SARS extended moratorium period used sparingly, reveals NCA report

The NCA Suspicious Activity Reports Annual Report 2019 reports that the NCA received a record number of SARs, including over 50% more requests for a Defence Against Money Laundering (DAML). While the number of DAML SARs that are granted remains high, the use of a new power to extend the moratorium period to up to six months, introduced in 2017, has not been used often. We take a look at this and some other key points from the report.

Most DAML SARs are granted in about 5 days

A DAML SAR allows entities or individuals to seek, from the NCA, a defence against prosecution for a money laundering offence, so that they can process funds that they know or suspect could be the proceeds of crime. A considerable proportion of DAML SARs were granted in the last reporting year. Of the 34543 DAML SARs filed (52.72% more than the previous year), 1,332 were initially refused, and of those, 17 were subsequently granted following further review during the moratorium period. This is a refusal rate of approximately 4%. If a DAML SAR is initially refused, it is very unlikely, based on these figures, that it will be subsequently granted (0.01% chance).

The turnaround time to process DAML SARs has increased due to the increased volume of reports. Reporters can now expect to wait an average of 5.12 days for a response.

The numbers of Defence Against Terrorism Financing (DATF) SARs also remained low: there were 392 submitted over the reporting year. However, a greater percentage (around 10% of the total) of DATFs SARs were refused, a higher refusal rate than for DAML SARs.

Moratorium period extended in tiny percentage of cases

Following receipt of a DAML SAR, the NCA has seven working days during which to grant or refuse the request.  If it refuses the request, this period is extended by a further 31 calendar days (the moratorium period). A change made by the Criminal Finances Act 2017 means that, upon a court application, the moratorium period can now be further extended for a successive series of 31 days, for up to six months in total.  This gives authorities a considerable amount of additional time to investigate and take action against possible instances of money laundering.  Crucially, as with the initial seven working day period, during the moratorium period, reporters should ensure they continue to take no action pending further confirmation from the NCA on how to proceed.  This presents even greater practical challenges for reporters already in a difficult position due to confidentiality restrictions when it comes to SARs.

The Annual Report reveals that the moratorium periods in 70 cases were extended, a tiny 0.02% of the total number of DAML SARS, although 5% of the number initially refused.  This means that if a DAML SAR is initially refused (4% chance) there is an approximately 1 in 20 chance of the initial moratorium period being extended.  Although used rarely, moratorium extensions appear to have been effective – leading to around GBP35m being restrained, and 12 new investigations.

The Annual Report does not reveal how long the extended moratorium periods lasted in these 70 cases.

Confidentiality

The fact that a SAR has been filed about a customer or in relation to a particular transaction must not be disclosed to the relevant customer; doing so risks committing the “tipping off” offence.  This can cause tricky issues for a reporter, for example what to say to a customer who is enquiring about the status of certain funds.  While this may be relatively manageable during the initial seven day window, it can get increasingly complicated if the NCA or an investigating agency seeks an initial (or even extended) moratorium period.

The NCA makes it clear in its report that its expectations are no different even where a reporter faces a civil claim from a customer.  It may or may not have had in mind the  Lonsdale case earlier this year in which a barrister sought access to SARS submitted by his bank after discovering that his bank account had been frozen. The NCA expects reporters to be able to rely on their underlying documentation to evidence suspicion rather than relying on a SAR to defend a claim against them, and use a SAR as evidence only “as a last resort”. There is no example given on the meaning of ‘last resort’.  Reporters will not want to risk committing a tipping-off offence, and would likely only ‘resort’ to disclosure if legally compelled to do so. Even when the bank in the Lonsdale case was ordered to disclose the SAR to its customer, there was a 14 day court ordered delay in order for the NCA to consider its position.  The case ultimately settled so we don’t know whether the SAR was disclosed, or what the NCA’s position might have been.

Retaining a clear evidential trail on ‘suspicion’ is advisable in any case should a bank decide to exit a customer relationship because of financial crime concerns.  This was seen this year in N v RBS, where a bank needed to show evidence of “exceptional circumstances” which would entitle it to terminate under the terms of its customer agreement.

Which sectors are most affected by the need to file SARs?

It is hardly surprising that the report confirms that most SARs continue to originate from the financial sector.  Just over 80% of all SARs were submitted by banks, with building societies, money service businesses and other financial institutions accounting for a further 15%.  There was an increase in the number of reports from Fintech companies and challenger banks.

However the volume of DAML SARS from accountants (1.06%), lawyers (0.58%) and entities not covered by the Money Laundering Regulations 2017 (1.21%) remains low.  For the latter, this may be due in part to a lack of awareness in certain non-financial services/professional services sectors as to when it is advisable to make a suspicious activity report. For further information on when and how anti-money laundering and counter-terrorism financing laws apply to the unregulated sector, plus practical guidance, see our guidance here.

Looking ahead

The pressure is on the UK to increase the level of enforcement activity from the current SARs regime in light of public criticism from the OECD and others.  We know that the NCA struggles to make the most of the intelligence contained in SARs due, in part, to the large volume it receives daily.  Some blame the large volumes on the low level and unclear test for suspicion for substantive money laundering offences in the UK: “A majority of stakeholders expressed the view that suspicion remains ill-defined, unclear and inconsistently applied by banks and businesses. This leads to defensive reporting where reports are made more because of concerns regarding a failure to comply with POCA than because of genuine suspicion.” (UK Law Commission)

The Law Commission’s recommendations, published in June this year, recommended retaining the core of the SARs regime but introducing statutory guidance on key concepts – including on the threshold for suspicion and the meaning of “appropriate consent”.  Many will look forward to this clarification.

This article appeared on the Allen & Overy Investigations Insight Blog - sign up to the blog to receive updates on important developments in business crime and financial services investigations  - email Investigations.insight@allenovery.com.