AML SARs thematic review: DAML spotlight

The Law Society of Scotland's anti-money laundering (AML) team has highlighted defence against money laundering reports (DAMLs) as a key area of focus for firms, following the release of initial findings from its suspicious activity reports (SARs) thematic review.

The questionnaire-based thematic review of 50 selected practices examined the profession's knowledge and understanding of the SARs regime. It highlighted a mixed understanding among MRLOs of the difference between an information SAR and a DAML, and the need for greater guidance in this area.

For the purposes of the report, we use the following terminology:

• SAR – Often referred to as an Information Suspicious Activity Report (iSAR) under the Proceeds of Crime Act 2002 (POCA), it is submitted by individuals or organisations. An iSAR may also be referred to as a Required SAR.

• DAML - a Defence Against Money Laundering (DAML) is a disclosure made to the NCA under Section 338 of POCA.

It was evident from our thematic review that MLROs hold a mixed understanding of the difference between a SAR and a DAML SAR.

Both are reported through the NCA portal, with a DAML requiring additional information on the prohibited act on which a defence is sought.

SARS

SARs are often referred to as iSARs (information SARs) or required SARs. A SAR should be submitted when an individual or organisation knows or suspects that another is engaged in money laundering. Submitting a SAR provides law enforcement with valuable information about potential criminality. By submitting a SAR to the NCA, you will be complying with your legal obligations to report suspicious activity under POCA 2002. 

DAMLs 

A Defence Against Money Laundering (DAML) is a disclosure to the NCA under s.338 POCA when there is suspicion that property involved is criminal. This prevents committing money laundering offences under POCA 2002, if ‘appropriate consent’ from the NCA is received, as per s.335 POCA.

The principal money laundering offences detailed in sections 327 to 329 of POCA, include:

• Concealing, disguising, converting, transferring, or removing criminal property. 

• Arranging or facilitating the acquisition, retention, use, or control of criminal property. 

• Acquiring, using, or possessing criminal property.

A third of MLROs incorrectly stated that a DAML constitutes ‘clearance’ or ‘permission’ to continue acting for a client.

The SARs Regime Good Practice Guidance states that a DAML:

• Provides a defence to a principal money laundering offence for the planned activity.
• Does not provide clearance, permission, or authority to undertake the activity.
• Does not oblige the reporter to proceed or imply legitimacy of the funds.
• Is not advice from the NCA on whether to continue acting for a client; this is a business decision based on risk appetite.

Further NCA guidance on DAMLs confirms that a granted response and defence:

• Does not imply NCA approval of the proposed acts, persons, or entities.
• Does not oblige the reporter to undertake the proposed act or replace professional duties and regulatory requirements.
• Does not provide a criminal defence against other offences related to the act.
• Does not override private law rights of any person entitled to the property. 

You will only receive a defence to undertake the matter to the extent to which you have asked for. It is therefore vital to ensure that you have included all information relating to the prohibited act.

The most common prohibited act that we come across relates to moving money from a client account back to a client where you suspect they may have gained it via unlawful means.

We were encouraged to note that the majority of MLROs understand what information should be included in a DAML disclosure. However, 28% suggested evidence was needed to prove the predicate crime.

No evidence of money laundering is required, merely suspicion. The NCA confirm this within Q.6 of its DAML FAQs.

For a DAML, the NCA requires the following information:

1. The grounds for your knowledge, suspicion or belief.
2. The description of the property suspected to be criminal.
3. The description of the prohibited act for which you seek a defence.

You must explicitly explain these criteria, as the NCA cannot interpret or infer information from disclosures.

We learnt that 98% of MLROs would not tell their client that a DAML had been submitted, if the client was chasing for completion of their matter.

In addition, 94% were aware that the prohibited act could not be completed until such times as consent was granted.

While we appreciate that most members are already aware that they should not discuss a SAR or DAML with their client, ALL reporters must remain mindful of ‘tipping off’ and should not discuss the fact that a SAR has been submitted with anyone, if this would risk prejudicing the investigation.

Further information relating to the offence of tipping off can be found within section 16.8 of the LSAG guidance. 

Most MLROs are aware of the moratorium period following a refusal for a DAML.

During this time, it is likely that law enforcement will be in contact with you to inform of any action they may take.

LSAG Guidance section 11.10.2 states:

• If consent is refused, a 31-day moratorium period begins.
• Urgency should be clearly stated in the initial report if consent is needed sooner.
• During the notice and moratorium period, prohibited acts are not allowed, but other actions, such as writing letters, conducting searches etc, are permitted.
• Status updates for a DAML can only be requested in life-threatening situations or potential significant harm to avoid diverting NCA resources.
• The UKFIU has seven days to update on a DAML, and unnecessary progress checks slow down the process for all stakeholders.

During the initial seven working days, the UKFIU will review your defence request, consult relevant partners, and may contact you for more information. If the request doesn’t meet the criteria for an Authorised Disclosure under s338 of POCA, it may be closed.

You will normally be notified within the notice period if your defence request is either refused or expressly granted. In other DAML cases, you might not receive any response from the NCA before the notice period ends. You have a defence against the proposed money laundering or terrorist financing offence, if you receive a granted letter from the NCA or if the notice period expires without a response from them.

If your DAML request is refused, the day you receive the refusal marks the start of a 31-calendar day moratorium period. During this time, law enforcement will take action against the criminal property. This moratorium period can be extended beyond the initial 31 days by the court.

Further information on this can be found within SARs in Action Issue 26.

It was encouraging to learn that 90% of MLROs know that the NCA cannot advise solicitors on the approach or actions to take to mitigate the risks identified.

This forms part of your holistic customer due diligence (CDD) approach. 

We explored holistic customer due diligence in a recent blog, where we highlighted that the “Oxford English Dictionary definition of 'holistic' is: considering a whole thing or being to be more than a collection of parts.” 

Taking the entire client and matter into consideration is imperative when applying CDD controls. There is no ‘one fits all’ approach to CDD.  

“A single risk factor may not automatically determine the risk rating of a client or matter. CDD and CMRAs combined should consider all the risk factors taken together holistically and assessment of the overall risk informs whether a matter or client is deemed to be higher or lower risk.”

55% of MLROs stated that the Law Society could not check the quality of iSARs and DAMLs.  

However, under r.66(1A), the Law Society does have the power to request a copy of any SAR disclosed to the NCA.

This activity will form part of our ongoing thematic review of SARs and be the basis for our request to see copies of SARs to test their quality.

27% of MLROs said that they did not believe the NCA could refer poor quality SARs or any other compliance concerns to the Law Society as the AML supervisor.  

Under s.7(4) of the Crime and Courts Act 2013, the NCA can disclose information obtained. This includes referring poor quality SARs to the Law Society as the regulator.

It is therefore essential that you retain a copy of your SAR.

This copy should be taken prior to the disclosure being made to the NCA, as you cannot request a copy from the NCA post disclosure.

We were encouraged to learn that 94% of those questioned were aware that more than one glossary code can be submitted to the NCA.

The NCA Glossary Codes and Reporting Routes Guidance confirms that several codes can be submitted and that the reporter should work on the basis that it is better to include one than not.

POCA is applicable throughout the UK and not just to regulated sector. It is therefore essential that all practices are aware of their obligations and work to ensure that relevant steps are taken internally to allow for internal SARs to be submitted.

The findings above show that practices have a good understanding of some of the key areas of compliance. However, there is further work to be done to ensure consistency and build upon existing knowledge.

Should you have any comments or observations, please reach out to us at aml@lawscot.org.uk.

• The Crown Prosecution - Money Laundering Offences
• LSAG Guidance
• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
• Publications - National Crime Agency
• Guidance on submitting better quality Suspicious Activity Reports (SARs)
• National Crime Agency