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Don’t fall foul of anti-money laundering rules

Does your company apply adequate customer due diligence measures when carrying out estate agency work? 

Does it establish and maintain appropriate policies and procedures on adequate record-keeping, internal controls or risk assessments, whilst ensuring that relevant employees are trained in how to recognise and deal with transactions and other activities potentially related to money laundering and terrorist financing?  

As you undoubtedly know, almost all businesses, including estate agents, are supervised by HMRC, which took over the regulatory duty in April 2014 from the OFT, for anti-money laundering (AML) purposes, and as such fall under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, which requires agents to conduct more thorough due diligence checks on both the buyers and sellers of properties than under previous legislation. 

Don’t fall foul of anti-money laundering rulesMichael Harris, director of financial crime and regulatory compliance at LexisNexis® Risk Solutions, said: “For every transaction processed, agents are required to obtain and hold identification and proof of address for all customers as an absolute minimum. 

“They [agents] must also establish whether there are any beneficial owners on whose behalf the transaction is taking place.

"This second step will become increasing important for transactions with overseas buyers in the run-up to the Foreign Owners Property Register, which is expected to go live in 2021.” 

MLRO 

Internally, a person must be nominated to act as a Money Laundering Reporting Officer (MLRO), and a senior member of the management team must also be appointed to take responsibility for compliance with the 2017 Regulation.  

Harris explained: “The MLRO has a vital role as a gatekeeper in fighting financial crime. If a member of staff suspects that a customer is engaged in money laundering – whether a transaction has occurred or not – they must file a Suspicious Activity Report (SAR). 

“The business’ MLRO must then assess whether it needs to be sent to the National Crime Agency and if it does, the transaction will be halted.” 

The government has estimated that organised crime in the UK can generate up to £24bn per year, and as the purchase of property has the potential to be used by criminals mainly due to the large funds which can be transferred in a single transaction, it is imperative that agents understand the regulations they are required to abide by and carry out the relevant checks. 

Checks should be made on the sellers, as well as the buyers, while letting agents should also report any suspicious activity, in accordance with the Proceeds of Crime Act. 

Don’t fall foul of anti-money laundering rulesThe latest anti-money laundering regulation changes, which are in practice across both auction and private treaty sales, have been warmly welcomed by Ian Kitson, director at Cheffins, who believes that they provide “an additional obstacle for potential money launderers”. 

“[AML regulations] have created additional security for vendors and the authorities and the benefits from increased due diligence have outweighed the negatives.” 

But spot and random checks by HMRC have uncovered agents failing to comply with anti-money laundering regulations, often resulting in substantial fines.

An HMRC spokesperson commented: “Last year alone these checks led to us issuing more than 880 penalties to all sectors - including estate agency businesses - for failing to comply with the rules.”

AML compliance failure 

Although HMRC to-date has not confirmed the identity of the agents who have been levied with fines, nor the amount they were ordered to pay, Mark Hayward, CEO of NAEA Propertymark says that some agents have been hit with what he described as “business busting” fines despite a “ramping up of compliance activity”, following the introduction of tighter AML regulations in 2017. 

Hayward told the press: “Fines are not publicly being made known but, anecdotally, we know they are significant.” 

Don’t fall foul of anti-money laundering rulesA major problem is that the sector remains “predominantly unregulated”, according to Hayward, with “no minimum standards” in place to stop anyone from setting up as an estate agent, making the sector vulnerable to criminal activity as well as general mistakes. 

Research from Landmark shows that there is a general lack of understanding when it comes to money laundering regulations. 

Just 12% of agents surveyed scored 100% on questions relating to the existing regulations and changes introduced as part of the Fourth Money Laundering Directive (4MLD) in June 2017, requiring agents to undertake checks on purchasers in addition to vendors. 

Understanding the importance of demonstrating a risk based approach was identified as the main area of concern in the study. 

Estate agents are required to have a process in place to identify the level of risk posed by the individual to the business from a money laundering perspective. Each client should be assessed individually and an appropriate level of check applied.

Time is of the essence

Joanne Dick, compliance manager at Carter Jonas, believes that one of the best ways in which to avoid falling foul of anti-money laundering regulations is being conscious of timing, and that means ensuring that identity checks on the seller are completed prior to entering into a contract, while she also advises that the due diligence on the purchaser should be completed prior to or at the point of exchange. 

She commented: “It [AML] is a fundamental part of our compliance process and, rather than thinking of it as an extra step, we’ve integrated the obligations into our procedures so that anti-money laundering is not seen as an obstacle but rather a normal part of the sales process.” 

Don’t fall foul of anti-money laundering rulesDick added: “Timing really is critical to remain compliant and although agents are keen to get the sale over the line, it’s vital that they recognise the importance of this step. It is also essential to ensure all members of staff are appropriately trained.”

But Landmark's research shows that while management and owners demonstrate a good understanding of the regulations, it's not being disseminated to front line staff.

“Irrelevant to their own knowledge and understanding of the regulations, business owners and management who are not training their staff will be identified and targeted” said Ben Robinson, director of agency services at Landmark.

“When HMRC first contact an agent they will be asking relatively straight forward questions, such as who is the Money Laundering Reporting Officer (MLRO), to whoever answers the phone. If that person doesn’t know the answer it’s not too much of a stretch to assume you may have them knocking on the door soon after!”

Robinson believes that more agents need to assess what it is that HMRC is really asking for. 

He continued: “I think too many agents are guilty of simply filing away a passport or driving license without really asking themselves what HMRC are looking for.

“The regulations require estate agents to risk assess their business relationships and apply an appropriate level of investigation to ensure that they understand who their customer is, and why they are involved in the transaction.”

Compliance checks really need to be a collective responsibility between both the agents and the compliance team, in order to collate all the essential information promptly so that the necessary checks can be undertaken, not just to allow for sales to complete, but ideally also rentals. 

Although anti-money laundering checks are currently not a legal requirement for lettings, an increasing number of agents are now starting to carry out checks for new landlords as a matter of best practice.

Don’t fall foul of anti-money laundering rulesThe inclusion of buyers as part of the 4MLD in June 2017 placed a heavy burden on the sector, and Robinson has “sympathy” for the impact it has had on agents, but expressed his surprise that lettings was excluded. 

He commented: “I firmly believe that lettings present as much of a risk as sales from a money laundering point of view and it is only a matter of time before it will be introduced for lettings.”

Indeed, the EU’s Fifth Money Laundering Directive (5MLD) indicates that high value lettings will soon be included. 

5MLD

The EU’s 4MLD may have only been implemented into national law just over a year ago, but the UK will soon adopt the 5MLD. 

The 5MLD is designed to further combat terrorism and money laundering following the escalation of terrorist violence in Europe and as a response to the Panama Papers scandal, which exposed the widespread use of trusts and opaque offshore structures to launder money generated from bribery, corruption and tax evasion.

Changes under the 5MLD look set to include, among other things, the regulating of virtual currencies and pre-paid cards to prevent terrorist financing, improving safeguards for financial transactions to and from high risk countries, while letting agents face having to conduct mandatory anti-money laundering checks on tenants paying more than €10,000 (£8,880) a month in rent. 

“This is great news,” said Alex Cobham, the chief executive of the campaign group Tax Justice Network. “At least in this area the UK will not pursue a post-Brexit race to the bottom on financial secrecy.”

The UK is now moving swiftly to implement the new rules, which will be in place until at least the end of the Brexit transition period in December 2020. During this time, Britain has pledged to abide by all existing and new European laws.

“With fraud on the rise and the fifth money laundering directive now being implemented, there has never been a time when AML services have been in greater demand,” said Martin Cheek, chief executive of SmartSearch. 

Technology 

In a bid to help improve anti-money laundering processes, some experts believe that there should be greater automation and less reliance on paper filing systems by making it mandatory to do electronic AML checking rather than relying on manual checks.

Having appropriate AML systems in place which can electronically verify documents, including any fakes, such as passports or driving licenses, used to make fraudulent transactions, can help prevent the risk of being victim to money laundering, especially as the manual checks involved can often make it hard to spot the counterfeit documents.

SmartSearch’s recently launched SmartAML app, for instance, which is able to electronically verify all documents remotely, with the same capabilities as the full SmartSearch verification platform, which is used by hundreds of estate agents nationwide.

This means users can carry out instant AML checks when they are in a client’s home or office and receive the results to their handheld device in seconds.

The app reads the name, full address and date of birth from the driving license. SmartAML then validates the information against the credit reference databases and automatically screens the person against worldwide sanction and PEP (politically exposed person) watch-lists which contain around 2.5 million data subjects.

The results are delivered back to the user in seconds with a green tick or a red cross. The search outcome details are then automatically uploaded into the full SmartSearch system, enabling the new client’s customer record to be monitored daily, weekly or monthly dependent on the client’s risk policies, for any changes to sanction and PEP watch-lists.

Don’t fall foul of anti-money laundering rulesCheek commented: “With the ever-increasing presence and risk of forged identity documents the introduction of electronic verification has brought with it confidence and certainty to AML compliance.”

However, while Cheek believes that technology can help tackle money laundering, he does not believe that it should be mandatory to do electronic AML checking, but rather sees a combination of both manual and electronic checks as appropriate methods of undertaking client verification, especially when dealing with high risk clients and property deals. 

Ultimately, as with all compliance, the important thing is to have clear, documented processes and procedures and evidence that they are being adhered to ensure that you and your firm are able to cope with the changes to AML regulations.  

Contacts: 

LexisNexis® Risk Solutions
Cheffins
NAEA Propertymark 
Carter Jonas
Landmark
Tax Justice Network 
SmartSearch

*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor and Editor of Landlord Today. You can follow him on Twitter @propertyjourno

  • icon

    A well-written article, I would even say that the author do not need an advice from the essay editing bureau. Everything is very competent and accessible. Thanks for your opinion.

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