Money laundering regulations: impact on estate agencies
Help or hindrance?
20 April 2016
Vivienne Harris reports on discussions about the Money Laundering Regulations and their impact on estate agencies
With Her Majesty’s Revenue and Customs (HMRC) now responsible for enforcing money-laundering legislation, compliance is essential for all those in the property industry, especially estate agents.
Regulation 5 of the Money Laundering Regulations 2007 defines customer due diligence (CDD) as:
- verifying and identifying the customer on the basis of documents, data or information
- identifying any beneficial owner and taking adequate measures, on a risk-sensitive basis, to verify the identity of any such beneficial owner.
Regarding estate agency, it states that CDD must be applied when an agent:
- establishes a business relationship with a client
- carries out an occasional transaction
- suspects money laundering or terrorist financing is taking place
doubts the validity of anydocuments or information previously obtained.
The identity of all customers must be verified before a one-off or occasional transaction is undertaken, or before the formation of a business relationship. However, CDD can be carried out during the establishment of a relationship, but only if this prevents disruption to the normal course of business and there is little risk of money laundering/terrorist financing. The level of CDD should be determined by each business using a risk-based approach.
This means each agent must make their own ssessment of the likelihood that a client, applicant or agent is laundering money or financing terrorists, and then use appropriate measures to reduce and manage those risks. These procedures should include staff training in the policies adopted by the agency and should be communicated to all employees. There will be some variation of the processes adopted by individual companies depending on their clientele, location and possibly the value of transactions.
Estate agents’ compliance with CDD, anti-money laundering (AML) and proceeds of crime legislation were discussed at a meeting of the National Association of Estate Agents (NAEA) in September 2015. Speakers from the NAEA, National Trading Standards, the Property Ombudsman and the National Crime Agency all spoke about their specific areas of expertise and the relevant obligations on estate agents.
Failure to follow the requisite risk-based guidelines is extremely punitive
Until April 2014, the Office of Fair Trading supervised AML, CDD and enhanced due diligence. HMRC now oversees these areas. What was obvious at the meeting was the importance that HMRC places on these issues and that estate agents may not only receive an unlimited fine for non-compliance, but up to 14 years in jail. However, Eversheds solicitors have written Anti-Money Laundering FAQs for Estate Agents, indicating that a 2-year sentence may be more applicable.
Clearly, failure to follow the requisite risk-based guidelines is extremely punitive. It is obvious that HMRC will be visiting estate agents’ offices without warning, requesting to see relevant client paperwork and other internal notes to check that procedures for compliance are in place and staff are fully trained.
At the September meeting, Sue Edwards, HMRC Deputy Director of Compliance, struggled to offer clarity on her department’s requirements. Unfortunately, the recommended procedures are somewhat opaque, but it is apparent that the rule-makers do not understand estate agents’ businesses or what impact these regulations will have on the industry.
A major concern was half-commission deals. If HMRC enforces the existing rules, this area of business could be wiped out overnight for sales and lettings. Predominantly, it is London agents that co-operate with each other regularly, but the new rules require that a sub-agent has the principal agent’s AML paperwork on file as well as those for the vendors or landlords. The principal agent will have to provide identification details of their clients to these parties, breaching current client anonymity controls.
The agent AML and client AML information is required before viewings on all instructions; the sub-agent cannot accept the full AML information if it has been provided by the principal agent or even a solicitor, but has to run its own procedure directly for collecting AML information.
Additionally, there may be further issues regarding clients’ privacy that have not been addressed, as AML rules allow infinite requests from many third parties, including sub-agents, relocation companies and retained agents.
Each agent must make their own assessment of the likelihood that a client, applicant or agent is laundering money or financing terrorists
However, Eversheds’ FAQs say that a sub-agent may be able to accept the information via the main agent, but it will have to do so on a risk assessment basis. This means sub-agents have to trust that the principal agent has carried out sufficient checks, and they are satisfied that the principal agent is responsible and trustworthy in this regard. Otherwise, the sub-agent will be obliged to carry out its own checks before any form of business relationship can be established.
Another possible consequence is that sub-agents, relocation agents and home-finders could waste time, energy and resources trying to conform to the rules when they simply want to view a property. Given that they make half-commission or retained appointments on properties for both sales and lettings on a daily basis, this could mean they need AML information on 10–20 agents and dozens of clients every day. Many of these buyer-led agents are not restricted by location, so the administration required to comply may prove a logistical nightmare.
The Data Protection Act 1998
This could be another hurdle. HMRC has said that agents should become data controllers, so they have authority to provide personal client information to third parties. To do so, agents will have to notify their clients that their data may be forwarded to other businesses, with fair notice in a specific format, and gain their consent.
LonRes, the website allowing agents to share fees and the organisation that asked Eversheds to create the FAQs, has said that merely adding a paragraph to the terms and conditions of business will not be adequate. Additionally, this data must only be used for the legitimate interests of the estate agent and the sub-agent, with protection in place to limit the amount of actual data shared.
Also, where a property is owned by a company or trust, AML checks are required on any director holding 25% or more of the shares or voting rights in the company and any individual who exercises control over management. For trusts, the criteria apply to any person with a specified interest of 25% or more who controls the management or in whose main interest the trust is set up.
The EU Fourth Money Laundering Directive comes into force on 26 June 2017 and requires letting agents to obtain AML details, but the guidelines for this will not come into effect until the UK government legislates accordingly. Letting agents tend to share fees with each other more regularly than sales agents so, depending on the mechanism for adherence, further issues may arise.
The directive will also amend some of the existing AML rules relating to the ongoing examination of all transactions and the risk assessment required to fulfil the processes. Other alterations include permission for obliged entities such as estate agents to provide AML and CDD information to sub-agents where the principal agent gives express permission that the information is reliable. The sub-agent will still be required to ensure that they are confident in relying on the information given by the principal agent, or they could face prosecution.
The main question at the NAEA meeting was: 'How do agents ensure compliance?' to which the answer was: 'Make your own risk assessment, but if your assessment is wrong, you will be heavily fined or even jailed.'
From the high number of grievances aired at the meeting, it was clear that the current government guidelines were considered poor, onerous and unworkable for the majority of agents in attendance.
Subsequently, I understand that HMRC has begun another consultation to engage with estate agents on these issues, although the timescales for the completion of this process is not yet known.
Fundamentally, there is a lack of clarity on how these rules affect estate agents based on poor insight into the industry. Agents need clear guidelines that are simple, quick and easy to apply.
Vivienne Harris is Managing Director of Heathgate Estate Agents
- The NAEA, RICS, the Association of Relocation Professionals and the Association of Residential Managing Agents have produced Money Laundering Guidance for their members
- Eversheds solicitors’ Anti-Money Laundering FAQs for Estate Agents
- Money Laundering Regulations: Estate Agency Business registration, HMRC
- Money Laundering Regulations 2007: supervision of Estate Agency Businesses, HMRC
- Money Laundering Regulations: business inspections, HMRC
- This feature is taken from the RICS Property journal (March/April 2016)