Anti-money laundering (AML) compliance has been, for better or worse, embedded in the day to day lives of lawyers for a number of years now but for estate agents its impact has been felt only more recently. Since June 2017, agents have been subject to more far reaching AML regulations than previously. Nearly two years on, it's worth looking at how they have responded to the challenge of complying with these.
The regulations require every estate agency to "…take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject". What does this mean in practice for agents on the frontline and how easy has it been to incorporate this new regime into their day to day practices?
The essentials
The relevant regulations are in the form of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, quite a mouthful. Most notably, these regulations introduced a key change requiring due diligence checks to be undertaken by agents on both the buyer and the seller. Agents are required as a bare minimum to obtain and hold identification documents and proof of address for all "customers."
They must also establish whether there are any underlying beneficial owners to be verified and have a clear process in place to identify the level of risk posed by the customer from an AML perspective. Compliance with the regulations is overseen by HMRC who have issued a guidance note on the subject running to over 60 pages.
The guidance sets out what estate agency businesses must do to meet their obligations in relation to:
- Customer due diligence
- Reporting suspicious activity
- Record keeping
- Staff awareness
Senior managers are required to put in place appropriate controls and procedures to reflect the degree of risk associated with its business and its customers. The guidance sets out "minimum requirements" which require senior managers to be able to demonstrate how they will:
- undertake customer due diligence checks on both sellers and buyers and carry out ongoing monitoring
- identify when a seller, buyer or beneficial owner is a politically exposed person or a family member or close associate of one then undertake enhanced due diligence
- appoint a nominated officer to receive reports of suspicious activity from staff and to make suspicious activity reports to the National Crime Agency
- make sure that staff are trained to recognise money laundering and terrorist financing risks and to understand what they should do to manage these including the importance of reporting suspicious activity to the nominated officer
- maintain accurate and up-to-date record keeping and retention of records for five years from the end of the business relationship.
The guidance also suggests that larger businesses should consider whether it is appropriate to appoint a compliance officer, particularly if the business has a number of branches or high turnover of customers and cross-border trading.
Timing
A customer's identity (and where applicable the identity of any beneficial owners) must be verified before entering into a business relationship or occasional transaction. In relation to timing for verifying the identity of the other party to a transaction, that other party's identity must be verified before contracts are exchanged.
The guidance recommends that due diligence should be undertaken when terms are agreed ie once the memorandum of sale is produced, so as early as possible. The guidance goes on to provide a summary of beneficial owner scenarios in the context of partnerships, trusts and corporates. There is also a section on the extent of training required for frontline staff.
Non-compliance
To date there has been no naming and shaming from HMRC for those that have been non-compliant. A person failing to comply with the regulations could face a fine, imprisonment of up to two years or both. Anecdotally, agents have reported that spot checks by HMRC have uncovered a number of failures to comply, with substantial fines being imposed in some cases.
The indications are that some agents were simply taking copies of identification documents are not going beyond that to risk assess to the extent that is expected. Recent research suggests that the average fine imposed for non-compliance is approximately £12,000.
Our comment
Our own experience suggests that firms of estate agents are responding to these regulations in quite different ways.
Some firms' policy is not to issue a memorandum of sale until they have been provided with the requisite AML documentation, and this is being strictly enforced, whereas others tend to address this only when an exchange of contracts appears to be imminent and at that point may turn to the buyer or seller's lawyer with a request for the sharing of their AML documentation.
This can sometimes be problematic not least as law firms will generally make it clear that no reliance can be placed on their own checks (both as to identity and source of funds for the transaction).
In the larger firms of estate agents, there are dedicated compliance teams who assist staff to adjust their practices so that the AML checks are seen as part and parcel of the sales process and are conducted at the very outset.
Not surprisingly various firms offering anti-money laundering checks are increasingly expanding into the estate agency sector as some agents continue to grapple with the requirements and the training their staff need to feel comfortable with this relatively new regime.
