The Potential Pitfalls of SARs: a cautionary tale, and 10 ways to avoid them

March 15, 2019

 

Filing Suspicious Activity Reports (SARs) should be a priority for all law firms when presented with circumstances that alert them to the potential for money laundering.

 

But the very word "suspicious" is - in itself - problematic: lacking clear definition.  

 

Money laundering is showing absolutely no signs of diminishing, but in 2017, there was a drop of nearly 12% in the volume of SARs submitted to the NCA.

 

Why is this?

 

One theory is that the lack of clarity in what constitutes suspicion is encouraging over-caution, especially in the light of cases such as Lonsdale v National Westminster Bank plc [2018] EWHC 1843 (QB).

 

So, read on for ten safeguards that could help protect you and your business when reporting suspicious activity.

 

Lonsdale v NatWest Bank Plc

 

David Lonsdale (the barrister, not the HeartBeat actor!) specialises in property law. He owns several properties and manages the finances of each of those enterprises with seven separate bank accounts; including one account for his earnings as a barrister, and another two joint accounts.

 

All good so far.

 

Except in March 2017, NatWest decided to freeze one of his joint accounts for eight days while filing a SAR to the NCA.

 

Then, in December 2017, they froze all of his accounts: while filing additional SARs.

 

That same month, NatWest wrote to Mr Lonsdale, informing him that they were going to close all of his accounts; offering no explanation or justification.

 

Genuine suspicion

Of course, if a bank has genuine suspicion of money laundering, they're entirely within their rights to file a SAR and freeze accounts.

 

However:

 

Mr Lonsdale vehemently objected to the closure of his accounts and the accusation of suspicious activity.

 

He demanded an explanation.

 

But the bank refused to discuss the issue.

 

Disclosure

 

Lonsdale requested disclosure of the SAR documents, as well as any notes leading to the decision recorded against his accounts under the Data Protection Act 1998 (since superseded by DPA 2018).

 

In line with DPA laws, the bank provided account data but refused to share the contents of any of the SARs raised against him; leading Lonsdale to file complaints on the grounds of:

  • Breach of contract

  • Breach of DPA 1998

  • Defamation of character

The bank continued to assert that they weren’t obliged to grant access to the contents of the SARs; leading Lonsdale to escalate the case by making an application to the courts.

 

The case was duly heard, finding favour in Mr Lonsdale's application for access to the reports.

 

The ruling determined that the grounds of suspicion detailed within the SARs constituted personal data, and therefore - on the face of it - were disclosable under the DPA 1998.  

 

What does this mean for Money Laundering Reporting Officers?

What we should initially reiterate is that the bank was fully entitled to file a SAR if they had reasonable cause to be suspicious.

 

But, of course, the Lonsdale v NatWest case does ring alarm bells for the potential of liability for MLROs.

 

Mr Lonsdale's complaint was that the bank failed to act on his instructions.

 

The bank's defence was that they had reasonable grounds for suspicion of money laundering and that they were acting in accordance with the law.

 

This case establishes that - in some circumstances - clients may be legally entitled to view a SAR made about them, which could, potentially, lead them to bring a defamation claim against the MLRO if that suspicion turns out to be damaging and incorrect.

 

Should MLROs fear defamation?

 

There's a distinction to draw here: for a statement to be considered defamatory, it needs to be intentionally false.

 

Therefore, if appropriate evidence is gathered, it's possible to demonstrate legitimate grounds for suspicion of money laundering.

 

Setting a precedent

 

This case does - to a degree - set a precedent; suggesting that MLROs should be more mindful when identifying grounds for suspicion.

 

The case suggests that the author of a SAR isn't immune from legal action merely because they're obliged by law to complete it.

 

Therefore, it’s essential that basis for suspicion is expressed as clearly as possible - not just because of the potential for legal action, but also because of the potential that it may be read by a client.

 

So, what does “suspicion” actually mean?

 

Unhelpfully, "suspicion" isn’t formally defined in legislation - but it has been the subject of question by the courts on several occasions.

 

The judge in the case of Lonsdale v NatWest stated that:

 

“The [person that suspects] must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be "clear" or "firmly grounded and targeted on specific facts", or based upon "reasonable grounds."

 

This suggests that the term "suspicion" is subjective; with a relatively low threshold. Suspicion must be genuine, but there's no robust necessity for it to be based on specific facts.

 

With this in mind - and in line with advice published by the NCA - here are our ten tips for avoiding the potential pitfalls when reporting suspicious activity:

  1. Use clear and concise language, aiming for simplicity of language over legal jargon. The "reasons for suspicion" section of the SAR limits your input to 8000 characters, equating to around 1500 words.

  2. Give full and precise reasons for your suspicion of money laundering. The NCA suggests answering six basic questions: Who? What? Where? When? Why? How?

  3. Specify all individuals and businesses, including suspected criminal property in as much detail as possible. Chances are you will not be in possession of all of the details; so you should make this clear if that's the case.

  4. Specify all information giving rise to suspicion and explain how you discovered it.

  5. Clearly distinguish between information that you know from that which you suspect.

  6. Present a chronological sequence of events which support your suspicion. Be as specific with regards to dates as possible.

  7. Justify the basis of your suspicion - don’t simply state that it’s a cause for concern. For example, a client’s bank account has large third-party transfers: explain if the client has been contacted (and if not, why not) and any explanation offered; describe why the explanation given has not allayed your concerns; and demonstrate how the pattern of transfers/withdrawals present suspicious circumstances

  8. If the SAR doesn’t relate to financial transactions, explain the activity you consider to be suspicious.

  9. Explain how the activity in question differs from normal, expected operations for that customer/business sector.

  10. If the SAR implicates a professional enabler (i.e. an accountant, insolvency practitioner, conveyancer, etc.) state whether it appears that the facilitation is witting or otherwise. Set out the case if your suspicion relates to the transactions only, or whether it extends to the professional involved.

Given the potential for vaguery, The Law Commission is exploring how to provide better guidance as to what constitutes suspicion. Expect to hear more news about this later on in the year.

 

In the meantime - take heed of our tips and make your SARs thorough and precise.

 

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