We looked in our last blog at the Know Your Customer (KYC) requirements under the money laundering regulations.
In this blog we look at the new regime imposed on estate agents and some letting agents under the EU’s Fifth Money Laundering Directive.
Money laundering is the process of cleaning money which has been gained from criminal activity in order that it appears to have been legitimately acquired. In April 2018, the European Parliament passed the Fifth Money Laundering Directive which contains amendments to the Fourth Money Laundering Directive on the prevention of money laundering and terrorist financing. In the property sector, it often involves purchases using the proceeds of crime and selling it on or renting it out to give the criminal an apparently legitimate source of funds.
The regulations affect estate agent businesses which includes property auctioneers and some letting agents. The UK implemented the new rules into their national legislation on 10 January 2020.
What do the regulations mean?
Estate Agents and Letting Agents letting properties with a monthly rental of €10,000 or more, must put in place procedures to anticipate and prevent money laundering and help reduce the risk that criminals may exploit their business for financial crime.
How to comply
It’s an offence to trade as an estate agency business (which includes property auctioneers) unless you’re registered with HM Revenue and Customs (HMRC) for anti-money laundering supervision. Registration is simple and can be carried out online at https://www.gov.uk/guidance/register-or-renew-your-money-laundering-supervision-with-hmrc.
Money Laundering Responsible Officer (MLRO)
There is a requirement under the regulations to have a nominated person within your business to act as a Money Laundering Reporting Officer (MLRO) and where applicable also nominate a Deputy MLRO. The MLRO is in charge of the Agencies overall strategy and reporting any suspicious activity in a Suspicious Activity Report.
Prepare a comprehensive written policy statement to show how your business will manage the risks and detail procedures to prevent money laundering (more on that below). Train and support staff to understand and implement these policies. Finally, undertake an Anti-Money Laundering risk assessment covering your clients, your business and how it operates.
Know your Customer (KYC)
It’s a legal responsibility to undertake KYC on the buyer and seller or landlord and tenant before establishing a business relationship or carrying out a transaction.
Proof of Funds – what do I need for due diligence?
There are no hard and fast rules as to what is required to satisfy the due diligence requirements for proof of funds. It depends upon the client, their personal circumstances and whether you have suspicions as to the nature of the transaction or its funding.
Examples of proof
Proof of funds can be shown with:
- An agreement in principle/mortgage in principle
- Bank statements of a buyer’s deposit amount (for mortgage buyers) showing a build-up of funds over a period of time
- Bank statements of a buyer’s cash amount (for cash buyers) showing a build-up of funds over a period of time
- Evidence of a buyer selling a property (if using the funds to buy the new property)
- Evidence if the money has been gifted
You may need to ask you to provide more details of where a buyer’s money has come from. This is normal practice as all estate agents must conform to the Money Laundering Regulations, and doing thorough checks is standard practice. Yes, customers may consider it an inconvenience but they have to provide the information to their lender and lawyer so providing it to the Agent should not cause unnecessary hardship!
Depending on where the buyer got their money from for their deposit or the full purchase price (if they are a cash buyer) will depend upon whether you may need to ask for further proof to show from where the money has come. Be especially careful of large unexplained cash injections into a bank account without supporting evidence.
You may require, for example:
- A letter from whoever gifted your money (e.g. the buyer’s parents have given money towards your deposit, won the lottery, left money in a will)
- Further bank statements from the past months/years (to show how the buyer’s money has built up over time)
- Evidence or receipts for gambling winnings, sale of shares or other large amounts of money in a buyer’s bank account
Politically Exposed Persons – Enhanced Due Diligence
A politically exposed person (PEP) is an individual with a high profile political role, or who has been entrusted with a prominent public function. PEPs represent a higher risk for Estate Agents because they are more likely to become involved in financial crimes like money laundering or the financing of terrorism than other clients. They include:
- Government Officials: Current or former officials appointed to domestic government positions, or positions in a foreign government. This may include heads of state or individuals working in executive, legislative, administrative, military, or judicial branches, in elected and unelected roles.
- Political Party Officials: Senior officials appointed to roles in major political parties at home or in foreign countries.
- Senior Executives: Individuals serving in senior executive roles, such as directors or board members, in government-owned commercial enterprises or international organizations – that is corporations, businesses, or other entities formed by or for the benefit of any such individuals.
- Family Members: An immediate family member of a government or political official, or senior executive – meaning spouses, parents, siblings, children, and spouses’ parents and siblings.
PEP status does not predict criminal behaviour, but the additional risk exposure it brings means that you must apply additional AML measures when establishing a business relationship. It also means that you must conduct ongoing monitoring to ensure that they don’t miss a change in a PEP’s risk profile. PEP monitoring requirements are preventative in nature and should not be considered indicative of criminal behaviour. In other words, a PEP is not necessarily a money launderer it just means that you should take extra care when carrying out your due diligence.
You should always check if your customer is a PEP at the outset.
Money from Overseas
Whilst money from overseas is not necessarily indicative of money laundering it may mean that you should be especially diligent in respect of its source. You may need to request translated documents (for example contracts for the sale of land or bank statements). Be exceptionally careful when monies are being transferred from countries Financial Action Task Force (FATF) list of “Non-Cooperative Countries or Territories” (further details can be found on line).
Making Suspicious Activity Reports (SARs)
If any staff know or suspect a potential customer is engaged in money laundering, they must raise an internal report to your MLRO. Basic examples of suspicious activity include difficulty getting paperwork off the customer to complete due diligence checks, fake or incomplete paperwork, it difficultly establishing the beneficial owner or requests to pay via instalments in attempt to bring payments under the rental thresholds.
The MLRO will need to assess whether there are grounds to pass the report onto the National Crime Agency (NCA). The NCA will determine whether you can proceed with the transaction.
For further information on regulatory compliance with AML or KYC why not contact one of Alexander JLO’s property specialists? We have been dealing with and assisting estate agents for decades and our unrivalled experience in this field will be of benefit to both you and your clients.