The risks of dealing with what you suspect may be criminal property are well-known. By doing almost anything with that property, you could commit one of the three principal money laundering offences in the Proceeds of Crime Act 2000 (“POCA”). To protect yourself from that prospect, you must submit a suspicious activity report (“SAR”) to the National Crime Agency (“NCA”). If you’re in the regulated sector, simply failing to file a SAR may be a criminal offence. The combination of a low threshold for “suspicion”, personal liability and an abundance of transaction data has seen the number of suspicious activity reports (“SARs”) made to the NCA rise to around a half a million a year. Yet, though the risks of not reporting are well-known, many are less familiar with the flip-side: where that SAR you submit may end up, how it may later be used and what risks this could pose for you and your organisation.
In this article, Linklaters and Corker Binning have collaborated to look at where a SAR submitted to the NCA may end up, including its use in subsequent civil or criminal litigation.
Why submit a SAR?
But, first, let’s address the reasons why a Money Laundering Reporting Officer (“MLRO”) may submit a SAR. For those in the regulated sector, if the threshold of suspicion is met, they are under a legal obligation to report to their MLRO, and if their MLRO is also suspicious, for the MLRO to report to the NCA. Failure to report could be a criminal offence.
For anyone inside or outside the regulated sector who is concerned that they may be dealing with criminal property – and therefore committing one of the three principal money laundering offences in POCA – they can make an “authorised disclosure” i.e. a SAR to the NCA seeking consent to deal with the property. In 2017, the NCA rebranded seeking consent as “seeking a defence against money laundering (“DAML”)”. This alteration was intended to remind reporters that an “authorised disclosure” only provides a defence to a money laundering charge and does not confer a wider immunity in respect of other crimes or grant any advantage as regards a potential civil liability.
In practice the low threshold of “suspicion” combined with the prospect of personal criminal liability for the reporter has led to over-cautious reporting. Indeed, in sample testing of SARs submitted across one week in 2019, the Law Commission found that approximately 13 - 15% of SARs did not appear to meet the threshold for suspicion.1
But where could that SAR end up and what risks could this pose?
The question therefore arises of where a SAR submitted to the NCA could ultimately end up and what risks this could pose. Below, we’ve outlined four possibilities based on our firms’ recent experience:
- The SAR may be used as the basis of an application for an account freezing order: The NCA or another law enforcement agency (to whom the NCA has forwarded the SAR) may treat the SAR as providing sufficient grounds to apply for an account freezing order (“AFO”).
The AFO is a relatively new law enforcement measure. However, since their introduction two years ago, AFOs have become widely used by all law enforcement agencies. As the name suggests, they have the effect of freezing any UK bank or building society account balance for up to two years, whereupon it becomes liable to forfeiture. The threshold for granting an AFO is low: merely reasonable grounds to suspect that the account holds money that represents the proceeds of a crime committed anywhere.
If the SAR discloses such grounds, the law enforcement agency may use it (in our experience, they may simply cut and paste it) as the evidential foundation for the AFO application. This application is made ex parte to the Magistrates Court, which will grant the AFO if persuaded on the balance of probabilities. The bank or building society will then become the respondent in the AFO litigation, paradoxically as a direct result of its MLRO having filed the SAR in the first place. Whilst most banks or building societies will not want to participate in this litigation, the account holder may well seek to contest either the AFO or any subsequent application for forfeiture of the frozen balance. In the process, the account holder may become aware of the SAR and seek its disclosure, bringing about judicial scrutiny of the bank or building society’s reasons for submitting the SAR and embroiling the reporter in the AFO litigation.
- SARs may be discloseable in civil litigation: SARs also may be sought by parties in civil litigation for other causes of action, such as breach of contract (where a customer’s banking relationship has been terminated) or defamation (where a customer claims that the SAR and ancillary communications are defamatory of them). In the recent case of Lonsdale v National Westminster Bank plc,2 a dispute about the legality of NatWest’s termination of a customer relationship, the High Court ordered the bank to produce the SARs it had submitted to criminal authorities. The Court was not persuaded that disclosure would cause the bank to “tip off” the customer or prejudice any investigation and, in any event, gave the NCA two weeks to object to the disclosure on those grounds.
The disclosure of a SAR in civil litigation can be uncomfortable for the reporter, not only because it reveals an organisation’s concerns of criminality in bare terms but also due to the personal impact the litigation can have on the reporter. In the well-known case of Shah v HSBC, the MLRO of HSBC gave evidence over six days and was forensically cross-examined on the content of a SAR submitted several years previously. Though the Court ultimately ruled in HSBC’s favour, the experience of being questioned in detail about one of the 4,500 SARs submitted by the bank each year and, ultimately, being forced to concede that the wording of the SAR was “very poor”3 and did not articulate all of the bases for suspicion is one that any organisation would wish to avoid.
- SARS may be considered in later investigations: SARs may also be used as evidence in future regulatory or criminal investigations, for instance to determine whether an organisation has complied with its money laundering obligations. By way of example, in finding that Sonali Bank’s anti-money laundering systems and controls were deficient, the Financial Conduct Authority criticised the “surprisingly low” number of SARs submitted within the business to Sonali Bank’s MLRO.4 Moreover, should a transaction later trigger a criminal or regulatory investigation into the reporting firm itself, there can be an uncomfortable mismatch between the explanation of “suspicion” provided in the SAR and the way these issues are framed in other contemporaneous records (emails, text messages etc.).
- SAR could one day be the part of a data leak: Finally, the recent leak to the media of SARs filed in the U.S. has demonstrated the very real risk that, like any electronic document, depositories of SARs are vulnerable to cyber attacks or compromise. As with the FinCEN leaks, this often triggers interest from politicians, Select Committees, regulators and indeed the parties that are referenced in the leaked SARs (which in turn can lead to the consequences outlined above).
So what should MLROs do?
An MLRO must of course file a SAR where the threshold of suspicion is met. However, the possibility that the SAR will be examined in other contexts reinforces the need to ensure that SARs are crafted with care and precision. Practically, this means following the guidance from the NCA5 on preparing better quality SARs: in particular, being clear and concise, being explicit about the reason for suspicion and identifying as clearly as possible the suspected benefit from criminal conduct. Being disciplined about articulating the basis for suspicion will put the reporter in the best possible position no matter where that SAR ultimately ends up, as well as helping to ensure that SARs are only filed where the threshold for doing so is met.
1: Law Commission, Anti-money laundering: the SARs regime, 18 June 2019, Page 47.
2: David Lonsdale v National Westminster Bank plc [2018] EWHC 1843 (QB).
3: Shah v HSBC [2012] EWHC 1283 (QB) at 101 - 103.
4: Final Notice to Sonali Bank UK Limited, 2016, para 5.3(15).