There can be little doubt that the submission of suspicious activity reports or SARs to the UK's Financial Intelligence Unit (the UK FIU) contributes to the fight against financial crime, but are we making the best use of such precious intelligence?

The National Crime Agency UK FIU 2020 annual report concludes that “money laundering underpins and enables most forms of organised crime, allowing criminal groups to further their operations and conceal their assets. Although there are no exact figures there is a realistic possibility that the scale of money laundering impacting the UK annually is in the hundreds of billions of pounds”. A sobering thought indeed.

Bad SARs and defensive reporting

The annual report goes even further and recognises that money laundering can threaten the UK’s national security and prosperity and undermine the integrity of the UK's financial system and international reputation. With hefty fines being imposed on financial businesses that fail to meet the UK’s exacting anti-money-laundering standards, and on their employees as well, it is perhaps not surprising that the UK FIU reports yet another surge in "defensive reporting" among money-laundering reporting officers or MLROs. In 2019/2020, the UK FIU received a record number of SARs, processing 573,085 (a 20% increase on the previous period of 478,437), with an 81% increase in requests for a defence against money laundering or terrorist finance (62,408).

In the last year the UK FIU has been fast-tracking SARs to law-enforcement agencies (LEAs) and has disseminated 11,406 "vulnerable person" SARs - up 205% on the previous year. Such cases often require the prompt intervention of said LEAs to protect the vulnerable person from falling prey to the unscrupulous fraudster.

In a report published in 2019, the Law Commission for England and Wales found that a significant number of defensive SARs are of low quality and can contain limited, or even no, useful intelligence. Employees at a financial institution are often driven to submit a SAR simply to secure the Government's comforting consent to their firm's intended strategy in respect of a certain client and a defence to the charge of money laundering if the client in question turns out to be bad. In short, the volume of SARs is so high that it might overwhelm the UK FIU and stifle its efforts to concentrate on intelligence that is likely to yield results.
 
The problem does not, however, simply rest within the UK FIU. The resources available to investigate such intelligence and take the profit out of money laundering are in short supply.
 
Looking at the UK FIU 2020 report with a critical eye, the volume of dirty money denied to British criminals is relatively modest (£172,000,000) and, although we have statistics for the volume of SARs passed to law enforcement agencies, we cannot gauge with any degree of clarity how this-or-that police force responded and performed upon receipt of the intelligence. This begs some questions: are LEAs geared up to handle a 20% surge in suspicious activity reports? Are they making the best use of such information?

Death by a thousand cuts

The Police in England and Wales have had to cope with swingeing cuts in funding from the Central Government over the last ten years. Forces are making more use of reserve funding – money set aside for unforeseen spending – and have sold off capital assets, including several hundred police stations, to help meet demand. The most notable sale was that of New Scotland Yard to investors in Abu Dhabi for £370 million in 2014.
 
Cutbacks have led to a reduction in the capacity of police forces in England and Wales to investigate complex, costly and time-consuming financial crime cases because one of their most valuable resources, the detective, can be tied up for months (if not years) on a single investigation. Although there are undoubtedly some pockets of excellence and financial crime units capable of removing assets under the control of organised crime groups, the national picture is concerning. In 2018/19, £13.3 billion was spent on the police in England and Wales (excluding capital spending). This was 16% less in real terms than in 2009/10, despite a modest increase last year. The billions of pounds spent by the private sector to improve systems and controls that detect money laundering and send off SARs is simply not paralelled by the dwindling budget for financial crime investigations.
 
The cost of the current pandemic to the public purse – and its effect on police budgets – simply exacerbates the problem and it is unlikely that adequate funding will be found to stem the decline in investigative capacity. The pre-pandemic announcement of funding to recruit 20,000 extra police officers might not lead to much immediately. Police Services in England and Wales are losing officers at an alarming rate and have to attract thousands of recruits simply to stand still. It takes years to train up financial investigators and make them capable of investigating complex structures spread over several jurisdictions – the loss of such expertise over several years will undoubtedly take time to replace.

Society is paying a heavy price for years of neglect. Financial crime now accounts for the majority of recorded crimes in England and Wales. In 2019 the public was more at risk of falling victim to fraud than to any other type of crime. HM Government’s figures show that reports of frauds increased by 15% on the previous year.

The effect of fraud on society is not yet fully understood and its effect on physical and mental health has not been well researched either. However, some studies indicate that financial crimes can take a devastating physical and/or emotional toll on people, including depression and suicidal ideation (Ganzini, McFarland, and Bloom 1990). Something ought to be done.

Perhaps cash-strapped Chief Constables ought to be allowed to retain all the assets that they have confiscated rather than the meagre percentages permitted them today. Victims of course must always be reimbursed first but if this were to happen, the results might be dramatic. Drug traffickers would be particularly vulnerable to such a change in strategy as the proceeds of their crimes do not need to be shared with victims, making them rather attractive targets.
 
An approach which adopts the Law Commission’s recommendations of improvements to the quality and content of SARs, and which ploughs back the proceeds of crime into investigations, would give the National Crime Agency more of a chance of achieving its declared goal of making the UK a hostile environment for money laundering while showing financiers that the police are finally being allowed to use their 573,085 SARs a year properly.  

* Simon Thomas can be reached on +44 (1534) 766254 or at simonthomas@bakerandpartners.com; Barry Faudemer can be reached on +44 (0) 1534 719222 or at barryfaudemer@bakerregulatory.com