Vigilance against money laundering and terrorist financing is not just a matter of ethical responsibility but a strict regulatory requirement. Suspicious Activity Reports (SARs) form the cornerstone of the legal sector’s contribution to the global fight against financial crime. This post will demystify SARs, setting out the legal framework and offering practical advice for law firm leaders and Money Laundering Reporting Officers (MLROs).
The Legal Framework
The foundation for SARs in the UK is rooted in the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000. These acts, alongside the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, mandate the reporting of knowledge or suspicion of money laundering or terrorist financing to the National Crime Agency (NCA). The ‘carrot’ is that submission of a SAR provides protection to the person making the disclosure. The ‘stick’ being that failure to make a SRA when required can result in severe penalties.
Identifying Suspicious Activity: “Does it make sense?”
The first step in the SARs process is the identification of suspicious activity. This task often falls to individuals within law firms who handle client funds or sensitive information. Indicators of suspicious activity can vary widely, but they often revolve around unusual transactions that have no apparent legal or logical purpose, overly complicated financial arrangements, or clients who are reluctant to provide information.
One of the most effective ways to train your staff is through workshops to identify potential Red Flags.
The Role of the MLRO
Every law firm within scope of the Money Laundering Regulations is required to appoint a Money Laundering Reporting Officer (MLRO), whose responsibilities include the oversight of the firm’s compliance with anti-money laundering (AML) regulations (in conjunction with the Money Laundering Compliance Officer), the evaluation of suspicious activities reported by staff, and the submission of SARs to the NCA when warranted. The MLRO plays a critical role in ensuring that the firm does not unwittingly facilitate money laundering or terrorist financing.
Reporting Suspicious Activity
When a potential suspicion arises, it is imperative that it is communicated promptly to the MLRO. This process needs to be clearly set out in the firm’s AML policy, with staff trained on the mechanisms for making an internal report. The MLRO will then assess the information to determine if it amounts to a suspicion requiring a formal SAR. If a SAR is warranted, the MLRO must submit it to the NCA through the UK Financial Intelligence Unit (UKFIU) using the SAR Online system. The report should be factual, concise, and free of speculation, providing all known details about the parties involved and the nature of the suspicious activity.
Seeking a Defence Against Money Laundering (DAML)
In instances where a firm intends to proceed with a transaction that is the subject of a SAR, the MLRO may request a Defence Against Money Laundering (DAML) from the NCA. This is effectively asking for legal permission to proceed without committing an offence under POCA. The NCA has seven working days to respond to a DAML request, which can be extended by a further 31 days if necessary.
- Training and Awareness: Regular training sessions for all staff members on recognising and reporting suspicious activities are crucial. This ensures that everyone is aware of their obligations and the signs of money laundering or terrorist financing.
- Clear Reporting Channels: Establish and maintain clear channels through which employees can report suspicions to the MLRO. Bonus points for working on your ‘approachability’.
- Robust Procedures: Develop and implement robust procedures for assessing and reporting suspicious activities. These should include guidance on when and how to submit a SAR, as well as procedures for seeking a DAML.
- Record Keeping: Maintain detailed records of all suspicions reported to the MLRO, decisions made, and actions taken. This documentation will be vital for demonstrating compliance with AML regulations.
- Ongoing Monitoring: Reporting suspicions is intrinsically linked to the quality of your ‘KYC’ and client/matter risk assessments. Implement systems for the continuous monitoring of client transactions and relationships, enabling the early detection of potentially suspicious activities.
- Collaboration and Communication: Foster a culture of openness and collaboration within the firm regarding AML efforts. The MLRO should be approachable and available to discuss any concerns staff may have.