Reach for the SARS? Latest figures reveal NCA nearing receipt of 1m SARs a year

• United Kingdom

• Financial services disputes and investigations
• Fraud and financial crime

02-02-2023

The latest Annual Report of the NCA’s UK Financial Intelligence Unit (UKFIU) shows that total numbers of SARs have nearly doubled in the last four years, and DAMLs are also up a startling 143% on from 34,151 to 83,300 in the same period. In this article, Ruth Paley, Zia Ullah and Dominic Simon take a look at the figures and comment on the key statistics.

SARs – the basics

The Proceeds of Crime Act 2002 (POCA) requires employees in the regulated sector to make an internal Suspicious Activity Report (SAR) to the Firm’s Money Laundering Reporting Officer (MLRO) where – in the course of that regulated business – the employee comes to:

• know or suspect that a person is engaged in money laundering or terrorist financing; or
• have reasonable grounds for knowing or suspecting that a person is engaged in money laundering or terrorist financing

The Firm’s MLRO is similarly required to scrutinise any such SARs and report any valid suspicions to the NCA. Failure to report suspicions of money laundering in the regulated sector is a criminal offence punishable by an unlimited fine and/or up to five years’ imprisonment. 

Where a firm needs to possess or otherwise deal with funds which it knows or suspects to represent a benefit from criminal conduct, it may commit a principal money laundering offence if it does not request a Defence Against Money Laundering (DAML) from the NCA. If the NCA grants the DAML, the firm can proceed to deal with, or continue to possess, the funds without committing a money laundering offence.

The NCA has seven working days to make a decision following receipt of a DAML, with the clock starting to tick on the day after receipt. Firms must not deal with the funds in question during this period. Where a DAML request is refused, a Moratorium Period begins, during which law enforcement has 31 days to take action against the relevant criminal property from the date of refusal. In certain circumstances, the Crown Court may grant an extension of the Moratorium Period for up to six months in total.

The United Kingdom Financial Intelligence Unit’s Annual Report (April 2021 – March 2022)

Every year, the NCA’s FIU produces its Annual Report (the Report) looking at the key statistical changes and trends in SARs and DAML requests, providing a fascinating window on the FIU’s management and administration of its workload, the extent to which SARs and DAMLs are providing meaningful and actionable intelligence to law enforcement, and the chances of a DAML being refused.

The Report covers two years’ worth of data for the years 2020/21 and 2021/22, with some helpful visual representations of the key statistics as follows, with the figures from 2018/2019 included for context and comparison. 

Trend	2018/2019	2020/2021	2021/2022	% change 2020/21 to 2021/22
SARs received	478,437	742,317	901,255[1]	+21%
DAML requests	34,151	105,107	83,300	-21%
Funds Denied from DAML requests	£131.7m	£138.6m	£305.7m	+120%
DATF requests	392	425	358	+16%
Vulnerable Person SARs Fast-Tracked	N/A	21,066	16,458	+22%
Confidentiality breaches	3	1	0	-100%

SARs made per sector

The Report also looks at statistical differences in the number of SARs made per sector. The Report breaks the figures down as follows:

Industry	April 2020/ March 2021	% of total	% comparison to 2019/2020	April 2021/March 2022	% of total	% comparison to 2020/ 2021
Credit institution: banks[2]	551,015	74.23%	+27.46%	637,776	70.77%	+15.57%
Credit institution: Building societies	29,838	4.02%	-2.42%	56,931	6.32%	+90.80%
Credit institution: Other	10,236	1.38%	+26.68%	14,113	1.57%	+37.88%
Financial institution: money services business	24,186	3.26%	+36.64%	27,397	3.04%	+13.28%
Financial institution: Other	100,211	13.50%	+70.05%	113,246	12.57%	+13.01%
Accountants and tax advisors	4,673	0.63%	-12.61%	5,863	0.65%	+25.47%
Independent legal professionals	2,215	0.30%	-26.31%	2,859	0.32%	+29.07%
Trust or company service providers	91	0.01%	+193.55%	140	0.02%	+53.85%
Estate agents	680	0.09%	-21.02%	780	0.09%	+14.71%
High value dealers	330	0.04%	-10.81%	304	0.03%	-7.88%
Not under Money Laundering Regulations	12,711	1.71%	+18.64%	35,494	3.94%	+179.24%
Gaming/leisure (including casinos and some not under Money Laundering Regulations)	6,131	0.83%	+19.05%	6,352	0.70%	+3.60%
Total	742,317	100%	+29.53%	901,255	100%	+21.41%

Looking to trends in the data:

• predictably, banks submitted the most SARs in both years, although the percentage of the total reports from banks is on a downward trend from over 80% in 2018/2019: despite a 15.57% increase in the raw number of SARs made by banks in 2021 - 2022, the NCA saw a 3.46% decrease the total net contribution of SARs made by banks

• all industry categories saw an increase in SARs, with the exception of high value dealers, who saw a 7.88% downturn, again as part of a wider downward trend in that sector’s reporting statistics over the last four years

• some industry categories marginally increased their total net contribution to the total number of SARs made, including building societies (+2.3%) , other credit institutions (+0.19%), and Not under Money Laundering Regulations (+2.23%).  It would be helpful to understand more about the profile of those making DAMLs outside the regulated sector, the underlying reasons for seeking a DAML and the proportion of those DAMLs which are refused

• there was almost no movement in SARs from the professional services sector including independent legal professionals, accountants, tax advisors and company service providers between the two years. Many commentators had expected these figures to rise,  given increased scrutiny on these sectors following pre-pandemic Home Office criticisms of ‘professional enablers,’ specifically calling out lawyers and accountants for a lack of activity in terms of SARs reporting. Instead, the proportion of SARs originating with these firms nearly halved as an overall percentage of the total from 1% (accountants and tax advisors) and 0.58% (lawyers) in 2018/19 to 0.65% and 0.32% respectively

• estate agents and High Value Dealers continue to submit very low numbers of SARs in absolute numbers, but the lowest number of SARs of all originate with the Trust and Company Service Provider sector, at only 140 in the latest figures (although up from a striking ‘23’ in 2018/19). Given the jurisdictional risks associated with this work and issues around transparency in the sector as a whole, these low numbers should give cause for reflection as to whether the appropriate level of training is being provided in this sector to enable its employees to understand their obligations

DAML Requests

Notable highlights in relation to DAMLs include the following:

• a decrease in the number of DAML requests between the latest data and the 2020/21 figures which the UKFIU suggests is likely being driven by the number of reporters that now understand they do not need a DAML when returning funds to the victim of a crime following recent clarification of the position in associated NCA guidance. It should be noted, however, that the latest figure of 83,300 is nonetheless a huge increase on the 2018/19 figure of 34,151

• 10,791, or 13% of DAML requests were apparently ‘granted’ in the latest year’s figures, roughly level in percentage terms with the previous year. Similarly, the number of DAML requests being ‘refused’ was also approximately the same over the two year span, with 2,185 being refused in 2021/22

• a question mark remains over the status of the remaining 70,000 or so DAMLs that were apparently neither ‘granted’ nor ‘refused’ in 2021/22, the NCA has confirmed that these were simply not responded to and, on expiry of the seven day period, the party requesting was free to proceed with ‘deemed consent’. It would be helpful to understand what features of a DAML might prompt the NCA positively to 'grant' the DAML as opposed to no response at all

• it may be that some of the ‘granted’ proportion are time-critical requests, whether by virtue of some need to act at pace, or the involvement of some vulnerable party, but absent any explanation, it is difficult to divine what might result in a ‘granted’ DAML versus radio silence from the FIU. The lack of guidance around vexed questions such as medicinal cannabis investment, for example, continues to create uncertainty about the exposure to POCA risk for many firms

• of the refused DAML requests, there were 1,206 instances[3] of immediate asset denial action taken by law enforcement in 2021/22, again roughly level with the previous year

• interestingly, the Report does not this time contain any information about threshold variations (for which see here) and, perhaps conspicuous in its absence, no data is provided about the proportion of DAMLs which were decided internally at the FIU without reference to law enforcement. One of the most interesting statistics to come out of the 2018/19 report was that more than two out of three DAMLs were never referred to law enforcement for a recommendation. Again, it would be helpful to know what the latest figures for referrals is, and what drives the NCA to refer externally

• £305.7m was denied to suspected criminals (money that was in effect restrained, confiscated or frozen in some way[4]) as a result of DAML requests (refused and granted), compared to £138.6m in 2020/2021. This represents a sizeable £167.1m or 120.6% increase

• of the £305.7m denied to suspected criminals, £292.6m is attributable to refused DAML requests, compared to £136m in 2020/2021. This £156m increase is in part because the coronavirus pandemic restricted financial activity during the previous reporting year. There were also 7 cases with restraint orders valued at between £10m - £50m in 2021/2022. There were apparently none in 2020/2021

• £12.9m of the £305.7m denied to suspected criminals is attributable to granted DAML requests, compared to £1.8m in 2020/2021, representing a substantial increase of 617%

NCA Response Times

In 2021/2022, the NCA took on average, 10% longer to respond to DAML requests, namely 3.1 days compared to 2.82 days in 2020/2021. However, the average response time was still well within the 7 day period, and significantly down from 5.12 days in 2018/19.

Moratorium extensions

In 2021/2022, 99 cases required one or more moratorium extensions and the UKFIU states that as a result of these extensions, £69.3m was denied to suspected criminals, compared £7.1m in 2020/2021 from 64 moratorium extensions.

Comments

If commentators were not so jaded by previous inexorable rises in SARs, the headline figures would make for shocking reading. When, in 2017/18, it was reported that 432k SARs had been made, this was considered to be a quite astonishing figure. That the total has since more than doubled is no less incredible. It is hard to say what is driving this extraordinary rise in reporting. The FCA’s admittedly now-out-of-date REP CRIM data suggests that just three firms (presumably financial institutions) were responsible for a staggering 60% of all SARs reported to the NCA in 2017-2020. Whilst it’s not clear if these firms continue to account for the corresponding increase over the most recent period, unchecked reporting from a relatively small number of firms may well be one explanation for the continued expansion.

It’s clear the government is looking for ways to control and reduce the overall burden, particularly on the DAML side. This is apparent from recent changes to ringfencing of tainted funds and an increase in the threshold amount for DAML reporting (up from £250 to £1000 as of the beginning of 2023), more detail on which is set out in our recent article here.

The fact is that whilst the government may try to dress these changes up as addressing the 'disproportionate economic hardship to individuals unable to access their property, for example to pay rent or living expenses' and working to 'help reduce some of the disruption faced by customers', this feels, perhaps, an unlikely benefit for the government to emphasise to the advantage of the (potentially criminal) customer. After all, the reason the customer cannot access his money is because it is suspected of representing the proceeds of crime. More plausible is an eye on a reduction in DAMLs, though as we have previously commented, is likely to be challenging to operationalise this approach.

We obtained the Home Office Impact Paper on the impact of raising the threshold amount for DAML submissions. It admits that the cost saving of submitting a SAR rather than a DAML for suspicious transactions under £1,000 is subject to significant uncertainty. It nonetheless makes the bold claim that total benefits to the regulated sector and the FIU, should be estimated in a range of £115.5 to £630.9 million, with a central estimate of £267.5 million over 10 years. It remains to be seen whether this projected benefit, or anything like it, comes to pass. Please contact us for a copy of the impact assessment if you’d like to review.

Looking to our commentary on the 2018/2019 report, it’s hard to resist the Groundhog Day impression. We spoke then of questions about ‘the sustainability of the current model’, and the ‘missed opportunity’ in terms of the Law Commission’s report on SARs reform which lacked ‘fundamental proposals to improve a regime which, many have long argued, is producing low-quality SARs which place an unmanageable burden on the UK FIU’. We observed then that ‘the regulated sector will be rightly fatigued by the slow progress on promised guidance and reform’, and indeed we observe now, three years later, that these new figures continue to offer little relief for the weary.

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[1] The UKFIU believes that the Fintech and Cryptocurrency sector has significantly contributed  

to the increase in SARs reporting.

[2]    The Report does not distinguish between the type of bank

[3]    1,190 Asset Freezing Orders, forfeits or restraints, 15 confiscation uplifts and 1 cash seizure

[4]    This reflects a rise in the higher monetary reports, and the increased use of Account Freezing Orders by law enforcement.