³⁴ For its part, the NCA comment that it ‘places no expectations’ on SARs volumes from different sectors, leaving it to each sector and its regulators to determine whether the number of SARs submitted by that sector is proportionate to the threats it faces.³⁵

In response, multiple factors for this reduction have been cited by law firm MLROs, including a general decrease in transactional work following the financial crisis, shifts in client demographics and specific changes in tax legislation.³⁶ Indeed, the NCA does acknowledge that the reduction in SARs is partially attributable to a general decline in transactional work, both in terms of mergers and acquisitions and residential conveyancing.³⁷ The reduction may also be a by-product of the maturity of the regime, bringing with it a better understanding of the AML legislation and the accompanying parameters of privilege, better client on boarding processes and less defensive reporting.³⁸ Certainly, FATF noted the appearance of a decline in defensive SARs across the regime more generally.³⁹

A number of MLROs were also of the view that the decline in legal sector SARs reflected a dampening down of risk appetite within law firms, whereby firms decline to act on suspicious or high risk transactions.⁴⁰ Declining to act on AML grounds is also a feature of practice noted by the SRA, and by FATF in its UK evaluation.⁴¹ In some instances, however, it may simply denote poor practice and lack of skill or judgment on the part of an MLRO.⁴²

Low levels of reporting from the sector have been highlighted at EU level.⁴³ However, EU figures illustrate that UK lawyers submit far greater numbers of SARs when compared to disclosures from the profession in other EU states.⁴⁴ Despite this, the Law Society notes that ‘the political narrative is that too few SARs are being made by the legal sector’, concluding that there is, in fact, ‘no correct number of SARs: what matters is that SARs are correctly made.’⁴⁵

6.1.2 Poor quality legal sector SARs

In addition to concerns over a decline in the number of legal sector SARs, the NCA has voiced concern over the poor quality of SARs submitted to it from the legal sector, with the director of the NCA’s Economic Crime Command Donald Toon even identifying the sector as ‘the worst offenders for submitting unsatisfactory suspicious activity reports’.⁴⁶ It is important to note that poor quality reports are not a concern in relation to the legal sector in isolation, and poor quality reporting across all sectors was raised as an issue with the regime by the Law Commission.⁴⁷ Indeed, the FATF mutual evaluation of the UK in 2018 also observed that ‘there are concerns about the quality of reporting by all reporting entities, including banks.’⁴⁸ The practical impact of poor quality reports is that investigative opportunities may well be lost.⁴⁹

In 2014, the SRA was asked by the NCA to provide guidance on submitting consent SARs following an NCA sample of 952 legal sector consent requests over a four-month period.⁵⁰ The review revealed various issues, namely: (i) there was no prohibited act under ss 327–9 POCA 2002/ss 15–18 TACT 2000 requiring consent (14%), thereafter (ii) additional information was required in order for the NCA to make a determination, such as the prohibited act, basis for the suspicion or failure to identify the launderer/property (33%), and (iii) difficulties in contacting the reporter (24%).⁵¹ SARs guidance has been available to the profession prior to this in each iteration of the Law Society’s AML practice notes, and the NCA has also issued a series of guidance notes in relation to the submission of SARs. Despite this flurry of guidance from multiple sources, the NCA still reported that as many as 42% of legal sector consent SARs were incomplete and it was noted that some SARs ‘indicated a lack of understanding or compliance’ with the AML regime.⁵² From October 2014, the NCA began to return consent SARs submitted with insufficient detail to reporters from all sectors, without granting or withholding consent.⁵³ Consequently, the SRA raised the concern that a lawyer may well take a risk and fail to resubmit a returned consent request.⁵⁴ Following the adoption of this procedure, 408 consent requests across all sectors were simply closed (2.8% of all consent SARs from all sectors) in the 2014/5 reporting period.⁵⁵ In response, it has been highlighted by some within the legal profession that the rejection of some SARs on quality grounds actually evidences a ‘lack of comprehension’ on the part of the NCA and law enforcement of the transactions law firms undertake, a theme which is also raised by participants in this research.⁵⁶ Sustained outreach by an array of agencies has been forthcoming on submitting better quality SARs, and is ongoing. ⁵⁷

Reform of the SARs regime was given much prominence in the Government’s AML Action Plan published in 2016 (Action Plan 2016), building upon the findings relating to the regime in the NRA 2015.⁵⁸ The Plan considered a move away from transactions-based reporting to a focus on high risk entities, the removal of the consent regime, and an upgrade of the NCA’s capabilities.⁵⁹ The Plan also highlighted the need for an improved IT system, better analysis of SARs, and improved information sharing, all of which were identified as issues by participants.⁶⁰

It is set against this background that participants were asked for their views on the operation of the SARs regime. An overarching caveat applies here, as it does to all the data chapters of this book. As explored in the methodology chapter, the responses from participants provide insights on the regime through a very distinct lens, that of professionals within Top 50 UK law firms, some of whom have a vested interest in the regime by virtue of their roles. It is also research conducted by an ‘insider’, which shapes and informs both data generation and analysis. It is in this overarching context that participants’ responses must be read. In terms of structure, this chapter will address the issues participants raised with regard to the regime in general, prior to a consideration of the consent regime in particular.

6.2.1 Excluding minor offences and regulatory breaches from the ambit of POCA 2002

One of the main issues participants raised with regard to the UK’s AML regime as a whole was the disproportionate effect that the ‘all crimes’ approach of POCA 2002 had on legal practice. This was an issue that was explored in detail in Chapter 4. To summarise briefly here: the majority of participants expressed the clear view that minor offences and regulatory breaches attracting criminal sanctions should be excluded from the ambit of the Act, with virtually all participants performing a compliance role holding this view. Removing such ‘technical’ offences from the ambit of the Act would streamline the SARs regime insofar as it relates to the legal profession, as SARs would no longer need to be submitted in respect of such offences. Whilst the Law Commission concluded that the all crimes approach should be retained as a general proposition on the basis that ‘reporting suspicion based on non-serious crimes is not a significant cause of the volume of SARs’, the potential for future de-scoping of offences following ‘further consultation with the legal sector specifically’ was explicitly acknowledged ⁶¹

6.2.2 The meaning of suspicion

POCA 2002 provides for both voluntary and mandatory reporting routes for the legal profession in respect of their knowledge or suspicions of money laundering. Whilst ‘knowledge’ is interpreted by the courts as actual knowledge, judicial guidance from R v Da Silva provides that ‘suspicion’ is a purely subjective concept which means ‘a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice’.⁶² Reporting on the basis of suspicion imposes an extremely low reporting threshold upon the profession, a position noted by a handful of participants, one of whom confirmed, ‘when I’m looking at whether or not I’m suspicious, I do think it’s a really low bar’.⁶³ Yet several compliance participants also noted that even with such a low threshold, there were still distinctions to be drawn between a suspicion comprising a ‘wild concern’ or ‘speculation’ and therefore unreportable, and a suspicion which is reportable under the provisions of Part 7 POCA 2002.

Whilst a small number of participants observed that suspicion was a low reporting threshold, none of those participants expressed the desire for the working case law ‘definition’ from Da Silva to be changed. This sits in contrast to the responses from the Government’s Call for Information on the SARs Regime, which reported that many respondents ‘wanted strengthening of the definition of “suspicion”, to allow better judgements to be made.’⁶⁴

The subsequent review of the SARs regime by the Law Commission noted that setting such a low reporting threshold (backed by criminal sanctions) is one of the drivers behind the high numbers of SARs seen in this jurisdiction, and that the concept of ‘suspicion’ itself remained ‘ill-defined, unclear and inconsistently applied’.⁶⁵ The Commission went on to note that this blend of factors has an attendant impact, not only on the numbers of SARs submitted but also on the quality of the intelligence within them.⁶⁶

For example, approximately 15% of the 563 DAML SARs across all sectors analysed by the Commission as part of its review did not meet the Da Silva threshold for suspicion.⁶⁷ In addition, ‘significant numbers’ reflected a misunderstanding of the law.⁶⁸ The Commission therefore recommended that statutory guidance on suspicion be produced in order to promote greater consistency and quality around reporting, supported by a prescribed form of SAR which would give greater direction to reporters.⁶⁹ In contrast, participants in this study did not express a desire for further guidance on suspicion, which accords with the Law Society’s view that such guidance is unnecessary as it would merely codify case law, nor would it minimise low value SARs.⁷⁰

The Law Commission also recommended that a newly created Advisory Board should review whether to raise the reporting thresholds for authorised and required disclosures to ‘reasonable grounds to suspect’ in a bid to drive up the quality and intelligence value of SARs.⁷¹ However, this was not an issue expressly raised by participants in this study. Nor did the consultation response from the Law Society reveal any appetite for raising the threshold for required disclosures, partly on the basis that most legal sector reporters would have reasonable grounds for their suspicion in any event, and partly due to the potential exposure to civil claims from clients challenging the objective reasonableness of any suspicion.⁷² Neither, for that matter, would a raised threshold impact upon the ‘technical’ SARs which are a feature of the sector.⁷³ Support was forthcoming from the Society, however, for a new exemption from the substantive offences for those in the regulated sector where there are no reasonable grounds to suspect property is criminal in nature.⁷⁴

Given the perspectives above and the debates in this area, participants’ views were canvassed as to their interpretation of the word ‘suspicion’ in practice, a word which, according to Stokes and Arora, ‘nimbly defies precise identification in practical terms’.⁷⁵ A number of participants automatically referred to the Da Silva guidance as their working definition, such as the compliance participant who commented, ‘it means what it says on the page for me.’⁷⁶ It is noteworthy, however, that all but one of these participants were compliance participants, some of whom had an active role in training their firm’s fee earners. It may be the case, therefore, that such participants encounter the Da Silva guidance on a regular basis as part of their day-to-day practice. As one participant recounted, ‘I’m so used to parroting out in training … that suspicion is a “possibility that is more than fanciful that the relevant facts exist”.’ ⁷⁷

6.2.3 The crucial role of the MLRO

Following the formation of a suspicion in the minds of participants, it became evident from the interview data that MLROs assumed a crucial role within the SARs regime, and it is this feature of the regime that will now be explored.

6.2.4 Defensive reporting within the SARs regime

Defensive reporting, where SARs are submitted to avoid criminal liability or regulatory criticism, was not a prominent theme in the interview data. This contrasts with the sustained focus it has received for many years from multiple stakeholders both within and outside of academia. The problem defensive reporting gives rise to is that it ‘creates a larger volume of poor quality reports’.¹¹³ As far back as 2006, an overarching review of the SARs regime by Lander identified defensive reporting as a specific weakness of the regime.¹¹⁴ A ‘significant level’ of defensive reporting was identified as an issue from the responses to the Government’s 2015 Call for Information on the SARs Regime, and highlighted once more as a ‘pressing’ problem in the Law Commission SARs Report in 2019.¹¹⁵ The issue has also attracted the attention of a series of academics including, inter alia, Arora, Stokes, Ryder and Yeoh.¹¹⁶ The Law Society too acknowledges that in many cases SARs are made ‘to ensure protection against the severe consequences set out in POCA.’¹¹⁷

Defensive reporting was raised specifically as an issue with regard to the ‘technical’ SARs discussed in Chapter 4. However, only a small number of participants went on to refer to it in the more general context of the regime as a whole, such as the MLRO who observed that ‘there may be a certain amount now of sort of protectionism.’¹¹⁸ Even fewer participants referred to defensive reporting within their own law firms, one notable exception being the MLRO who acknowledged that, ‘we are over scrupulous … maybe that means we lob in too many [SARs].’¹¹⁹

One MLRO was of the view that the maturity of the UK AML regime has resulted in a reduction in defensive reporting by the sector, stating:

In the early reporting days, there were probably tens if not hundreds more reports being made because everybody was covering backsides and we’ve got to report this, and we’ve got to report that, and I think now it’s really settled.¹²⁰

This reduction in defensive reporting attributable to the maturity of the regime is also alighted upon in the SRA AML thematic review of the legal profession in 2016, and may also comprise one of the factors driving the decline in number of legal sector SARs.¹²¹ FATF also made the more generalised observation in its mutual evaluation of the UK that ‘it appears that the amount of defensive filing has declined.’¹²²

This reduction will only constitute a positive development within the regime, however, if the decline is in respect of SARs which are not, in fact, reportable. The maturity of the UK AML regime is also a theme that many participants raised in a number of contexts during the course of the interviews, and will be explored further in Chapter 7. Looking forward, the Law Commission has recommended a prescribed form of SAR on the basis that this may discourage defensive reporting given that ‘closed and clear’ questions would clarify the level of detail required from reporters.¹²³

6.2.5 The lack of intelligence value of SARs

One of the interconnected potential consequences of a suspicion-based reporting regime combined with an ‘all crimes’ approach to AML backed by personal criminal sanctions relates to the intelligence value of the SARs submitted. For example, with regard to the suspicion threshold Stokes and Arora noted, ‘there must be doubts as to the actual quality of such disclosures for intelligence purposes where the threshold is placed so low.’¹²⁴ On the ‘all crimes’ approach, the Government’s Call for Information on the SARs Regime in 2015 noted that ‘the use of an all crimes approach, with no de minimus [sic], obliges reporters to raise SARs that are of little value.’¹²⁵

The questionable intelligence value of SARs was raised specifically in relation to the ‘technical’ SARs discussed in Chapter 4. A small number of participants revisited this theme in a more general context, with one such participant concluding that ‘most of the SARs we submit are of absolutely no intelligence value.’¹²⁶ The same participant, however, also acknowledged what Stokes and Arora have referred to as the ‘leave no stone unturned’ approach to AML that the UK has adopted under the aegis of POCA 2002, noting that:

I think the whole idea was better report everything and the intelligence agencies can decide what’s of use, and what’s not of use.¹²⁷

The ‘all crimes’ approach has been discussed in detail in Chapter 4 and looks set to be retained in the UK, albeit with the potential for de-scoping following further consultation still extant.¹²⁸ Any measures that would seek to raise the suspicion reporting threshold in an attempt to improve the intelligence value of SARs submitted requires careful consideration. From a policy perspective, whilst there is a considerable appetite to improve the quality of SARs and overall efficiency of the SARs regime, there is no appetite whatsoever to lose any potentially useful intelligence streams – hence the Law Commission’s recommendation that a newly created Advisory Board be tasked with considering raising reporting thresholds in more detail.¹²⁹

In the meantime, should the status quo be retained, then the interwoven issues of defensive reporting and the questionable intelligence value of SARs will abide. Here, too, on a more mechanical level, the Law Commission is of the view that a prescribed form of SAR may still assist in improving the quality of intelligence by encouraging consistency of reporting and prompting the furnishing of more targeted information.¹³⁰

6.2.6 Legal professional privilege and privileged circumstances

One effect of the SARs regime is that it overrides the duty of confidentiality that exists between a client and their professional advisors across a number of sectors.¹³¹ The duty of confidentiality may be preserved however in relation to the legal sector where common law legal professional privilege (LPP) applies so as to block disclosure.¹³² In addition, bespoke provisions within the failure to disclose offences under ss 330/1 POCA 2002 expressly carve out the requirement to disclose information received by legal professionals under ‘privileged circumstances’ unless such information is supplied intending to further criminality.¹³³ As with defensive reporting, however, privilege was not a notable theme within the data. A number of participants simply noted that privilege was a factor to be considered when determining whether or not to make a SAR, but no further issues with privilege were evident from the interview data. As one participant noted:

you have to absolutely have focus on privilege, as to when you have lost privilege, because up until that point … your duty entirely is to your client.¹³⁴

6.2.7 Lack of feedback and analysis of SARs / information sharing

One of the issues that participants raised with regard to the SARs regime was the lack of sufficiently relevant, detailed, or indeed any feedback on the SARs submitted to the NCA, both at an individual level and across the sector as a whole.¹³⁵ This lack of, and desire for, feedback on SARs was also reflected by FATF in its mutual evaluation of the UK.¹³⁶

A paucity of feedback results in an unfortunate position where, according to one participant, ‘there is no direct line between law enforcement and a report of suspicion.’¹³⁷ The need for improved feedback, together with a desire for ‘clear operational outcomes, such as arrests and asset recovery’, were highlighted as key themes in the Government’s Call for Information on the SARs Regime in 2015.¹³⁸ As Goldby notes, ‘Meaningful feedback is crucial to the implementation of a risk-based approach to anti-money laundering.’¹³⁹

The role of the UKFIU within the NCA needs to be considered here.¹⁴⁰ A ‘distributed’ model with regard to SARs dissemination means that law enforcement authorities have direct access to the SARs database and conduct their own analysis of SARs (although tactical analysis means that new SARs are screened and may be fast-tracked to law enforcement should they meet specific criteria).¹⁴¹ This is in contrast to other FIUs, which are tasked with both analysing and disseminating SARs. As a matter of UK policy, therefore, the NCA has a limited role in operational and strategic analysis, a position which for FATF ‘calls into question whether SAR data is being fully exploited in a systematic and holistic way’.¹⁴² It is for this reason that review of the UKFIU’s role was designated a Priority Action by FATF for the UK.¹⁴³ FATF also notes that the lack of feedback may be partly attributable to limited NCA resources.¹⁴⁴

This is not to say that the NCA does not conduct analysis at all.¹⁴⁵ Previously, the SARs Data Exploitation Team (SDET) analysed SARs data and reviewed reporting from particular sectors, feeding back to relevant regulators with a view to improve reporting, with the legal sector being reviewed in the 2013–14 period.¹⁴⁶ SDET was subsequently incorporated into the DAML Team and an Analysis and Communications Team created in January 2017 to intensify strategic analysis.¹⁴⁷ Nevertheless, FATF has called for better statistics to be produced on the NCA’s analysis and disseminations.¹⁴⁸

Whilst some analysis of SARs is provided by the NCA in its annual report on the regime, which includes a selection of case studies, this is largely quantitative, tends to be cast in general terms, and provides little by way of detailed analysis of the SARs submitted by each sector.¹⁴⁹ This position prompted Owen to comment that the NCA annual SARs report simply made ‘for an excellent quarry of anecdotal success stories’.¹⁵⁰ This generalised and limited feedback by the NCA limits the utility of such reports to the legal profession, a position which was pinpointed by the MLRO who commented in relation to his practice, ‘it’s not relevant, hardly any of the examples I’ve seen were relevant to an international commercial practice.’¹⁵¹ In this context, it is worth noting that it is not only relevant case studies which are required here – Wood and others note the need for more information on ‘how the innocent are duped’ rather than highlighting cases of complicit or complacent legal professionals.¹⁵² The NCA reporter booklets, which comprise a ‘sanitised summary of feedback’ on the use of SARs by end users with direct access to the SARs database are similarly cast in general terms, necessarily so given their sensitivity, as are the case studies appearing in the NCA’s ‘SARs In Action’ publication launched in March 2019.¹⁵³

This issue was expanded on by the compliance officer who articulated his frustration with the lack of analysis and feedback as follows:

There is a dearth of analysis in relation to what is actually being provided by law enforcement, and [it] shouldn’t take a lot to help that, all it needs is ‘here are the number of SARs from City law firms that either helped or supported existing cases’ and the key element there being where the case was not already known to law enforcement, and that’s weak, there’s no analysis on that, which should be an easy win.¹⁵⁴

This desire for meaningful and relevant feedback on legal sector SARs from or via the NCA was echoed by the deputy MLRO who reflected:

I mean it would be fascinating to know what … actually happens with all of this data that’s flowing in because … the less that actually gets to law enforcement that they do anything about, the more the regime is fundamentally devalued. ¹⁵⁵

Joint respondents to the Law Commission consultation on SARs Reform even advocated ‘explaining better the known value of SARs’ rather than to ‘cut them off at source’, in order to ‘enhance the legitimacy of the regime among user groups’.¹⁵⁶

A note of caution must be sounded at this juncture. As Goldby observes:

it is not true to say that a SAR can only be deemed useful if it triggers an investigation, followed by a prosecution and conviction.¹⁵⁷

Goldby draws upon research by Fleming, who observes that SARs may have multiple uses in practice.¹⁵⁸ Some SARs may indeed be ‘noise’ in that they are submitted defensively or report unfounded suspicions.¹⁵⁹ Nevertheless, as outlined by Fleming, SARs may also assist in building a cumulative intelligence picture, develop that intelligence picture, trigger or assist investigations, or provide sufficient intelligence in isolation.¹⁶⁰ Given this nuanced contribution that SARs make to the intelligence landscape, it may not be possible in all cases to draw direct links between SARs submitted and specific actions taken. From Fleming’s perspective then, the position is more complex than ‘simply “running the numbers.”’¹⁶¹ Rather, a ‘holistic, networked view of SARs data’ is required.¹⁶² What this indicates, is that it may not be possible to provide the direct connections between SARs and actions that some participants desired. Nor do end users of SARs ‘collect specific comprehensive statistics on the results obtained using this intelligence’.¹⁶³

Despite this caveat, an increase in the analysis of SARs and feedback by the NCA would do much to address the concerns raised by participants. Better analysis of SARs has been listed within various iterations of the UKFIU’s strategic plans and was one of the proposals put forward in the Action Plan 2016.¹⁶⁴

There are likely to be improvements in this area. More ‘in-depth’ feedback on SARs, with an emphasis on smaller reporting entities and sectors such as the legal sector which are not major reporters, was one of the actions recommended by FATF in its review of the UK’s financial intelligence provisions, as was improving statistics on the UKFIU’s analysis and dissemination of SARs.¹⁶⁵ Furthermore, ‘improved SARs analysis’ and a ‘comprehensive regime-wide approach to feedback’ is envisaged via the SARs Reform/Transformation Programme (a public-private partnership between the Home Office, NCA, and stakeholders such as UK Finance and the Law Society). This will incorporate a portal allowing direct communication between reporters and the NCA, enabling the NCA to share feedback and information on trends and typologies.¹⁶⁶ The intelligence picture will also be augmented by developments at a national level such as the creation of the National Economic Crime Centre (NECC), harnessing intelligence and capabilities from across the public and private sectors to tackle economic crime.¹⁶⁷

It is appropriate at this juncture to consider information sharing in a much wider context given recent developments in this area. The need for improvements in information sharing is addressed in the Action Plan 2016, which stated, ‘we need radically more information to be shared between law enforcement agencies, supervisors, and the private sector.’¹⁶⁸ The Action Plan 2016, in setting out its AML priority areas, also emphasised a ‘stronger partnership with the private sector’ via ‘new means of information sharing’ to enhance the UK’s risk-based approach to AML. ¹⁶⁹

There have been a number of developments since then under the Criminal Finances Act 2017 in terms of greater information sharing in a broader sense. New provisions have been inserted into POCA 2002 which, when fully implemented, will permit voluntary information sharing between members of the regulated sector and the NCA, and joint disclosures (super-SARs) to the NCA with regard to money laundering concerns.¹⁷⁰ The information flow to the NCA will also be enhanced by way of ‘further information orders’ provided for under the Act whereby the NCA may seek further information from those reporting to it or businesses in the regulated sector.¹⁷¹

Far more needs to be done, however, to address the lack of information sharing as between the NCA/law enforcement and the legal profession, a point made strenuously by the Law Society in the following terms:

We strongly believe that the principal dialogue should be between law enforcement and the private sector and that information sharing across sectors merely supplements that dialogue.¹⁷²

The operation of the Joint Money Laundering Intelligence Taskforce (JMLIT), an innovative public-private partnership between law enforcement agencies and the banking sector, models how such information sharing can work in practice.¹⁷³ Piloted in February 2015, placed on a permanent footing in May 2016, and subsequently lauded as a ‘best practice’ exemplar by FATF, JMLIT showcases the way in which:

the NCA and other law enforcement officers are working side by side with staff from some of the major UK banks and financial institutions to tackle the highest priority risks.¹⁷⁴

The shared expertise exemplified by JMLIT has resulted in a number of direct interventions (and over 30 JMLIT ‘Alerts’ have been issued as at the time of writing), but also ‘more informed prioritisation’ and ‘an improved collective understanding’ with regard to money laundering risks in the sector.¹⁷⁵ Such an approach could, in theory, be rolled out across other sectors, and indeed was considered by the Law Commission in its overarching review of the SARs regime.¹⁷⁶ Faced with mixed responses from consultees, however, and amidst concerns that the efficacy of JMLIT may become diluted, no recommendations were forthcoming to extend JMLIT to other parts of the regulated sector.¹⁷⁷ Wood and others in particular note the inherent difficulties in managing and funding a JMLIT model within non-bank sectors which are dominated by SMEs and small businesses.¹⁷⁸ Further developments may yet be forthcoming, however, as the NCA has reported ongoing work to expand the JMLIT concept, and the potential expansion and enhancement of JMLIT also features within the Economic Crime Plan 2019–22.¹⁷⁹ In any event, the legal sector contributes to various JMLIT expert working groups.

Certainly, at an AML supervisory level there is a focus on co-operation and information sharing between supervisors and authorities within the MLR 2017 which is reinforced by OPBAS.¹⁸⁰ Furthermore, the Economic Crime Plan 2019–22 notes the establishment of JMLIT expert working groups for supervisors within the legal and accountancy sectors in order to promote intelligence sharing.¹⁸¹ A Legal Sector Engagement Group is also in operation, drawing together the NCA and representatives from the legal sector.¹⁸² Some success has been observed in this regard, with FATF noting that the operation of such Engagement Groups has increased the value of SARs.¹⁸³

Another aspect of information sharing which has been considered recently is that of pre-suspicion information sharing. Whilst the Commission consulted on the desirability of this amongst the regulated sector, this option was not raised by participants in this study or embraced by the Law Society, the latter citing confidentiality and data protection constraints.¹⁸⁴

Information could be disseminated to the profession by granting legal sector supervisors direct access to the SARs database. This would then support the obligation in Regulation 47 MLR 2017 requiring supervisory authorities to provide up-to-date information on money laundering risks and typologies relevant to the population they supervise. A note of caution should be sounded with regard to granting direct access, however, which the Lander Review did not recommend as being necessary.¹⁸⁵ Issues abound with regard to confidentiality, data protection, and supervisory resources. Hence the NCA reports that the

majority of regulators indicated that they wanted better information from the SARs regime but did not wish to have direct access.¹⁸⁶

Improved information sharing between the NCA and the legal profession would better support practitioners generally, and MLROs in particular, as it would provide clearer parameters within which to operate. The benefits of such information sharing would also cascade down to the profession more widely as more detailed and relevant typologies affecting the sector could be disseminated across the profession as a whole. Such examples could be interwoven into AML training offered at the firm level, thus improving awareness across the sector. The desire for relevant examples to be used in AML training was an issue that was raised by participants and was explored in Chapter 5.

There are likely to be further developments in this sphere. Certainly, the emphasis on information sharing both within the private sector and between the public and private sector is carried forward under the aegis of the Economic Crime Plan 2019–22, where it is set out as a Strategic Priority.¹⁸⁷

6.2.8 A bespoke SARs form for the legal profession

As outlined earlier in this chapter, the NCA has voiced concerns over the poor quality of the SARs submitted to it. Many participants, however, reported numerous difficulties when using the generic online SARs form itself, an issue that could be addressed by the creation of a bespoke SARs form for the legal profession.

The banking sector constitutes the largest reporting sector in the UK, submitting 80.08% of all SARs in the period 2017/8.¹⁸⁸ Historically, the sector was also the initial focus of UK legislation when EU AML measures were transposed into UK law.¹⁸⁹ This historical and current dominance of the banks within the AML regime in general, and the SARs regime in particular, is clearly evident when filing a SAR. The form itself focuses on transactional terms tailored to financial institutions in that it requests, inter alia, details of the currency, bank account, debit or credit in respect of which the report is being made.

Given the ‘all crimes’ approach of POCA 2002, the transactional details requested by the NCA are not relevant to a legal professional when reporting a saving or benefit identified in respect of the breach of an environmental licence, for example. Legal professionals must navigate through the form to a free text section in order to make a disclosure.

Many compliance participants raised difficulties surrounding the submission of the SARs form itself as an issue with the reporting regime. Over 99% of all SARs are now submitted electronically, with the SARs Online portal constituting the NCA’s stated preferred method of submission.¹⁹⁰ However, participants reported encountering practical difficulties using the SARs Online system, with one commenting that, ‘the technology needs to improve, it needs to be easier to add information.’¹⁹¹ This need for an upgraded IT system for SARs was recognised and designated as one of the issues listed for action in the Action Plan 2016.¹⁹² In their responses to the Call for Information on the SARs Regime, all sectors ‘viewed the technical infrastructure … as inadequate.’¹⁹³

Some participants found that ‘the online portal’s a bit clunky’ and ‘immensely difficult to navigate’.¹⁹⁴ Still other MLROs were far more critical of the difficulties encountered when using the online filing system, stating that the NCA website was, quite simply, ‘appalling’.¹⁹⁵ Whilst the NCA acknowledges the challenges users face when using SARs Online, ongoing improvements to the IT system were initially ‘focussed on addressing back end resilience issues rather than user interface design changes.’¹⁹⁶

The main difficulty participants experienced when using SARs Online stemmed from the fact that the forms themselves are ‘very much tailored to financial institutions’ and therefore ‘don’t really lend themselves to law firms’.¹⁹⁷ Hence MLROs filing reports online must navigate their way through a series of questions relating to transactions of the type effected via the banking sector before being able to enter narrative comments with regard to the notional savings and benefits likely to be encountered by legal sector reporters. As one MLRO said of the online questions pertaining to the transfer of funds via a bank account prior to adding their narrative disclosure, ‘I just ignore those which I think are completely irrelevant to, you know, to our sector.’¹⁹⁸ This challenge is pinpointed by the participant who stated:

the problem with the online form is the terminology that they use. They talk about suspect and then money transaction and sometimes none of these things apply at all.¹⁹⁹

The frustration engendered by this lack of tailoring with respect to the SARs Online form was vocalised by the MLRO who commented:

The difficulty with the forms is I think they’re geared up to financial institutions such as banks and things and about 80 or 90% of the questions just don’t relate to what we’re doing.²⁰⁰

A number of participants felt that the SARs form was drafted purely with the financial sector in mind and that the legal sector had been clumsily bolted on to the same reporting system. This view is typified by the participant who concluded:

the form’s never been fit for purpose, certainly not fit for lawyers, it’s designed for banks.²⁰¹

This feature of the regime can be easily addressed by the provision of a bespoke or appropriately tailored legal sector reporting form, which dovetails with the needs of the profession. This solution was suggested by a number of participants, including the MLRO who proffered the view that, ‘I think there could be a different set of templates for lawyers’.²⁰² The Law Society has also pressed this issue, arguing for the form to be ‘redesigned’ in a manner which is ‘fit for purpose for all types of reporters.’²⁰³ This issue is also reflected in the responses to the Government’s Call for Information on the SARs Regime in 2015, which noted that ‘non-bank respondents felt that any new technical solution needs industry-specific templates.’²⁰⁴ Updating reporting mechanisms across all sectors was listed as a Priority Action by FATF in its mutual evaluation of the UK, including by making SAR Online more ‘user-friendly.’²⁰⁵ FATF reported ‘serious concerns’ around an untailored online system which inhibited input ‘in a useful format’ and recommended customisation of the form to make it fit for purpose across all reporting sectors.²⁰⁶

A bespoke legal sector SAR would focus on those aspects of a transaction most likely to give rise to a report from a legal professional in practice: namely the nature of any underlying offences where known, and any notional savings and benefits potentially constituting criminal property. It is these features which are far more likely to form the basis of any report under POCA 2002 from the legal sector, as opposed to filing a SAR in relation to simply debits and credits flowing through a bank account. A bespoke form would therefore address some of the difficulties encountered by the profession when submitting SARs, without impacting upon the data harvested from SARs across all sectors.²⁰⁷

Many advances are underway at the time of writing as part of the SARs Reform/Transformation Programme. One aspect of the Programme is the replacement of the NCA IT system to deliver improvements to reporting, and as part of this sector-specific SARs are under consideration.²⁰⁸ The Law Society notes that the current form could be enhanced by the addition of drop down menus and required fields to better guide reporters, and whilst the creation of multiple sector-specific forms is not endorsed, the Society has suggested an interactive form.²⁰⁹ The Law Commission has also recommended that a prescribed form of SAR be produced in principle, which can be tailored to specific sectors and circumstances by way of an interactive online form.²¹⁰ It is hoped that appropriate tailoring could then deal with the challenges faced by participants outlined above.

Having outlined the issues that participants raised with regard to the SARs regime overall, consideration must now be given to the operation of the consent regime in particular.

6.3.1 Dealings with the NCA DAML/consent team

Participants were fairly evenly split between those who had a positive or negative experience with the NCA consent team. With regard to those participants reporting negative experiences, a small number of participants pinpointed very specific issues they had encountered: they were of the view that the NCA were under-resourced (or ‘beleaguered’ as Keatinge and others would later put it), took a box-ticking approach, that it was difficult to expedite consent, and that there was no single point of contact at the NCA consent desk.²²¹ A number of participants raised two, more general, negative issues: namely that, (i) consent took too long to obtain and/or that the response time was getting longer, and (ii) the NCA misunderstood the transactions participants were effecting.

The first of these general issues, that NCA consent ‘takes too long’ and that the NCA are ‘getting slower and slower to come back’ to reporters is self-explanatory, and the effect of the transactional hiatus whilst consent is sought will be explored subsequently in this chapter.²²² At the time the interviews took place (between November 2015 and June 2016) the average turnaround time for consent requests between October 2015 and September 2016 was 6.2 days, an increase from 4.7 days for the corresponding 2014–15 period.²²³ New procedures were implemented by the NCA in July 2016 leading subsequently to a reduction in average turnaround time to 4.32 days between April 2017 and March 2018.²²⁴ The NCA attributes these turnaround timeframes to the high volumes of SARs received, their complexity, and the non-inclusion of information by reporters.²²⁵

In response to the ever increasing numbers of SARs, the NCA was restructured in 2016 (going ‘live’ in January 2017) in order to place more resources in critical areas such as dealing with consent requests.²²⁶ Nevertheless, the FATF mutual evaluation in 2018 also still highlighted the NCA’s ‘lack of available resources (human and IT)’, and designated substantial increases in both as Priority Actions for the UK.²²⁷

The NCA’s perceived lack of understanding of the transactions effected by participants was attributed by a number of such participants to the fact that the NCA was more accustomed to dealing with banking sector SARs.²²⁸ This was highlighted by the compliance participant who said of the NCA:

because the majority of what they see is about a financial transaction and movement of money by a bank, when it comes to the legal profession they really struggle with ‘well how does a transaction work?’ ²²⁹

In the period prior to the interviews (2013–14) the NCA also reported shifts in staffing which resulted in a ‘gap in experience which will take some time to replace’.²³⁰ However, subsequent feedback from the private sector to FATF as part of the UK mutual evaluation process in 2018 also reported a ‘lack of understanding of the business of the non-bank regulated sectors.’²³¹

In addition to this lack of understanding of transactions effected by the legal sector in a general sense, a number of participants reported that the ‘technical’ SARs discussed in Chapter 4 were poorly understood on the part of the NCA. This is best illustrated by the MLRO who explained:

If you’ve got a regulatory offence you can be on the phone to the consent desk trying to explain to them why it is actually reportable – they’re like ‘well I don’t understand what the problem is here’.²³²

This lack of understanding of the transactions effected by the legal sector was put forward as an explanation for the poor quality legal sector SARs complained of by the NCA. As one compliance participant said of the NCA:

their statistics on ‘well we have to keep calling lawyers in relation to consents’ is not because the consent is filled out poorly, it’s because they don’t understand the transaction, or don’t understand how transactions work.²³³

Improvements in this area may well be forthcoming on the basis that the Law Society is working closely with the NCA with regard to consent requests from the sector. A sector-specific SAR form would also assist in ameliorating this position as it would be tailored to deal with notional savings and benefits as opposed to credits and debits through an account. A Legal Sector Engagement Group was set up in 2016 whereby representatives from the sector and the NCA meet ‘to build better working relationships between SARs regime stakeholders and to improve SAR submissions.’²³⁴

A fairly equal number of participants recounted positive experiences when obtaining consent from the NCA. Some participants reported establishing a good rapport with the NCA, as demonstrated by the MLRO who stated:

I do quite like the fact there are people on the end of the phone who are now entering into a dialogue.²³⁵

Furthermore, in contrast to those participants who raised concerns over the response time from the NCA, a number of participants were of the view that obtaining consent was either quick and/or getting quicker. This view is typified by the participant who stated in relation to consent requests, ‘they’re turned round very fast’.²³⁶ A small number of participants observed a recent development on the part of the NCA whereby the NCA exercised its discretion not to make any decision on a SAR, a development deemed ‘seriously unhelpful’.²³⁷

Inevitably, the response time and interaction between the NCA and those reporting to it have an impact on dealings between legal professionals and their clients, and it is this aspect of the consent regime that forms the focus of the following paragraphs.

6.3.2 Deal pressure and the consent regime

A number of participants highlighted the ‘challenge’ that arises where consent has been sought from the NCA and a transaction cannot be completed prior to receipt of the relevant consent.²³⁸ As one participant reflected, ‘it can be stressful … when you’ve got a looming completion date, trying to get that [consent] back.’²³⁹ The issue is remarkably stark in that any failure to obtain consent ‘can hold up transactions.’²⁴⁰

This tension that exists for lawyers waiting for NCA consent in order to be able to complete a transaction is best articulated by the transactional partner who said:

there is a bit of a collision between quite fast moving transactional environments and what is effectively a public body that moves at its own pace, that always feels quite stressful as an engagement point … it is somewhat unrealistic in a way for us to down tools whilst we wait for them to respond in an environment where we are moving fast through a process.²⁴¹

Set in this context then, even receiving consent within 48 to 72 hours was deemed to be ‘a massive amount of time … that can delay a closing’ according to one deputy MLRO.²⁴² In what are likely to be very rare instances for the legal sector, the moratorium period may now be extended by court order by up to a further 186 days, following the enactment of the Criminal Finances Act 2017.²⁴³ Although early indications suggest that the number of extensions is likely to be extremely small (between 31 October 2017 and 31 March 2018 there were six successful applications), such extensions may also increase as investigations with an overseas element increase, where longer timescales are required in order to gather evidence.²⁴⁴

The NCA has also reported an ‘unsustainable’ 100% increase in DAML SARs (from 2,000 to 4,000) in February 2019 compared with February 2018.²⁴⁵ It is to be hoped that such pressure on the consent regime may be offset to a certain extent given that the NCA, in acknowledgement of the fact that ‘the volume and complexity of SARs will continue to rise’, confirmed staffing increases as part of its 2018–9 Plan.²⁴⁶

6.3.3 The client relationship and tipping off

The transactional hiatus where ‘you have to prevaricate with your client’ whilst waiting for consent from the NCA may have the effect of damaging that client relationship.²⁴⁷ This concern was noted by FATF in its mutual evaluation of the UK, and was raised by a number of participants, including the transactional partner who commented on the consent regime as follows:

if it means you have to back off a transaction for seven days and it turns out there’s absolutely nothing wrong, you could have ended up seriously damaging the transaction, seriously damaging your relationship with the client.²⁴⁸

Seriously damaging a client relationship is one potential consequence of the operation of the consent regime, although, it has to be acknowledged, not as serious as illicit funds moving through the legitimate economy. In addition, a number of participants were acutely mindful of their potential criminal liability for ‘tipping off’ should they disclose the fact that a SAR has been made to their clients.²⁴⁹ This prompted one transactional partner to comment that, ‘the thing we struggle with is not being able to tell the client.’²⁵⁰

Some participants spoke of effectively ‘going under the radar’ once a SAR has been made to avoid any potential tipping off.²⁵¹ This places the lawyer in an invidious position with their clients, particularly where, as one participant recounted, ‘the client’s screaming and tearing their hair out because they don’t know what you’re doing.’²⁵² The SRA thematic review of AML in 2018 noted that 88% of firms it visited had addressed the tipping off challenge either by training or by providing processes designed to assist staff.²⁵³ There is also a limited exemption from the tipping off provisions in respect of applications made to extend the moratorium period under s 336A POCA 2002, such that a lawyer can only tell their client such information as is necessary to notify the client such an application has been made.²⁵⁴

Sophisticated clients may also challenge their legal advisors, as highlighted by the participant who noted:

You have this ludicrous situation where often the client will say ‘well you’ve done this, I suspect you’ve done a SAR’ and you can’t say you have or you haven’t you know, the client’s not stupid.²⁵⁵

This interplay between deal pressure, the client relationship and tipping off are crystallised effectively in the comments made by the transactional partner who summarised:

if you’re actually working to … a serious commercial deadline and the law firm has to stop acting … obviously it causes severe issues, not least with your client who wonders why you’ve done that, because you can’t tell them because of tipping off.²⁵⁶

It is this dynamic that was also reflected in responses to the Government’s Call for Information on the SARs Regime, prompting respondents to request ‘a form of words, agreed with the NCA, to use with customers who question the delay of their transactions.’²⁵⁷ The issue with any set form of wording of course is that it soon becomes a recognised euphemism for AML procedures. The Law Society have also called for a review of the tipping off provisions, on the basis that the regime:

rarely hides what is going on from astute criminals, and yet it places professionals at risk of civil litigation and criminal penalties.²⁵⁸