Annette Fong Head of Compliance Solutions
Estate Agents & AML: Knock Knock Who’s There?
“I would do dry January, but I’m a real estate agent.” – The Broke Agent
The Fifth Money Laundering Directive (5MLD) came into force in January 2020, extending the UK Money Laundering Regulations and implementation of regulatory controls to include real estate firms, real estate brokers, estate agents and rental intermediaries.
During this time, estate agents could have considered dry January, but instead, may have been 'driven to drink' by the new stringent requirements to implement policy and procedures to prevent money laundering by confirming the identity and/or identities of all vendors, buyers, tenants, landlords and people with significant control of companies on residential and commercial property transactions.
The types of transaction include:
- Selling a property;
- Buying a property; and
- Leasing a property with a value from €10,000 per calendar month.
In addition, estate agents are subject to regulatory supervision, oversight and enforcement by HM Revenue & Customs (HMRC). Failure to comply with the identification and due diligence requirements can result in severe penalties and even criminal prosecution.
On 7 January 2021, HMRC published a list of companies which had received penalties between 1 February and 30 September 2020. Featured among them was a fine of £23.8 million against a money service business for flouting money laundering regulations. This included failures to carry out risk assessments, failure to have the correct polices, controls and procedures in place and failure to conduct appropriate due diligence and maintain proper records.
Nick Sharp, Deputy Director of Economic Crime, Fraud Investigation Service, HMRC, said:
“Businesses who fail to comply with the money laundering regulations leave themselves, and the UK economy, open to attacks by criminals.
Money laundering is not a victimless crime. Criminals use laundered cash to fund serious organised crime, from drug importation to child sexual exploitation, human trafficking and even terrorism.
We’re here to help businesses protect themselves from those who would prey on their services. That includes taking action against the minority who fail to meet their legal obligations under the regulations as this record fine clearly shows”.
Therefore, even if a business may be able to absorb such a penalty, the reputational damage caused can be catastrophic.
The state of money laundering in real estate
Money laundering is a growing, worldwide problem. The United Nations Office on Drugs and Crime estimates the amount of money laundered globally in one year is 2 - 5% of global GDP, or US$800 billion - US$2 trillion. Due to the clandestine nature of money-laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.
Estate agents play a key role in early detection of a property transaction being used as a conduit for illicit funds. This is because property can be purchased via anonymous companies and trusts, making it difficult to identify who the true owners are and if they pose any money laundering risk.
Through their research, Transparency International identified 513 properties in the UK bought with suspicious wealth, with a combined value of more than £5 billion. Of the 513 properties identified, 82 are commercial – including hotels, restaurants, golf courses and office space – whilst 430 are residential.
In recent times, the following headline articles depict the coverage of money laundering and property –
- Woman arrested in property rental network money laundering probe
- The Birmingham homes once rented as part of prolific gang's £17million 'property portfolio'
- Unexplained Wealth Orders: Suspected money launderer gives up £10m of property
In the UK’s National risk assessment of money laundering and terrorist financing 2020, it was noted that the property sector faces a high risk from money laundering, due to the large amounts that can be moved through or invested in the sector, and the low levels of transparency.
As such, UK property purchases remain an attractive method to launder illicit funds. Criminals often purchase properties as long-term investments and to release their criminal funds. The large amounts of money that can be moved in one transaction and the appreciation in value, along with the enhanced lifestyle, makes them very attractive to criminals, in particular super-prime property. Criminals may also look to increase property purchases as a method to launder and increase their wealth, particularly during current COVID-19 times while bank interest rates are low, and sellers may be more willing to accept much lower offers.
In May 2020, the Royal Institution of Chartered Surveyors (RICS) revised its Anti-Money Laundering (AML) guidance in light of COVID-19. The guidance ensures regulated firms comply with RICS’ professional standards but does not provide legal advice on specific obligations for firms carrying out regulated activities. It cautions that advice from a legal professional or AML supervisor may still be required.
The 'when' and 'how' of customer due diligence
Estate agency businesses must carry out due diligence on both their customer and the counterparty to a transaction. Due diligence is required on a customer at the point the estate agent expects the relationship to have an element of duration. This may be when a contractual relationship is formed, but in some cases may be earlier.
The purpose of due diligence is to ensure an estate agent knows that the parties to a transaction are who they claim to be. The exercise of due diligence is where an estate agent is most likely to be alerted to the presence of red flags. Standard due diligence is generally straightforward but should be carried out with appropriate attention. Typically, it involves the collection of identification documents, as well as investigations on official registers and compliance search engines.
Estate agents should always consider whether it is necessary to carry out Enhanced Due Diligence (EDD), particularly where red flags are identified. EDD requires an estate agent to take greater efforts to establish the subject’s identity, as well as carrying out additional measures such as source of wealth checks. The level of due diligence performed should always be informed by the business’ risk based approach.
Red flags are indicators that help estate agents to treat a transaction with greater suspicion. They suggest a higher risk of money laundering and may include (but are not limited to):
- A purchase of a property without a mortgage from a financial institution with no verifiable source of income justifying their wealth;
- A purchase of a second property very soon after the first purchase has completed;
- A lack of interest towards the transaction from a client, for example where they do not want to view the property first;
- Successive purchase/sales of the same property (where a client seeks to buy a property and sell it multiple times);
- Clients seeking anonymity buying property through complex corporate structures, such as companies based in secrecy jurisdictions which can mask the ultimate beneficial owner. For example, an overseas buyer from a country that is considered a high risk jurisdiction including tax havens; or a buyer using a complex structure for settlement; and
- Clients that are PEPs from high corruption-risk jurisdictions and those charged with or alleged to have committed corruption offences.
As the above is not an exhaustive list, a business risk assessment must be undertaken as part of complying with the AML regulations. All estate agency businesses must have systems and processes in place to identify and report red flags. Controls and employee training should be implemented to ensure such systems and processes are complied with. These policies must be documented and businesses must be prepared to submit them for review at HMRC’s request.
Transactions should be dealt with on a risk-based approach, with more resources spent on transactions which present a greater number of red flags. Identified red flags should be investigated by the estate agent working on the transaction. Where they are not satisfied that the red flags’ cannot be reasonably and legitimately explained, the transaction should be reported to the business’ nominated officer or appointed Money Laundering Reporting Officer (MLRO).
The nominated officer/MLRO should be experienced in judging the money laundering risk a transaction poses. Where, having considered all the circumstances of a transaction, they still judge it to be suspect, the nominated officer/MLRO should file a Suspicious Activity Report (SAR) with the National Crime Agency. Responsibility for the failure to file an SAR rests with the nominated officer/MLRO once the transaction has been reported to them.
What should estate agents be doing now?
It is recognised that due diligence requirements have become increasingly onerous for estate agents and consequently, this has had negative cost implications for firms. However, opportunities for streamlining do exist by virtue of the direction that firms take a risk-based approach, meaning maximum resources need not be spent on each individual transaction. In order to create an AML framework which satisfies the regulation but still, represents cost efficiency where possible, firms are recommended to seek expert advice and utilise technology solutions.
Firms who have yet to undertake risk assessments and create policies and procedures to satisfy HMRC that they take the threat of money laundering seriously should act now. Firms who already have an AML framework in place, should be reviewing at least on an annual basis. This will demonstrate that the firm is committed to both the letter and spirit of AML regulation compliance.
The key points to consider are whether:
- The risk assessment framework is adequate to capture all risks associated with a particular transaction, including jurisdiction, sector, and complexity of the ownership structure;
- The due diligence undertaken appropriately reflects the risk profile generated from the risk assessments;
- There is senior level involvement at an appropriate stage where a transaction is identified and escalated as high risk; and
- Risk profiles are monitored and revised to take account of changing circumstances or additional information.
Ince offers an end to end legal advisory and consulting service to help businesses with AML compliance. In conjunction with these services, we also offer a digital KYC solution to assist with process efficiency and cost effectiveness.
For more information about our digital KYC solution, visit the dedicated page on our website.