Leveraging Suspicious Activity Reporting (SAR) reform to better manage financial crime risk
In recognition of the vast growing number of SARs, and the inability to effectively utilise the data within them, the UK in its Economic Crime Plan of 2019-2022 set out its intentions to further reform the SAR regime. This built upon previous commitments from April 2016 in the AML/CTF Action plan and work underway at the Home Office since 2017. The aim of the reform being to fundamentally change the SARs model, deliver better IT, enhance feedback to reporters, and reform the UK Financial Intelligence Unit (UKFIU).
With the SARs reform programme progressing and bearing fruit (e.g. increased resource within the UKFIU), this blog looks at why financial institutions should see SARs reform as a means to further enhance their management of financial crime risk.
The FCA’s May 2021 Dear CEO Letter highlighted that firms are often unable to explain the investigation and decision making that drive SAR submission (or not). In our experience there can be various underlying reasons for this including:
- unclear internal procedures;
- limited experience amongst personnel investigating alerts and internal SARs;
- investigative personnel having targets which prioritise throughput volume over handling and decision-making quality;
- confusion over the breadth of the reporting duty (e.g. attempted fraud vs successful fraud);
- fragmented workflow which can impact on audit trail integrity;
- inconsistent understanding of the concepts of ‘knowledge’, ‘suspicion’ and ‘reasonable grounds’;
- staff training which doesn’t adequately focus on the vulnerabilities of the firm’s products/services or include tailored and contextualised ‘red flags’.
As discussed below, engaging with the SARs reform agenda offers opportunity for both improved regulatory relations and more efficient internal controls.
1. Learning from higher quality suspicion reporting data to refine risk-based controls
As the quality of SARs increase, it becomes easier for firms to discern trends and patterns which can be used to inform the design of AML/CTF controls. If for example, internal and submitted SAR data shows a particular geographic concentration, a firm might regard the jurisdictions concerned as presenting a higher risk, such that additional due diligence can be undertaken on such transactions and the associated parties. Behavioural patterns extracted from suspicion reporting data can be used to fine-tune the calibration of transaction monitoring solutions, potentially being used to ‘train’ newer machine learning based solutions. Suspicion reporting data can be used as an input to business or enterprise-wide risk assessment such that a firm has greater comfort that it is aware of the different money laundering typologies it is exposed to and can decide where to focus its resource for best risk mitigation effect. Increasing the quality of internal and external suspicion reporting can be a key enabler of running a more effective and efficient AML/CTF programme.
2. Leveraging UKFIU output to drive healthy culture and maintain staff engagement
One of the added benefits of increased resource from the SAR reform programme is more direct engagement between the NCA and the wider regulated community. The UK FIU’s approach to sharing more information through publications such as SARs in action, the SARs Reporter Booklet and their podcast series provide great insight into the value of SAR submissions and how this helps catch criminals. Recent episodes have focussed on how SARs have helped combat county lines and child sexual abuse. Financial institutions can utilise such material to refine the training provided to staff, help staff understand the importance and benefit of vigilance and appropriate enquiries. In turn, this can help improve capability to spot and handle potentially suspicious activity, the quality of reporting, decision-making and staff engagement.
Reporting firms have long lamented limited guidance or engagement from the UKFIU. However, the UKFIU is dramatically increasing its headcount (to 190 by 2022, compared to approx. 80 FTE as at 2018) which should enable an upturn in industry engagement and feedback on submitted SARs. In addition, the NCA continue to iterate their guidance on the SARs regime.[i]
3. Focussing on the objectives of suspicion reporting
The primary purpose of suspicion reporting is to transfer valuable non-public information to the FIU for triaging and tasking out to law enforcement, in turn to better equip Law Enforcement Agencies (LEAs) to identify and disrupt Organised Crime Groups (OCGs). Arguably, the personal accountability for employees in the regulated sector and Nominated Officers for failing to report drives a tendency to report if in doubt. Whilst understandable to protect employees from potential liability, the resulting volumes – the UKFIU received some 573,00 SARs in 2019/20 – are of questionable value. The year-on-year growth in the number of SARs submitted by financial institutions (20% growth from 2018/19 to 2019/20) significantly outweighs the growth in the volume of transactions conducted (around 3% from 2019 to 2020). Whilst this might suggest an increased ability across financial institutions to detect suspicious activity it might also indicate an uptick in ‘unnecessary’ reporting.
Recent FCA analysis[ii] shows that around 47% of internal suspicion reports result in the submission of a SAR to the NCA. However, in our experience, this proportion can vary markedly between firms and sectors, implying that there is wide variance in the approaches taken to evaluating internal suspicion reports and markedly different risk appetites. It is important to remember that if Nominated Officers have the requisite experience, sufficient internal authority and broad enough access to information, a well-reasoned and documented decision not to submit a SAR is a perfectly reasonable outcome. Nominated Officers are not ‘post boxes’ to rubber stamp SARs on their way through.
A key plank of the concept of ‘effective’ AML programmes is providing highly useful information to government and law enforcement agencies. By refocussing on intelligence provision, FIs might significantly reduce their operational burden and better support LEAs. This would also be consistent with the FCA’s messages regarding ‘purposeful’ AML controls. One might say, a classic case of ‘less is more’.
By engaging with the SARs Reform agenda, FIs are likely to gain opportunities to better understand their exposure to money laundering and terrorist financing risk, influence the future shape of the regime to better deliver the needs of reporting firms, reduce the operational burden of suspicion reporting and better demonstrate the effectiveness of their contribution to the ‘whole system’ defence against economic crime. There are positive outcomes on offer for a wide variety of participants in the UK’s anti-financial crime community and, in theory, the only losers should be the OCGs.
[i] Version 6 published in September 2021 – https://www.nationalcrimeagency.gov.uk/who-we-are/publications/446-guidance-on-submitting-better-quality-sars-1/file (accessed 15 Oct 2021)
[ii] Analysis of REP-CRIM returns published in Oct 2021 – https://www.fca.org.uk/data/financial-crime-analysis-firms-2017-2020#lf-chapter-id-key-observations-suspicious-activity-reports-sars-(accessed 15 Oct 2021) –