Interview with Sir Stephen Lander and David Armond of SOCA

The chancellor and the then Home Secretary were looking at the environment for SARs, after the events of 7 July 2005, and worried about how to make the system work better.  They lighted on the comments that were coming in from the City about SARs, and decided they wanted a review. We’ve had a review every five minutes on this thing, and the Home Office suggested I should do it, in part because the organisation of which I was chairman [SOCA] was going to have a big part in getting the thing to work.

There are problems with arrangements as they had been working and I set those out here, without trying to be too unpleasant to anybody.

You wouldn’t come away from reading my report (Review of the Suspicious Activity Reports Regime - The SARs Review - March 2006) thinking everything in the garden was rosy. I think there were three major difficulties. One was the uneven behaviour of the reporters [the name given to financial institutions required by the Proceeds of Crime Act to participate in the SARs process] which was a fault of the regime as a whole.

There was a very passive view of the responsible owner of the activity, namely the National Criminal Intelligence Service (NCIS), about their duties, which wasn’t irrational. It came from the FATF (Financial Action Task Force) recommendations. There was a very uneven performance in law enforcement about doing something about the resulting data. There were difficulties at each stage.

The fundamental conclusion I came to was that there was no one centre of responsibility. Everyone could always blame someone else. Being the owner of the database meant that you had to take some oversight responsibility for the whole thing. That needed to be handled in a way that engaged with other people who would then feel party to the whole thing.

The principal organisational recommendations are how to secure buy-in both by the buyers of the information and the users of the information to a more deterministic approach. You must do something. The law requires these regulated sectors to do this. They must do it. There’s an onus on law enforcement to give it good welly, to make proper use of the resulting material.

The requirement from FATF is to provide information to law enforcement. It is not to process it and do added things to it. It’s my judgement that that is necessary to get best value. So I am adding to the requirement. That is about the nature about this jurisdiction. It is about the volumes.

In European terms we are the big end of the league. We also have a long history of relations between government and banks and national institutions. We get quite a lot of reporting. We will have over 200,000 SARs this year.

Sheeping and goating

You won’t get best value out of that from our police service, unless there is some value-added, some sheeping and goating with some of that material by the centre. This will separate out those which are more likely to produce operational benefit from those which are less likely.

Reporting sector

Part of the problem of uneveness of behaviour by the reporting sector is that some people report things that aren’t worth reporting and others don’t report things that are. We need to work hard to get better quality in. I am really clear that this [the SARs process] is a very powerful piece of machinery.

Public duty on reporters

It is a public duty issue. Parliament has created a very intrusive piece of legislation that interferes in the business process and in a contract between a banker or a financial institution and its customers. The Crown has imposed on the reporting sectors duties to report information or seek consent.  There is a duty on the authorities to put in place an arrangement to make good use of that. There is a public duty.

In law enforcement terms, these [ie SARs] are free goods. They are these leads, 200,000 a year, to crime, where quite a lot of the preparatory work has been done by somebody else. There is a cost and benefit issue. The cost and benefit issue works really well if the information is useful. This comes back to the quality of the reporting. We’ve been doing a lot of analytical work on the data to see what degree of reliance we can place on it.

There is cross-matching with other data to see if we already know this person’s a crook. That would validate the suspicion.

This enables us to look at whole data base or at a large segment of it and find connections between reports that were not visible to the naked eye, or not visible at the point of receipt.

Something between 40 and 50% of these reports relate to genuine evidence of crime. In these cases, some follow-on action by law enforcement would be both appropriate and useful. That is a very large number of free leads for law enforcement. That means that we have 100,000 a year of free leads where we are into some useful knowledge about criminal assets. That is very powerful.

The issue is to turn that very high degree of precision in the reporting into outcomes in the real world, which constrain criminal property or the financing of terrorism. These are very important public goods.

More analytical and processing in the centre

We’ve taken the view (and we’ve staffed the team, more or less) to put additional analytical and processing effort in the centre, to extract those patterns, to give the value added to the law enforcement community. That’s the overall approach. We are very bullish about the potential of this to make a difference.

We can’t deliver law enforcement to make them do things, that’s not the way the system works. We can just say, here you go, we think this is worth pursuing, and it’s down to you.

What we give to law enforcement is more transparently useful. The FATF recommendations presume that the FIU (Financial Intelligence Unit) database material is held by a separate organisation outside of law enforcement. There is a flat relationship with between the FIU and law enforcement, so when law enforcement get the stuff, they pass it onto the relevant person.

We think we have to do some value added to get the best value. We have to help the reporters raise their quality and we have to do something to make the material more easily usable.

We have 52 police forces, Customs and other law enforcement organisations, all different customers, slightly different requirements, we think this has a lot of potential. We think there is potential for law enforcement to come to us and say, we have this set of events, is there anything in the database that helps illuminate that. There has been very little of this historically.

We want law enforcement to use the database and check. They start an enquiry, and they light upon some suspect. They need then to look into the database to see if a bank or financial institution has reported a suspicion about this person’s money.

How access to the database is structured. We receive data from reporters here, through the Egmont channels. [The Egmont group is a collective of Financial Intelligence Units]. The data is accessible by law enforcement agencies in the UK who have access through remote terminals. They can make their own enquiries of the data. We are encouraging them to use it in a broader, more imaginative way than before.

We are trying to develop our own analysis of the data to identify interesting links, by comparing it with other data sets, by using more sophisticated data mining tools, to develop intelligence packages which we will also pass out. We are intending to take queries from them [law enforcement groups], where we have more sophisticated capabilities than they have locally.

We are saying: here is a huge data set, with 200,000 to 250,000 reports a year, which is immensely valuable in terms of law enforcement in the UK, not just around financial crime, but it also has value in terms of other work. This should be a mainstream data set.

SOCA differs from NCIS in that we are end-users of the data, we use it for own purposes. We develop leads and operations based on intelligence that comes through. [Use of these databases] has been very inconsistent. Some forces do it a lot and some don’t.’

Inside the church

We have put in place some management structures that have brought [the reporting sectors] inside the church. Representatives of the reporting sectors will get greater visibility of what is going on and are consulted and are told what is going on and get some better view. So that even if they can’t say, “that operation came from a SAR from this bank”, they can at least say to their community, that things are going on. It gives them a degree of confidence.

We have been speaking to the senior people in the banks in a general way. The big banks are the bulk numbers, even if they are not likely to come across the most serious crimes. The boards of the banks are happy to do this. They see the requirement; they recognise the public duty issue; certainly one or two make a virtue of doing their duty.

Grump in the banks

You can overstate the degree of ‘grump’ about this among the reporting institutions. It [the grump] is not the fact of spending money and putting the systems in place and they are working. There is some spin-off for themselves and their risk departments because they have had to put in place software and that produces leads for them in terms of suspect accounts.

It is not that they are unhappy about the systems. They are unhappy about particularly the lack of any sense of it having added value in the real world. There is grump about the reality.

Convincing the board

Senior MLROs [money laundering reporting officers) would tell you that things are changing and changing quite speedily. The key issue is around our dialogue and feedback. It was important for us to convince not just the MLRO community who are already on-side, this is their day-job, they believe in this stuff, they are convinced that it is important.

It is convincing the board that this is good value for money, and we are making best use of the material that’s available [the material reported to the FIU in the SARs]. We have the mechanisms for doing that now. But also for giving some sort of feedback -- albeit where the material is anonymised -- so front line staff in banks can see the worth of their activity.

If you create a chain of action that leads to a SAR, you ask, was it worth it?  Did law enforcement do anything with it? So we have mechanisms to give feedback at that level.

What the reporting sector also wants is a means to improve their systems, how they can improve the quality of the SARs that they make, how they can use intelligence that we can provide them with to identify further risks for themselves.

The SARs Committee

We have created a high-level committee, The SARs Committee, which is chaired by Paul Evans [SOCA’s Director for Intervention], which involves very senior representatives from the regulated sector and  law enforcement and from the regulators, to whom we report progress on recommendations within the report.

The SARs Vetted Group

I have established a group which sits below that, called the ‘SARs vetted group’. This is composed of individuals who more concerned with operational activity. We are intending to share intelligence with that group in a way that has never been done before, thanks to the information gateways provided by the SOCA legislation.

Thirdly, we have increased the number of staff in the ‘dialogue team’. It is their job to give regular feedback and receive feedback from the various institutions that are reporting about quality of feedback, what’s been done with the information, about how their systems can be improved.

There will be an annual report, first one to be published in October 2007, which reports on the use of the system and what end-users do with the information.

There is a project approach to delivery of the recommendations. We are on line and on track for delivering on time.

Contracting out?

I raised the possibility [in the Lander report mentioned above] of us buying in expertise to do some of the IT heavy lifting. The problem is that we are a new organisation with pressing IT needs. We inherit 65 different IT systems, none of which talk to each other. They include Customs, NCIS, Crime Squad, Immigration Service… When you merge organisations they all have their own special systems, only some of which we have direct access to.

There is in the private sector a lot of expertise about the management of large volumes of data and the extraction from it of non-obvious patterns, fuzzy logic systems. The question for us was, shall we buy the expertise as a package, in effect outsource that piece of processing, or shall we try to replicate it in-house by buying in that piece of software and training up staff and so on. That is a judgement that is not for me to recommend. It is an operation and delivery issue. The team here have decided a way forward on that. We have put an RFI (Request for Information) out for companies to express interest and we have decided to do some in-house and some by getting in outside expertise. That is being judged on utility and value for money grounds.

There is no question of us giving someone else the data, because, as the FIU, are responsible for data, we can’t give away the responsibility. But we can get in expertise and buy, in effect, part of the processing, by people with expertise that we would have to develop for ourselves and haven’t got.

List X arrangements

We would only do this with companies on List X arrangements, who have classified contracts. This is standard business. There is nothing unusual about private companies doing classified or sensitive government contract work. There are well established procedures. If people who are not our employees have access to the data, they have to be vetted to the same standards as our employees and subject to the same controls and restrictions on the use of the data.

The vetted group: people with whom we sit down and talk and discuss more sensitive matters are security-cleared to the appropriate level.

This raises, in terms of access to sensitive data, no issues that are not raised in hundreds of contracts in government. We are not close to it. We have gone for a twin-track approach. We are delivering some quick wins using some of our internal resources and some of those are very evident and obvious. Lots of things have changed. The more complicated piece is the subject of a developing business requirement and discussions. Hopefully we will take a decision on the way forward at some time in the New Year. It will be a matter for the SOCA board to decide.

More funding

This (The FIU) is an organisation with a resource budget of £400m, depending on which day of the week it is, and whether everybody has paid up. I am in the process of saying to the Home Office, it would be nice to have some more money for this please. If we don’t, we’ll just move slightly slower. I am not worrying about the money for this thing [the working of the SARs process], it is so evidently very important. It will be high up our priorities. Proceeds of crime is very, very important in dealing with organised crime. It [financial gain] is the purpose for which the crimes are committed. We see it as an extremely important part of our business.

The value of the proceeds of organised crime in the UK?

Organised crime costs between £20 billion and 40 billion. That includes the knock-on costs. We estimate, out of that, £5.5 billion might be described as profit. It is subsequently available for investment. Roughly half of that stays in the UK and half goes overseas.

In terms of the money laundering regulations and this regime, the target for criminal property, criminal assets that is available to be seized, criminal property, as the law defines it, is £5.5 billion a year.

Targets for recovery

POCA (The Proceeds of Crime Act) is relatively new legislation. It is not yet mainstreamed in law enforcement. SOCA’s contribution itself will be a part of the UK contribution. The Asset Recovery Board has been set up to manage this process nationally. [The Asset Recovery Board is not to be confused with the Asset Recovery Agency, which uses civil law processes to recover the proceeds of crime].

The ARB reports to Ministers. It’s an issue for the board and all the agencies to make more use of the legislation. There are very challenging targets. This is both opportunity territory and necessity.

£96m was seized from criminals in the UK at financial year ended 31 March 2006. The amount of confiscation orders awarded at court is significant higher than that. This is money taken away from and collected. It takes 3 years from charge to getting the money off people. We are talking about a pipeline put in place just after the legislation was passed, when nobody was using it.

If this figure doesn’t go up in future years, we are all for the high-jump. It ought to. We are a fresh start, we haven’t got any pipeline. We have a bit of a pipeline from one of the predecessor agencies, but not much. We are starting with a clean sheet of paper.

Powerful legislation

ur piece of the bag is people doing something for money. They are causing a lot of harm to our country for illegal profit. The legislation is powerful with a very clear and well articulated description of what the profit of a crime is. Criminal property is very clearly defined. It is almost anything that results from crime, any money or asset, we all have a duty to make that tell against criminals, and we have  a particular duty because of the SARs regime.

How well is the reporting sector doing?

They produce a lot of very useful data. Their behaviour is uneven. There are some under-reporters.

And solicitors…

Solicitors are in a different business to bankers. Bankers are a transaction- based activity and each transaction might give rise to a suspicion. Solicitors are an advisory activity and the solicitor may have a relationship over the long term with a individual client and it may be certain set of circumstances that give rise to suspicion. Therefor the sort of reporting you get and the sort of leads you get are different. You’d expect them to be different.

The quality of reporting by banks

Some of the banks are particularly good at reporting particular types of predicate crime. Things involving money they are particularly good at. They’ve been particularly good at detecting carousel frauds, that’s been helpful. They’ve become quite good at detecting the proceeds of fraudulent acquisition of tax credits, both of which have been very helpful.

Solicitors contrariwise deal with assets of a bigger nature, buying and selling property, and sometimes that gives rise to these issues. There is uneven behaviour across all sectors. But in a general way, we think we are getting good material. Sectors can do a bit better. What we are getting is not largely duff, it is largely usable.

Part of the dialogue process is to help those who are under-reporting, or under-reporting on profile for their sector, to help them look at their systems to see why this may be the case. It’s a two-way process.

One institution wasn’t doing one of the reporting things available, and they now are. They were doing it on an informed basis, using an interpretation of the law we thought it was fallacious and we told them what we thought.,

The key thing for us is to be open and transparent. We need to be more prepared to come out from behind our screen and say what about this. That’s helped by having the vetted unit and the representatives if the institutions on the management committee.

Accessing bank information

What you get with this [the SARs] regime is the expertise of the institutions applied to their own business, identifying what in their own judgement we could never detect, because we are not bankers. Identifying what in their judgement is suspicious or unusual. We get out of it, even with an unevenly operating system, material of such high potential value.

Their expertise is being applied in a purposeful manner. We could never do that after the event.

We can get production orders and go round and get all the papers. Quite often, the first thing we get is a SAR. Then we do some work; then we go round and get the papers evidentially, so we can use them in court.

Organised crime is principally about illegal profit. Your key vulnerability is how you process that money. Your key point of vulnerability is the point at which you intersect with the normal, legitimate economy. Here are the bankers and solicitors who are experts and have some understanding about business behaviour and they are better equipped to detect the anomalous and the suspicious, which is what they are required by law to do. It is their subjective judgement. They are qualified and we are not.

Fraud Report

The pressure on police forces in the field has been street crime. Until this organisation, there has been a diffuse national response to the organised end to it. Fraud has been the cinderella of law enforcement. There are no brownie points for a police force when someone comes through the door and says I have been defrauded by somebody doing X.

The natural and understandable response is ‘your first remedy is a civil one’, there is a question of contract. You need to go away and try that. That may still be the right answer for quite a lot of low-level fraudulent activity. But where it is systematic and organised, systemic, then that is an issue of some significance.

The law has changed the terms of engagement. It doesn’t say ‘this thing’s called financial crime’, it says there’s stuff called ‘criminal property’. Criminal property is the proceeds of a crime. The definitions in POCA are very important. It changes the whole terms of engagement.

There isn’t such a thing as financial crime. By definition, a crime that has a profit is financial crime, so all acquisitive crime becomes subject to these regulations. We might be pursuing some drugs gang and we find that one of them has a Rolex, that is the proceeds of crime. That is criminal property.

To have a concept of drugs crimes and financial crimes is false. They are not. There are crimes that produce criminal property and that is forfeit subject to the predicate crime being proved. That is a very powerful formulation. That is why this legislation has yet to be fully exploited.

We think financial crime and significant fraud is an important issue and we want to do some things about it.

Under the legislation that preceded POCA, there were various statutes that had provision for confiscating the proceeds of crime, the Misuse of Drugs Act, for example. But they were targeted at high level offenders. The POCA is an all-crimes approach and can be applied equally to the street robber who has half a dozen expensive tracksuits and a stereo in his bedroom. The thrust of the legislation is to use it as a crime reduction tool and to demonstrate that crime doesn’t pay. That’s the philosophy that runs through this and it applies equally to the national/international level of criminality where there are multi-millions of profit made, huge property portfolios. It applies to low level criminals who operate on a local basis. We are keen to encourage law enforcement to use the legislation.

The beauty of the legislation is its conceptual clarity. When you know a lemon you know a lemon. It is not difficult when you are pursuing criminal conspiracies that involve acquisition of property and value, to be clear when the bad people are arrested and prosecuted, that there is criminal property involved and that the legislation impinges. By definition, their possession of that criminal property is a money laundering offence in its own right. You don’t need to be a financial investigator or a qualified account to understand the clarity of that. You may need some financial skills to get to the last pennies, but the law is quite powerful. In some contexts it puts the onus on the criminal to own up to their assets. They are in contempt of court if they tell porkies. The risk is on them rather than the Crown.

Forensic accountancy skills require skills we don’t possess, we don’t easily possess. We have a bit of it. It would be nice to have more and it is expensive. It isn’t mission critical. You need intelligent and skilful people, you need to be able interplay a predicate criminal investigation with a money laundering understanding. But the law is quite powerful in this area and you can get the information and we can do production orders on people. There are compellability powers in the new legislation, we can go to people and demand information which they have to supply.

We can lay orders on somebody in prison here to repatriate their own assets and they are in contempt of court if they don’t do it. It is imperfect but it is pretty bracing. I don’t feel we are under-equipped. We can always do with more skills in any organisation, and we are starting with a mix of skills. If we were starting with a totally clean sheet and could have everybody we wanted, it wouldn’t be quite the way it is. But we have  a lot of skills.

Problem with the police forces

We don’t control UK law enforcement and there will be uneven behaviour after October last year. We will do our best to make that as little as possible and to make visible to ACPO (Association of Chief Police Officers) who is doing well and who isn’t doing well, to put moral pressure to perform better. We have no control.

We will help to do better, we will do our best to make it easier for them, but we can’t direct, nor do we want to, by the way, direct chief officers what priority they attach to this work. That is not our business. We cannot guarantee to deliver someone else over whom we have no control. With the reporting sectors, I am somewhere in between the two extremes. Most people want to behave properly and will find it helpful to be given advice as to what is helpful and what isn’t. If we can make it easier for them to report, we will do so. That is the purpose of new forms and guidance.

The person who is sceptical of delivery is right to be anxious because there have been false dawns before. But I am very confident about our own end of it, subject to small details like money and IT.

I hope that our other partners will come to the challenge. We will do all that can to support them to come to the challenge. We are providing briefings to law enforcement users on how they might get the best from the tools we have given them access to. We are giving them case studies on how best to apply the tools and techniques to use. We are talking to HM Revenue and Customs.  We will be doing all we can strategically to turn this around. But at the end of the day it will be the chief constables who decide on how engaged they are. And rightly so

This is a holistic system. This is a regime. All participants have slightly different pieces of the action. We have put ourselves into the centre and we are in two relationships. One of the things we do ourselves and that is both provide the services to other and to use the information for ourselves. We will be using the information for ourselves in two different ways.

We will do our very best to help them perform their part of this piece . But we cannot deliver their behaviours because in law and practice they are responsible for themselves. If that is taken as being anxious about them, it is not, it is just reality.

Using the SARs material

We get two benefits from this material. One is case specific. This leads to a criminal investigation which allows us to prosecute and financially eviscerate organised criminals who are damaging this country. It also helps us put together programmes of work that will make the criminal environment less easy for the criminals to prosper. We have two types of investigative activity. One is case specific: investigating particular crimes by particular individuals, that is people (criminal), focused.

The other is project-focussed - to look at aspects of the criminal environment to make it more difficult. We have work going on in both of those to decide what resources to put into each of those if we are going to make an impact on n organised crime which is an enormous scale. Casework won’t do it and the projects on their own wont do it. But the two together just might.

The Elmer database

The database is available for police forces to search for themselves. They can go in there and look for all their postcodes. If they have any sense, whenever they find a new identity, they go and look if there’s something on the data base already.

Those 100,000 leads could be early analysis we’re doing. We may link 30, 40, 50 SARs together to a single piece of intelligence. Some will be adding material to existing operations or investigations. So they might be historical. You can’t say there are 100,000 leads. It’s more complicated than that. The idea that there’s lots of really useful information, if only it could be taken into account, is right.

Elmer is the vehicle for getting at the information and that is where the IT questions come in.

Terrorist funding

The Terrorism ACT 2000 (part three) is about terrorist funding. The reporting regime is the same. Institutions in the regulated sector report to the FIU on things about terrorism and we have a little team who look at that and look at the money laundering stuff and see if it is terrorist related. Anything we have any sniff about, we pass to Scotland Yard where there is the NTFIU (National Terrorist Financing Intelligence Unit).

Terrorism is not our bag. We don’t do terrorism. We support others doing it a bit. It is not an organised crime we are dealing with. It is done by other people.

The arrangements for terrorism here are complicated; they are the result of a long drawn-out war between intelligence agencies and the police which were drawn up more or less to no-one’s satisfaction in 1992.

Despite all of that it works extremely well and is better than anyone else’s anywhere in the world. There is a culture clash, in our opinion. It works and it has been very successful.

Nobody believes me; it has been very successful by international standards. You fiddle with it at your peril. The fundamental difference between Counter-Terrorism and the rest of organised crime is that Counter-Terrorism is not about crimes for profit, it is about something else. A whole lot of other issues about nation states and politics come into play that don’t come into play in acquisitive crime. Conceptually, they require different mindsets and different approaches. Fundamentally, the same issues arise about knowledge and action. You make the most impact on criminal problems by having the best understanding on what the problem is.  The dynamic of good understanding, good knowledge, good intelligence is very important. It is the same with terrorism; it is the same with organised crime. In all other respects the two are different.