Foreign Direct Investment – learning the lessons from SARs | Deloitte UK has been saved
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The new National Security and Investment Bill, currently moving its way through the House of Lords, will bring the UK into line with many jurisdictions across the world in strengthening its powers to mitigate threats to national security from Foreign Direct Investment (FDI).
A new Investment Security Unit (ISU) will be established to review deals involving foreign investors, across 17 ‘sensitive sectors’ which have recently been revised by Government. To provide certainty for investors, the bill requires notified transactions to be either cleared or ‘called in’ within 30 working days of the notification being given and accepted. Once called in, Government will have 30 working days, which is extendable – in cases where the specific legal test is met – by a further 45 working days, to carry out a full assessment of the transaction.
The Government hopes that this will strike an effective balance between protecting our security interests and maintaining economic competitiveness.
In establishing this new FDI regime, lessons can be learned from an area with a number of similar characteristics - the Defence Against Money Laundering (DAML) regime, that sits as a subset of the wider Suspicious Activity Report (SARs) framework.
With DAMLs, organisations in the ‘regulated sector’ are obliged to submit reports to the UK Financial Intelligence Unit (UKFIU) when they suspect that property they intend to deal with is in some way criminal, and that by dealing with it they risk committing one of the principal money laundering offences under the Proceeds of Crime Act 2002 (POCA). These transactions are then assessed by the UKFIU, which has a time limit of seven working days to consider its response and the authority to direct subsequent action.
To summarise, both DAML and FDI processes are typified by proactive notifications from the private sector into government, which then has a defined time-limit to evaluate and act.
The numbers of SARs and DAMLs submitted has risen substantially over the last 20 years. When the original SARs database (ELMER) was built back in 2000, it was designed to hold 20,000 records – not an unreasonable starting assumption, given that 14,500 were submitted in 1999. However, fast-forward to 2019/20, and the UKFIU received 635,493 SARs of which 61,978 were DAMLs. Unsurprisingly, this has placed enormous operational pressure on the UKFIU.
The growth in submissions has been driven by a number of factors, identified by the Law Commission’s review of the SARs regime in 2019:
The worst case scenario for the ISU is to be inundated with ‘defensive notifications’. This is not a wholly unlikely outcome: the legislation gives Government significant powers to unwind transactions if they call them in after the event, but it cannot do this in cases where the transaction has already been approved. Therefore, investors may well seek the safe harbour of approval if there is even a marginal risk of the deal being undone.
Although statistics need to be treated with caution, a side-by-side comparison with the equivalent body in the United States (CFIUS) is potentially illuminating. In 2019 CFIUS employed 32 FTE and reviewed 231 notices. By comparison, the UK Government’s Impact Assessment indicates that they expect to receive 1,000-1,830 annual notifications, in addition to the 70-95 transactions which they expect to “call in” for an assessment, which will be assessed by ~100 officials.
This comparison indicates that the ISU might have limited capacity to process notifications, even taking into account the proposed government amendment to change the overseas stake threshold from 15% to 25%. If anticipated notifications escalate, with those caught by the regulation adopting a defensive position, the capacity of the ISU would be further constrained. In this case the implications could be:
In learning the lessons from DAML and SARs, there are a set of steps Government can take to alleviate ‘defensive notifications’ and help to ensure that the experts in the ISU are focused in reviewing only those cases which warrant it:
As we set out in our recent article on economic crime it is critical that there is increased collaboration across the system. The establishment of the ISU provides an opportunity for public and private sectors to develop and operate an effective regime – and it is an opportunity which must be seized.
Tim supports organisations across the Economic Crime regime, including policy makers, regulators, private sector and law enforcement. He works with them to design whole-system solutions, focusing on the disruption of criminal activity, illicit financial flows and the protection of the vulnerable from exploitation. He is an expert in operating model design; translating strategy into a blueprint for the future, creating a business case for change and structuring programmes of transformation.
Chris is a Director in the Financial Crime team within Deloitte's Forensic practice. He has over 15 years’ experience in intelligence, investigation, policy, and partner support roles within national law enforcement agencies. Chris has worked extensively with overseas law enforcement, industry and regulators to deliver operational objectives and build capability.