5MLD & Letting Agents – Knock, Knock….Who is renting the property?
"Little pig, little pig, let me come in."
"No, no, by the hair on my chinny chin chin."
"Then I'll huff, and I'll puff, and I'll blow your house in."
– The Three Little Pigs by James Halliwell-Phillipps
Letting agents do not need to go to the lengths of the big, bad wolf of blowing the house in, to comply with the Fifth Money Laundering Directive (5MLD).
“Are we never to have a moment's peace? The rent here may be low but I believe we have it on very hard terms.”– Marianne in Sense and Sensibility, Jane Austen
“Risk comes from not knowing what you’re doing.” – Warren Buffett
Although Marianne has the opportunity to rent a modest home, Barton Cottage, on the property of a distant relative, Sir John Middleton, if the scenario were to occur today, both the tenant and landlord may not be aware that the rental arrangement may fall within the 5MLD. In turn, Sir John Middleton’s letting agent may not have considered and understood the risks in complying with the 5MLD requirements as it applies to rental property, and may not have implemented the necessary controls.
Who is captured by 5MLD?
Letting agents who deal in a rental property (residential or commercial) with a monthly rent of or equivalent to EUR 10,000 or above, are required to carry out customer due diligence (CDD) checks and comply with other anti-money laundering requirements. CDD checks need to be carried out on any new tenants and landlords from 10 January 2020. Also, if an existing tenancy is renewed after this date, letting agents will need to carry out appropriate checks at that point on both parties.
Letting agents are supervised by the HM Revenue & Customs (HMRC) for anti-money laundering and counter-terrorist financing (AML/CTF) purposes under The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (Money Laundering Regulations). The types of business that must register include:
- High Street residential estate and letting agencies;
- Commercial estate agencies and letting agencies;
- Online estate agencies and letting agencies;
- Relocation agents, property finders, private acquisitions specialists;
- Asset management businesses that also provide estate agency or letting agency services;
- Social housing associations that offer estate agency or letting agency services;
- Letting or property management agents that offer estate agency services to landlord customers.
- Property or land auctioneers;
- Land agents;
- A sub-agent providing estate agency services to a main estate agency business;
- Business brokers or transfer agents brokering the sales or transfer of client businesses to third parties; and
- Construction companies (residential property builders) with a sales offices on-site, where they act or offer additional estate agency or letting agency services other than the sale of their own construction properties.
Letting agents must register with HMRC by 10 January 2021. Even if letting agents have yet to register, they will still need to comply with the Money Laundering Regulations. Any estate agent who carries out activities such as property sales, should already be registered with HMRC for AML supervision. If the estate agent also carries out lettings activity, they will need to inform HMRC.
Are you complying to prevent money laundering?
Any businesses that fall under the scope of the Money Laundering Regulations should follow the law according to their sector-specific guidance as issued by their supervisor. For letting agents, since HMRC is the supervisor, HMRC’s sector-specific guidance should be followed. Lettings agents are expected to follow HMRC’s Estate Agency Business (EAB) guidance.
In summary, letting agents handling higher value rentals must now:
- Register for AML supervision with HMRC and renew their registration annually.
- Appoint a nominated officer/Money Laundering Reporting Officer (MLRO) who will be responsible for the letting agency complying with the Money Laundering Regulations.
- Take appropriate steps to identify and assess risks of money laundering and terrorist financing.
- Put in place written risk assessments, policies and procedures on how to manage and lessen those risks.
- Carry out CDD checks on any new tenants and landlords involved in a let where the monthly rent is equivalent to EUR 10,000 or more and carry out ongoing monitoring.
- Ensure all employees are aware of the Money Laundering Regulations. Business owners should provide routine training on how to recognise transactions that may be related to money laundering.
- Report suspicious activity. The nominated officer/MLRO should make a suspicious activity report even if no transaction takes place. It is a criminal offence for anyone to do or say anything that ‘tips off’ another person that a disclosure has been made where the tip-off is likely to prejudice any investigation that might take place. If the transaction or business relationship with the customer whom the report has been made needs to proceed, then permission from the National Crime Agency is required to progress the transaction.
- Maintain and keep records (in the form of documents or information) for a period of 5 years.
There is often confusion between AML and KYC CDD. Whilst knowing your customer (KYC) and customer due diligence (CDD) via identity checking is a key part of compliance, it is not the sum total or even the most important part of anti-money laundering compliance. Simply knowing who a money launderer or fraudster is, does not prevent the money laundering or fraud occurring. Therefore, it is important to consider where the money from the transaction is actually coming from; whether a proper explanation can be provided; and whether that source indicates that the money has been lawfully acquired. The expectation is not for letting agents to play detective but reasonable enquiries must be made.
Therefore, due diligence is often reasonably thought of as applying a ‘smell’ test. Does the transaction fit with what you know about the parties? For example, a tenant who has previously rented a small flat in Pimlico who now wants to rent a large house in Mayfair without a sensible explanation of why their circumstances have changed should arouse suspicion, regardless of satisfactory identification checks.
What are the consequences of non-compliance?
If a business fails to comply with the Money Laundering Regulations, HMRC can take various measures from issuing warning letters, to civil penalties and potentially criminal prosecution. Criminal prosecution could result in a fine or imprisonment, or both.