Author: Niall Hearty
30 March 2023
6 min read
A recent survey of property firms painted a stark picture of property firms’ money laundering shortcomings.
The research, conducted by tech company SmartSearch, estimates that up to £100 billion is being stolen in the UK each year, largely through companies’ anti-money laundering (AML) shortcomings.
According to the survey, a quarter of regulated firms admit to still using flawed manual checks on hard-copy documents, such as passports and utility bills, which can be easily forged.
More than three quarters of property firms have not changed their approach to onboarding new customers since the invasion of Ukraine and the resulting sanctions that were imposed on Russia. Nearly half of all regulated firms are failing to check on the use of front or “ghost’’ companies used by criminals to disguise the beneficiaries of a transaction.
Companies and individuals operating in the property sector face a number of obligations in relation to money laundering.
Those working in the estate agency sector are subject to the Money Laundering Regulations. To give them their full name, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (which were amended post-Brexit by the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020) set out the additional obligations of private sector firms working in areas of higher money laundering risk. They aim to stop criminals using professional services to launder money by requiring professionals to take a risk-based approach.
A business must register with HM Revenue and Customs for the purposes of the Money Laundering Regulations if it carries out any activities defined as estate agent activity in accordance with section 1 of the Estate Agents Act 1979, and it acts:
Estate agency activities include:
Those businesses that must register include high street residential estate agencies, commercial estate agencies, online estate agencies, property or land auctioneers, land agents, relocation agents, sub-agents providing estate agency services to a main estate agency, asset management businesses that provide estate agency services, those brokering the sale or transfer of client businesses to third parties, social housing associations offering estate agency services, letting or property management agents offering estate agency services to landlord customers and residential property builders with on-site sales offices offering estate agency services other than the sale of the properties they constructed.
The obligations the Money Laundering Regulations place on businesses include conducting customer due diligence measures to check that customers are who they claim to be, carrying out risk assessments of the business, and putting in place internal controls and monitoring systems that reflect the size, complexity and nature of the business.
Like other companies, estate agents have an obligation to submit a Suspicious Activity Report (SAR) to the National Crime Agency (NCA) if they have knowledge or suspicion of money laundering activity.
In practical terms, customer due diligence means obtaining that person’s name, a photograph or official document confirming their identity and their residential address and date of birth. It may also be necessary to identify the ‘beneficial owner’ in certain situations, such as when someone is acting for another person in a transaction or because there is a need to establish the ownership structure of a company, partnership or trust. In recent years Parliament has introduced steps to try to ensure greater transparency around the beneficial ownership of property in the UK. A new register of overseas entities (ROE) was created under the Economic Crime (Transparency and Enforcement) Act 2022, which came into force on 1 August 2022. It requires anonymous foreign owners of UK property to reveal their identities (the deadline to do so was 1st February 2023). This will allow them to buy and sell land or property in the UK.
Customer due diligence should be conducted when establishing a business relationship in order to establish its purpose and nature, including the source of funds, reasons for transactions, the customer’s line of business, their dealings with any underlying beneficial owners and the expected level and type of activity in the relationship.
The lockdowns caused by the coronavirus pandemic led to the Financial Conduct Authority making it clear that electronic due diligence was an option due to difficulties conducting face-to-face checks, yet firms were still expected to continue operating in accordance with the Money Laundering Regulations. Joint Money Laundering Steering Group (JMLSG) guidance has stated that firms can use electronic sources to verify a customer's identity, provided that the firm has verified that the customer (and any beneficial owner) exists and that the applicant seeking the business relationship is that customer.
Due diligence has to be employed whenever money laundering or terrorist financing is suspected, when doubts arise about a customer’s identification information that has been provided previously or when an existing customer’s circumstances change. Such changes could relate to the level or type of business activity or the ownership structure of a business.
Due diligence must be carried out when transactions above a certain size are to be completed. The threshold for this will vary between €10,000 or €15,000, depending on the precise nature of the transaction. But checks should also be made when a number of payments are made by the same customer in a short period of time, if a number of customers have carried out transactions on behalf of the same person, when a new customer carries out a large, one-off transaction or when numerous customers have sent money transfers to the same person.
Concerns should be raised if a customer does not want to provide identification, gives unsatisfactory identification, is reluctant to reveal who they represent, enters into transactions where the source of funds or reasons for it are unclear, or agrees to very high penalties or charges.
Enhanced due diligence is needed if entering into a business relationship with a ‘politically exposed person’ - usually a non-UK political figure, their relatives or close associates - or with someone from a country classed as high risk. Such an approach should also be taken in any other situation where there is a higher risk of money laundering or when a customer is not physically present when identification checks are carried out.
Enhanced due diligence involves:
The enhanced due diligence requirements for dealing with a politically exposed person are:
Businesses regulated by the Money Laundering Regulations must assess the risk that they could be used for money laundering.
A risk-based approach involves carrying out a risk-based assessment of the business and its customers so that controls can then be devised and put into effect to manage and reduce the impact of the risks. Those controls have to be monitored to assess their effectiveness - and revised whenever necessary.
The nature of a business’ risk assessment should be determined by its size and structure, the range of services and / or products it is involved with and the types of customers it has.
Companies must make sure they have internal controls and monitoring systems that are capable of alerting all relevant individuals within it of any possible attempts to use it for money laundering. Procedures have to be in place to both prevent such suspicious activity and ensure it is reported promptly.
Controls should include:
Like many other areas of business where large amounts of money exchange hands, the estate agency sector will always be attractive to the money launderer. This is a situation reflected in that sector being covered by the Money Laundering Regulations, which means estate agents have to meet numerous obligations.
Failure to comply with these regulations can, if it results in a criminal prosecution, lead to two year’s imprisonment and / or a fine. Those in the estate agency sector, therefore, must ensure they are legally compliant – and seek advice if they are unsure how to go about this.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.