Anti-Money Laundering - The New Rules
Did you know that the laws regarding money laundering have significantly changed in the last few months? There is now an even greater legal responsibility for estate agents to check the details of all prospective house buyers as well as sellers.
So if you're wondering why you seem to be being asked a lot more questions than usual, please bear with us. This article from the Mortgage Finance Gazette explains more...
June sees the start of summer with people thinking about their holidays and taking some much needed time out. But for the property industry it has been a very different picture with a new directive coming into force and providing businesses with little time to prepare.
On 26 June 2017 the Fourth EU Anti-Money Laundering Directive was passed. A new piece of legislation set to clamp down on fraudulent transactions within the property sector. Normally, when a new piece of legislation is being proposed there is a window of 21 days to lay the legislation before parliament. For reasons not known, this 21-day window did not happen this time leaving the industry with just one full working day to become compliant. For the majority of estate agents this was an impossible task.
The Anti-Money Laundering Directive is an EU law which all current 28 member states are obliged to transpose to law. This means taking the EU guidance and interpreting and adapting it to their own legislation, which in our case is the UK law.
Our advice to those in the property sector has been not to panic. This is a step change for the profession but one that is manageable if tackled in the correct way. It is important to start planning the necessary processes and procedures that are required and to have a plan in place for when you will be able to deliver and be fully compliant. Rather than viewing this as a burden on time and costs, which it undoubtedly is, see it as an opportunity to improve your due diligence and compliance and to further protect your business. For many, it will be the first time they have tackled their money laundering obligations with real intent.
Informal transition period
HM Revenue and Customs has recognised that this has been a very quick process and businesses have been given little time to prepare for and to ensure the recommended processes for compliance are in place. Therefore, HMRC has said it will adopt a pragmatic approach when reviewing businesses, as it can fully appreciate it is not possible to push a button and be compliant automatically. Essentially, they are offering an olive branch and allowing for an informal transition period so long as it can see plans are being put in place to be compliant by early autumn. This is an informal period and you should show some haste in tackling the new directive as the first prosecution won’t be far behind the autumn window we are advocating.
This new legislation is about removing the situations where criminals may seek to hide their money such as through the use of unnecessary trusts or nominees, for example. It is about identifying suspicious circumstances as they arise and ensuring excellent reporting to the crime agencies who will in turn be looking for prevention and apprehension tactics.
The property market has long been recognised as an effective mechanism through which criminals may launder the proceeds of their criminal activity. The sheer size of the market and the high value of property assets means that extremely large sums can be cleansed in a single transaction.
This new directive is a big change for estate agents – and those carrying out estate agency functions by making introductions between buyers and sellers. They now have a stand-alone duty of due diligence not only on their clients but also on the counterparties involved in the property transaction.
This will involve considerably more work for estate agents as they are now not only required to ask ever more intrusive questions around salary, current financial commitments like savings and debts, household expenditure as well as personal information such as marital and job status, but also to seek relevant information on the party they have no contract with.
In addition, property professionals in the regulated sector will need to carry out risk assessments of their business for money laundering. This is simply considering your types of client, in terms of where they or their money comes from, and what types of deals you are advising on. This allows you to identify what types of matter or client is in the “red zone” for money laundering, so that you allocate more compliance time and resource on those particular matters. In our view, you need to conduct a ‘root and branch’ risk assessment at least every two years.
This new regulatory regime and the level of due diligence that is required will significantly increase workloads due to the associated volume of administration needing to be tailored to each client case, and for the usual terms of business to be updated. The likely doubling of workloads will inevitably increase company costs with existing staff needing further training; and in many cases, estate agents needing to recruit additional staff to help with the increased administration workload.
The financial impact on estate agents will be significant and could cost the larger agents with more than 100 branches a combined, additional £6 million. For smaller estate agents and surveyors this may very well be the first time they will have carried out checks on both the buyers and sellers, which will come as an additional cost and time burden.
UK estate agents with an international presence and branches overseas will also have to adhere to the directive and apply the UK standards to all of their operations.
Appointing a money laundering regulation officer
One of the first steps we would advise estate agents and surveyors to take is to appoint a money laundering regulation officer (MLRO). For those agents that have a considerable number of branches they should also consider appointing a deputy MLRO, someone who can be that second pair of eyes and ears for the MLRO. We must stress that the MLRO of an agency will need to be someone of senior management ability: they will need to have a certain level of gravitas, be credible, be able to spot when things don’t quite add up and won’t succumb to undue pressure.
Impact to auctioneers
The guidelines state that auctioneers should ID all potential buyers before providing them with a paddle. However, if you have 300 people attending an auction that would be an immense level of additional administration to ensure due diligence is carried out on every single person. Consequently, this rule only applies if the auction house is charging them a fee. If there is no fee or money exchanging hands then it is not classed as a business relationship.
The question auctioneers will now be asking themselves is, is it worth charging a fee? It is worth noting that the full level of diligence will not be required in the first instance, with the final enhanced risk assessment to be carried out at a later date once the sale is confirmed.
A challenge if not a curse
There is no doubt that the new directive presents some challenges to regulated property professionals. The HMRC’s guidance is presently in interim format and we would encourage all affected to keep an eye on that status – we anticipate further changes to come as the sector gives feedback; we are already seeing changes with the second guidance.
Separately, do keep engaged with HMRC, especially those who have either received a letter from HMRC recently or notice of an inspection. It is clear that HMRC is stepping up its visits and at the moment they are generally “announced”. It will be important to be engaged with the regulator on such visits. The HMRC has significant powers to conduct visits and to review files, policies and particular matters.
It is certainly not a bad idea to carry out internal reviews of your preparations to comply with the new EU directive, which may include tweaking your present systems and controls. This could include a number of things such as internal file reviews, appointing “compliance champions”, giving additional training to those who may have missed key information in the past, and reviewing how robust your systems are by recording “near misses”.
These are all challenges to business at a time when both the residential and commercial sectors are under strain. There will be some cost uptick and greater regulatory scrutiny. Those are givens. The National Crime Agency is effectively seeking better intelligence with which to pursue criminals by enlisting estate agents to be their “eyes and ears”. The smart business will be prepared and view this as a challenge to be met. We are here to assist those businesses going forward.
It’s in our interest
Despite the little time allowed to prepare for this new directive, estate agents and other organisations operating in regulated sectors, have to get to grips with this piece of legislation. The consequences for failing to be compliant and falling foul of the regime, could be a hefty financial penalty which could be unlimited, or worse still, involve a prison sentence for failing to recognise fraudulent activity.
This directive is part of a drive to raise standards across the property sector, which ultimately will be in all our interests in the long run.