The House of Commons Home Affairs Committee has published a report on money laundering and the proceeds of crime. The report is brutal, making it clear the systems in place are not fit for purpose and radical reform is needed.
The report made the following observations and recommendations:
- The ELMER system for Suspicious Activity Reports (SARs) is heavily overloaded and rendered completely ineffective. The system currently processes 381,882 SARs despite being designed to manage only 20,000, and only 15,000 reports are examined in detail. The report recommends that the Government replaces ELMER with a robust system for handling Suspicious Activity Reports by 31 December 2016, and to repair the damage to the reputation of the SARs regime, those who actually use the SARs system to make reports, as well as those charged with investigating, should be involved in designing the replacement to ELMER.
- A ‘confiscation court’ should be created. Specialist courts would enable complex confiscation hearings to be dealt with more efficiently and with much greater expertise, with the added bonus of leaving Crown Courts more time to focus on criminal trials.
- There are significant weaknesses in the Asset Recovery Incentivisation Scheme (ARIS), specifically in that it rewards those who have not been affected by the crime that triggered confiscation or taken a role in the recovery of assets. The Government should apply a new formula which ensures that at least 10% of the criminal assets recovered are returned or donated to the communities that have suffered at the hands of criminals, deducted from the 50% portion which the Home Office currently takes.
- Outstanding confiscation orders should be put onto the Police National Computer (PNC) by merging or connecting it with the Joint Asset Recovery Database so that law enforcement officers know a suspect is in breach of a confiscation order and can act on it. The report makes a stark comparison:
“It is ludicrous that the PNC can tell a police officer that a suspect owns a dog but not that they are evading payment of a criminal confiscation order”.
- Greater coordination and collaboration between public bodies involved in POCA and the private sector could result in more efficient collection of proceeds of crime and the denial of assets to criminals. The Government should create a market for the private enforcement and collection of unpaid confiscation orders once they enter arrears, earning a fee from a portion of that order.
- Just 335 out of some 1.2 million property transactions last year were deemed to be suspicious. This suggests that supervision of the property market is totally inadequate, and that poor enforcement has “laid out a welcome mat for money launderers”. The Government must enhance supervision of the property market and both sides of the transaction. In addition, as with estate agents and other professional services, letting agents must use the Suspicious Activity Reporting regime (SARS) system and undertake appropriate due diligence when taking on new clients.
- Improvements need to be made in measuring success and accountability. The benefits from POCA include both the efficient collection of criminal assets and the effective disruption to criminal activities. The Home Office should publish annual statistics on its performance in depriving criminals of their gains, including a measure of how crime rates have been influenced by denying criminals their assets, as well as complete lists of all assets seized from criminals over the course of the year. These should include measures against all three of the Home Office’s stated aims:
- To deny criminals the use of their assets.
- To recover the proceeds of crime.
- To deter and disrupt criminality.
- The NAO reported that, at September 2015, there was £1.61 billion total debt outstanding from confiscation orders. It is likely that much of this money has been hidden and is beyond the reach of the authorities. Additionally, the figure is inflated because when a criminal refuses to engage with the POCA court proceeding, the judge is left with no option but to demand the full amount rather than the prosecution and defence agreeing the actual collectable amount. Consequently, a confiscation order is often made for assets that may never have even existed. The courts should be given a power to compel attendance at a confiscation hearing.
- Even after a confiscation order has been made, there are very few incentives for criminals to either engage with the courts or to pay the money back, with many choosing to extend their prison sentences and avoid paying. Non-payment of a confiscation order should be made a separate criminal offence. To enforce this, the committee recommended that no criminal should be allowed to leave prison without either paying their confiscation order in full, or engaging with the courts to convince a judge that their debt to society is squared.
- The Government should confiscate the passport of any criminal subject to a confiscation order to deny criminals owing the state money the ability to evade payment by travelling abroad.
- The £1.61 billion figure for uncollected debt is largely artificial as nearly a third of it represents interest and penalties for non-payment. However, judges have determined that this money is owed to the state as a result of criminal activity and it should not simply be written off. When collection rates are reported, they are now set in the context of ‘collectable’ and ‘uncollectable’ debts. If somebody with an outstanding debt comes into significant funds the authorities would then be able to collect that debt. Criminals still owe this money, and will accrue interest on their debt to society. There is no expiry date on this debt because crime must never pay.
- Enforcement of POCA must remain at a local level but the current system lacks a clear line of overall responsibility, strategy and accountability. The report recommends that the National Crime Agency be made the lead agency for the recovery of criminal proceeds, and given resources and tools to influence performance, including the Asset Recovery Incentivisation Scheme (ARIS). Once the NCA has been established as the lead agency, it should take steps to merge all of the sources of information and data used to pursue criminal assets (including the replacement to ELMER) into one ‘asset recovery database’, under the control of the NCA, but capable of being openly accessed and updated by all of the relevant agencies, with the necessary security systems in place.
There are questions about many of the recommendations. One theme is centralisation, making it clear that one agency has primacy in the recovery of assets. This was a recommendation of Transparency International (see Blog, Transparency International: the UK should consider, 26 November 2015) and may receive a cautious welcome, although its long term success will depend on assets and resources being made available. For more information on the NCA see Practice note, National Crime Agency: overview.
The methods of targeting of individuals owing money seem excessive. Comments that no person will be allowed to leave prison without paying their confiscation debt or taking part in proceedings is draconian and almost certainly unworkable, indeterminate sentences having been previously deemed inappropriate. It would also drastically increase the burden on the prison system, for what is, in reality, the non-payment of debt. Similarly, the removal of passports may be seen as a token gesture unlikely to concern the most serious offenders.
There will no doubt be some relief felt by nominated officers that the current reporting system has been recognised as not fit for purpose, and perhaps some annoyance that such efforts are to no effect. The reporting system is the crux of the UK’s anti-money laundering process and needs to be improved urgently. The proposal to allow those doing the reporting to assist in designing the new system should therefore be welcome. However, to avoid suffering the same fate, any future system must be appropriately resourced. A deadline of December 2016 for having a revised system seems fanciful. The priority must be to get things right. For more information see Practice note, Reporting suspicious activities: overview.
The use of the private sector, a common theme of law enforcement measures over the past 12 months (see Legal update, City of London Police outline financial fraud strategy) could be successful in collecting unpaid debts. However, clear guidance and regulation must be provided to ensure any settlements are identical to those that can currently be achieved by government agencies. Private firms must surely focus on locating and collecting assets, rather than entering into settlements that clear a large proportion of the existing debt.
Finally, the report ignores the advice of the Head of the POCA unit at the SFO that the debate is skewed by the artificial figure of £1.6billion debt (see Legal update, Home Affairs Committee hears evidence on proceeds of crime). The proposals from the report seem to move this figure from one column to another, rather than make an honest assessment that the vast majority of this figure is simply fantasy (for an example of such a case, see R v Ahmad  UKSC 36). Reforms to how confiscation figures are arrived at and how long they can be kept on the books would be useful because the success of recovering the proceeds of crime will always be tainted by this ever growing debt.
There is clearly plenty for the new Justice Secretary to consider on her first full day in office.
For more information on the current confiscation regime see Practice note, Confiscation under POCA 2002.
For more information on money laundering, see Practice note, Money laundering offences in the UK: overview.