Compliance Code Cracker: Defence against money laundering, suspicious activity reports and tipping off

In the latest edition of "SARs in Action", the National Crime Agency (NCA) — the UK financial intelligence unit (UKFIU) — said that in the period 2019–2020 it had received 61,978 defence against money laundering (DAML) requests. It also said that, building on the progress of the Economic Crime Plan, the UK government was reviewing the effectiveness of the suspicious activity reports (SARs) regime, including a consideration of the DAML SARs system.

In the May Statement of Progress on the Economic Crime Plan it was stated that, by Autumn 2021, legislative and non-legislative proposals to improve the effectiveness of DAML and SAR reporting, including exemptions for ineffective DAML reporting, would be developed.

Fintechs and the SARs £250 threshold

Under s 339A of the Proceeds of Crime Act 2002 (POCA) banks are not required to request a DAML if the transaction they plan to execute is for a sum below £250, but the fintech sector did not exist in 2005 when this provision was introduced and so the exemption does not apply to it. Electronic money institutions are still required to request DAMLs for all transactions, even those of a low value. Under s 32 of the Financial Services Act 2021, however, electronic money institutions or payment institutions are now included in the £250 threshold. The provision will come into effect on June 29, 2021.

In a debate on the bill, Abena Oppong-Asare MP (Lab) said that rapid growth in the fintech sector and its inability to use the £250 exemption meant the number of DAMLs had grown from 15,000 in 2015-16 to 34,000 in 2018-19 and 62,000 in 2019-20. She also said that, according to the NCA's 2020 annual SARs report, the most significant growth had been from fintech companies. She said that, according to the report, such firms had submitted 32,454 DAMLs, which represented 64% of the total increase in overall SARs and 83% of the increase in DAMLs. Further, such unnecessary DAML reports were affecting the NCA's ability to investigate criminals, she said.

Legal effect of a DAML SARs "consent"

In the NCA DAML SARs FAQs it states that the legal effect of a DAML is (and always was) solely a defence to a principal money laundering offence under ss 327, 328 or 329 of POCA. It also states that a DAML does not provide any form of clearance, permission or authority to undertake the specified activity. Furthermore, it says that a DAML being granted does not oblige/mandate the reporter to proceed with the proposed activity or imply legitimacy of the funds in question. It says, moreover, that it is not for the NCA to advise whether a reporter should continue to act for a client. That, it says, is a business decision for a DAML SARs reporter to make, based on its own risk appetite.

The NCA and the JPMorgan litigation

The limited effect of a DAML SAR is illustrated in a case based on Quincecare negligence that has been brought by the Nigerian government against JPMorgan Chase N.A. Perhaps one of the most startling aspects of the case was the fact that JPMorgan had sent nine DAML SARs to the then-UKFIU, the Serious Organised Crime Agency (SoCA), and that in only one case was consent withheld — only to be provided at a later date. Such consent provided no specific defence for JPMorgan to the civil action being brought by the Nigerian government. The point about a reporter being obliged to make decisions based on its own risk appetite was made by SoCA, which noted in an email sent to the bank on August 19, 2011 regarding a DAML request, "This is a business decision for JPMorgan to make, taking into account the legitimacy and all aspects of due diligence regarding the new request."

DAML refusals and the moratorium period

In NCA guidance on requesting a defence under the POCA and the Terrorism Act 2000, the point was made that most refusal decisions in POCA cases would take place where there was likely to be a criminal investigation leading to restraint within the 31-day moratorium period that followed refusal. Where there was no likelihood of restraint or other action within a moratorium period then, in most cases, it would not be proportionate for the NCA to refuse. Additionally, the FIU might not reply to a request, or might close the case due to a lack of information, it said.

The guidance also says the NCA will analyse the DAML request, consulting with UK and international law enforcement partners as necessary. It says that, during this period, the activity that is the subject of the request should not be carried out, otherwise a bank would risk committing a money laundering offence. The notice period is the statutory seven working day period in which the NCA has time to make a decision. The day the disclosure is submitted is considered day 0. The moratorium period then begins, with the day of notification of refusal being issued becoming Day 1 of the moratorium period, which extends to 31 calendar days following notice of refusal.

The Criminal Finances Act 2017 and DAMLs

Since October 31, 2017 changes included in the Criminal Finances Act 2017 have allowed law enforcement to apply to a Crown Court for an extension of the moratorium period for up to six months, which provides the authorities with additional time to investigate and take action against possible instances of money laundering. A Home Office Circular on this subject says that under the "consent regime" in s 335 of POCA the "defence" is available if, before the end of the notice period, a reporter does not receive notice from a constable or customs officer that consent is refused. If a refusal is given, then the 31-day moratorium period commences. The notice period is the period of seven working days starting with the first working day after the person makes the disclosure. The purpose of the moratorium period is to allow investigators time to gather evidence to determine whether further action, such as restraint of the funds, should take place. This period, which until October 31, 2017 was not renewable, often failed to allow sufficient time to develop the evidence, particularly where it needed to be sought from overseas through mutual legal assistance.

Amendments to POCA found in ss 336A- 336D, which were included in the Criminal Finances Act 2017, allow senior officers of authorised law enforcement agencies to seek an extension to the moratorium period for up to an additional 31 days at a time, up to a maximum of 186 days. The court may, on an application under s 336A of POCA, grant an extension of a moratorium period if it is satisfied that an investigation is being carried out in relation to a relevant disclosure (but has not been completed); the investigation is being conducted diligently and expeditiously; further time is needed for conducting the investigation; and it is reasonable in all circumstances for the moratorium period to be extended. If a fact pattern akin to that in the complex, multi-jurisdictional JPMorgan case were to be considered now by the NCA, then the possibility of a moratorium extension could mean that the reporter might be more likely to receive a refusal to a DAML SAR.

What would an ordinary prudent banker have done?

Despite the limited 31-day moratorium period applicable in the JPMorgan case, Mr Justice Calver noted that — with regard to the DAML SARs consents — he was unable to say what an ordinary prudent banker would have done in those circumstances. Notwithstanding that caveat, he went on to say that one plausible possibility would have simply been for the bank — because of continuing reasonable grounds for believing that the payments would defraud the customer — to have continued to refrain from making any payment so that the money would have remained in the account. He also suggested that an alternative plausible outcome was that the money could have been frozen in the account by court order by reason of intervention by the regulatory authorities, such as the-then financial intelligence unit, SoCA.

Seeking a declaration

He also suggested that it may have been open to the bank to seek directions or a declaration from a court based on clause 5.7 of the depository agreement. A declaration is a discretionary power of a court to grant a declaration as to rights of parties or the existence of facts. Clause 5.7 provided that in the event of any dispute between, or conflicting claims by, any person or persons with respect to the depository cash, or if the depository was uncertain as to its duties or rights thereunder, the depository would be entitled to apply to a court of law to determine the rights of such persons. It would meanwhile be at the depositary's option to refuse to comply with any and all claims, demands or instructions with respect to such depository cash or any obligations thereunder so long as such dispute or conflict continued.

Tipping off

Section 333D of POCA has been amended by the Criminal Finances Act 2017 so that under s 333D [A](1) the "tipping-off" offence under s 333A of POCA is disapplied when an application to extend the moratorium period is made. It provides that where such an application is made under s 336A, a person does not commit an offence if the disclosure is made to a customer or client of the person; the customer or client appears to the person making the disclosure to have an interest in the relevant property; and the disclosure contains only such information as is necessary for the purposes of notifying the customer or client that the application under s 336A has been made.

Once in receipt of notice of an application to extend the moratorium period, a firm will be able to inform its customer of the existence of the application to extend the moratorium period without committing the tipping-off offence. It is, however, a limited disapplication and the firm will be unable to disclose the content of the SAR to the client, or even the basis for its suspicion.

Further information on compliance matters can be found https://podcasts.apple.com/gb/podcast/compliance-clarified-podcast-by-thomson-reuters-regulatory/id1548510826 here.

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