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Anti-Money Laundering Update & FAQ with Mark Hayward

Webinar recorded live:
Categories: Guest speakers & industry specialists,Legislation

November - Lettings Month


The 5th Money Laundering Directive comes into force in January 2020 for both sales and letting agents.  Mark Hayward, Chief Executive of NAEA Propertymark, joined us for a live webinar to give a brief overview of the new legislation and answer your other questions around anti-money laundering requirements in general.

Watch the replay of the full session above, or if you’d prefer to scan for a particular answer – have a read through the summary of Mark’s responses to your questions below.

(Please note: the answers below are not to be taken as legal advice. You should always seek independent legal advice if unsure about your legal obligations).

What will be included in the 5th Money Laundering Directive?

Unfortunately, we can’t provide as much detail as we would have liked to because Government is currently closed down due to the ongoing election.

Once an election is announced, Government departments are in purdah – meaning they can’t communicate to the outside world, offer guidance and clarify points. So this is a broad brush strokes update on the effect the fifth directive will have.

The biggest thing is that the anti-money-laundering (AML) directive will include the lettings sector into the overview criteria of the law. Sales agents are well used to having to comply and will have practices and systems in place. We anticipate about 70% of agents are both sales and lettings agents – so will have already registered. The 30% of lettings only agents will now have to register with HMRC in order to be supervised. If you’re a sales/estate agent, you need to amend the documentation to include the fact you also cover lettings.

A good place to start when it comes to understanding your obligations is Propertymark’s Anti-Money-Laundering: How To Comply booklet.

All sales and lettings agents will need to take these steps:

  • Register with HMRC
  • Write a risk based analysis of your business area
  • Appoint and register a Money Laundering Reporting Officer (MLRO) and a Deputy Money Laundering Reporting Officer to cover them when they’re off
  • Carry out training on all staff. It must be documented that you’ve carried out that training and you need to document the learning outcomes of that training. This should be done at least annually. All team members must be familiar with who their Money Laundering Reporting Officer is and the procedure they must undertake should they be suspicious on any transaction.

If you have a suspicion, you must not make that suspicion public in the office. Instead you need to raise it with your MLRO to reduce the risk of “tipping off” the person accused.

If you have a number of branches, you need to carry out an annual audit on your offices and have that available should HMRC visit you. HMRC term a visit as an “intervention”. You’ll be given notice and they’ll visit you even if you decline the invite. They’ll be looking at your systems and procedures, question you and may want to see specific files (or look at a random selection of files).

You’ll need to carry out Customer Due Diligence (CDD) and establish the identify of all your staff, and you’ll need to document that.

Due Diligence, also known as KYC (Know Your Customer needs to be undertaken in advance of you entering a business relationship with a seller. When the 5th Directive introduces this requirement for lettings, the due diligence requirement will be set subject to a threshold – but could apply to both landlord and tenants. Currently within the draft legislation there’s a threshold below which you don’t have to conduct CDD. We’re waiting clarification as to the threshold and whether it applies to the property in terms of rent or to the landlord.

The penalty for not taking your AML requirements seriously is an unlimited fine and/or a prison sentence.  As of this year HMRC are now able to name offenders. Earlier this year there was a fine of over £200k levied on an agent, together with a number of other fines, just for not getting the procedures correct – not for any criminal wrongdoing. You need to be able to easily demonstrate you’ve got the procedures in place and that you’re compliant with the regulations and staff are fully aware if you do get a visit from HMRC.

It’s not onerous, it’s not complicated, but you need to follow the procedures and demonstrate you’ve followed them. Don’t commence any work until KYC, CDD is satisfied.

The date of this coming into force is 10th January, yet there’s no official guidance available yet as to its contents. Is it definitely going ahead, regardless of the outcome of the election?

Yes. The UK has undertaken to adopt European Law within a specified time period. That time period expires on January 10th. Legislation and royal assent will have to move very quickly but it will happen – so agents need to take this seriously.

Below is a summary of Mark’s responses to your live questions, grouped into categories for ease of scanning.

 

The introduction of Anti-Money Laundering requirements for lettings

Is the threshold going to be in relation to who needs to register with HMRC?

The threshold is so you know before you enter a business relationship with a tenant or landlord at what level you’ll need to perform due diligence. We believe it will be quite high, but are awaiting clarification.

To be clear – every agent undertaking lettings activity will need to register with HMRC – there is no threshold for this. You’llalso need to have all the processes in place and appoint an MLRO in the same way as sales agents do today.

Should lettings agents be registering now to be ready for 10th January?

I’d encourage people to start registering now for HRMC. There might be some information required that you don’t yet have to hand, so it’s a good idea to start the process now and make sure you’ve got everything sorted in good time.

Should we be looking to check all existing landlords if the AML check wasn’t done when they initially signed up?

Once we know what the threshold is. There is no requirement to do it until at least the lease is renewed but in terms of best practice and to make sure you can manage any potential issues, I’d recommend starting to do it as soon as you can to get into the habit.

Registering with HRMC

Some agents say they find the HRMC system for registering very clunky and they’ve tried several times and failed to register. What would you advise?

Unfortunately, the system is not great. But a poor system doesn’t excuse an agent from not meeting their obligation to register. There is some good news though. HMRC’s IT team have created new software that’s been piloted by agents across the country. The result of the pilot will be available early next year and the result will be a quicker, easier to manage system for agents to use – hopefully by early next year.

Due Diligence

Does CDD also need to be done on a buyer, as well as a seller?

With the seller, you need to check them before you commence any activity on their behalf. On the buyer, I’d recommend that once the offer is accepted subject to contract and subject to customer due diligence. Technically it doesn’t have to take place until exchange of contracts but best practice is to do it at the time the offer is accepted, so you’ve got it documented.

A number of people say it’s OK because the lawyer or lender will do it, but do it at the point of offer to stay on the safe side and make sure you can evidence it.

Can you outsource the checking of documents to a third party, and can it be done electronically?

Photo ID needs to be checked in person. It can’t be confirmed by Skype or a photocopy of a passport sent in the post to you. You need to do it face to face to be able to confirm the person stood in front of you is actually Mr Smith.

If you rely upon a third party to do this for you, you will remain liable if they’ve made a mistake in terms of confirming your identity. You need to make a judgement on the level of risk you’re comfortable with.

What’s the difference between Simplified CDD and Enhanced CDD? When should you use each type?

Simplified CDD is photo ID and utility bill. The photo ID can be a passport, a driving licence, or for instance a firearms certificate. If someone doesn’t hold a passport or driving licence (for instance, some older people don’t0, you can very their ID as long as they have a government verified letter or document that’s addressed to their home address.

Enhanced Due Diligence is when you’d scan whether anyone has had sanctions applied against them, if they’re a PEP (a politically exposed person) and is more of a global assessment as to their risk. Again, there are companies that can do this for you.

When should you do each form of due diligence? If something doesn’t seem right, if it isn’t typical of the business you’d normally deal with, I’d recommend Enhanced Due Diligence. If it’s a typical transaction with nothing unusual, simple should suffice.

Can ID be black and white?

Yes. As long as you can look at it and confirm the person standing in front of you is that person.

Is there any obligation for an agent to sign the copy of the ID to confirm the likeness?

You should sign it on the back to say you certify its a likeness of that person.

What if you’re dealing with a company purchasing the property? Whose ID do you need to check?

Go onto the Companies House website. Key in the company. When that comes up there’s a list which gives you the name of the company directors. Click on the tab that says significant persons and that indicates whether any of the directors owns a significant amount of the shares. You need to do CDD on the director that owns more than 25% of the shares.

What are the requirements for due diligence on overseas clients?

You certainly still need to do it. You might treat some countries with more scepticism than others based on their reputation. Go to the guidance on the 4th money laundering directive, which gives a directory of associations/organisations based in each country that can verify ID for you. They can confirm the identify for you.

Can we accept black and white certified ID from 2018 from a mortgage officer. Is it acceptable?

No. It’s from 2018, so is too old to accept. A mortgage advisor should also not necessarily be relied upon as a trusted individual. A lawyer is more acceptable but they are increasingly reluctant to certify ID either. It’s your decision to assess the risk and ultimately the liability is yours: you are responsible for ensuring compliance.

How often does the CDD need to be renewed, if at all?

It just needs to be checked for sales at the start of the transaction.  You should re-check them if they do business with you separately in the future, e.g. selling another property.

Does every new instruction or vendor need to be checked with the land registry at £3 per time?

Best practice is to do it. You’ve already checked their ID so you’re now checking that they own the property. Despite the £3 cost, if you didn’t do it and you went to court and used the £3 charge as a defence, the judge wouldn’t consider that favourably as an excuse given the size of the fee you’d receive for the sale.

Over the past 2 years, we’ve sold multiple properties for the same client. How frequently should you be doing the due diligence?

Technically at the commencement of every new business relationship, i.e. every instruction, you should repeat the ID process. Your client might be irritated but it’s down to you to make a judgement and we’d recommend that you do it every time. People expect to provide ID these days for many things so it shouldn’t be too onerous.

Do new build developers need to comply, or are the rules different?

The rules are different between new homes sales on site and new homes sales from a sales office, because a new homes developer is not seen as an estate agent – they’re seen as an owner/vendor.

But in general they have to go through the same process in terms of checking ID.

What’s the best way to do due diligence on the seller of a deceased estate when the land registry still shows the deceased’s name as the owner?

It depends from where you get your instructions. If it’s a probate sale and you’re instructed by the trustees, you need to get ID on every trustee. If the instructions come direct from a lawyer, then first of all you need to check they are indeed a lawyer.  You can do this by checking the Law Society register. You then need to conduct CDD on the lawyer.

If you have a lawyer from overseas, how do you verify them?

Go onto the guidance on the 4th money laundering directive. Look to find organisations in those countires who can confirm that the person you’re dealing with is a lawyer.

How do you identify a PEP (Politically Exposed Person)? Is it sufficient to ask the client?

A PEP is a politically exposed person – which could be someone in government, someone related to someone in government, someone in the armed forces, someone who is located abroad that may be involved with foreign government or ministries.

There’s guidance in the 4th money laundering directive that can help you. There are also specialists that are able to assist you.

Do we need to use the Propertymark ID anti-money laundering checklist every time we take ID or is it sufficient to say the original has been seen?

I would recommend using the form every time. It’s freely available to members. HMRC will approve no forms but they have seen the form and raised no objections.

Risk assessments

Is there a template that exists for a risk assessment?

No. Do not use a template. The requirement for the risk assessment is that it needs to be written by you, you need to be able to print it out. Look at the area your business operates, the type of property you deal with and you make an assessment based on that – which might change, and needs to be reviewed if those circumstances change. HMRC have supervised our sector for a number of years. After 2 years they came to me and said they didn’t understand how “creative” our sector could be. They’ve spent years visiting our sector, offices and software. They’ll know if you wing it.

The Money Laundering Reporting Officer  (MLRO) and Suspicious Activity Reports (SARs)

If you’re a sole trader, how can you meet the requirement for a deputy MLRO?

You don’t need a deputy if you’re a sole trader. If you have more than one employee, you need to have that in place.

What does the MLRO need to do?

If you’re a MLRO, you need to need to understand how you’d submit a Suspicious Activity Report (SAR) via the NCA (National Crime Agency) website. I’d recommend you download the app that allows you to make the report.  If a member of staff reports something to you, you analyse it and judge it’s not sufficient to raise a SAR, you need to document that the report was made to you as the MLRO and why you decided not to submit a report to the NCA.

The number of SARs made throughout all sectors annually is over 700,000. In our sector it was just over 800. We handle 800-900k transactions, so there’s definitely a gap between what’s happening and what’s being reported. It’s estimated that anything between £70 and £90 billion is laundered through property annually in the UK.

Why are so few SARs raised?

The NCA in their website with Rightmove earlier in the year (click here to watch the replay) mentioned they find them incredibly valuable, even if nothing comes of them immediately. They’re stored for 6 years and play a vital role in helping inform wider patterns around criminal activity. How can we get more raised as an industry?

Firstly, you need to familiarise yourself with the process. One of the criticisms is that the SAR regime is aimed at banks and accountants and one size does not fit all. There is a criticism that they go into a black hole, but they do help form patterns and those patterns join up. So please be patient.

There’s a review of the whole SARs process being undertaken, which will require quite a fundamental financial injection. I can assure you, even though this has been said for years, that it is now happening and it will be made more fit for purpose. We’re also looking at how information can be shared better within industries.

If you are suspicious and it doesn’t smell right, always make a SAR. It’s best to take a safety first approach. If anybody is prosecuted as a result of a SAR, you’ll never be named and it’s treated anonymously.

Do SARs need to be kept secret?

Yes. There are penalties for “tipping off” if you have not kept a SAR secret from your organisation.

Will you need a separate MLRO for sales and lettings?

No – you just need one per company, as well as the deputy.

Can you have the same Officer for multiple businesses?

Yes, if they are linked legally. If it’s tenuous, then we’d recommend you err on the side of caution and appoint separate Officers.

Training your team

What training is required?

You will need to train all your team, document the training you’ve done, the date and document what the learning outcome from the training was.

Can Anti-Money Laundering training be done by an external agency?

Yes, but the MLRO will need to document it along with the clear learning outcome.

Cash payments and deposits

How much cash can a landlord take upfront and by transfer?

Always be wary of cash. If you have to take it, you need to ask and get proof of where it’s come from.

If a foreign student wants to pay in cash up-front for 6 months, how should an agent respond to that request?

There have been 2 instances this year that have made the news. A letting agent in Mayfair who took from a student 1 year’s rent up front on a flat. The rental amounted to nearly £250k – not typical, so you’d need a SAR to be raised.

Be careful with your own bank account details. I’ve seen instances of people paying a large sum of money into an agent’s account, only to almost immediately request a refund – and then that money has come back out again suddenly clean. That is a red flag.

The red flags are unusually high amount of money, unusual amount of time to pay the deposit for and a person you wouldn’t normally expect to have that kind of money. Anything that isn’t typical should ring alarm bells.

What counts as a “high amount of money”?

It depends on what is typical in the area you operate in. Your own risk assessment should factor in if it’s unusual or atypical for what you’d expect in your local area.

Where else can I go for help if I still have questions about Anti-Money Laundering?

There’s a whole section on our website on anti money laundering, with various documents and guidance. Click here to view NAEA Propertymark’s anti-money laundering resources.

Mark Hayward is the Chief Executive of NAEA Propertymark and, having run a UK wide operation for one of the main high street banks, has extensive experience in sales, lettings, auctions and property management. Mark has worked closely with HM Government, in particular with Treasury, BEIS, the Home Office, Cabinet Office, Ministry of Justice, and with MHCLG helping shape legislation. In addition, aiding HMRC and NCA in identifying areas of risk around AML with emphasis on UWO and, in future, providing a Register of Overseas Beneficial Ownership.

Government’s intention to regulate the industry resulted in the formation of ROPA (Regulation of Property Agents) group on which Mark sat.

He is on the Board of The Property Ombudsman, TDS (Tenancy Deposit Scheme), and the government’s Economic Crime Strategic Board.