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Estate Agency AML Compliance - Countrywide fined £215,000 and Treasury Select Committee repeats criticism of estate agents as ‘weak link’ in UK AML Regime

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

27-03-2019

The news last week that estate agency Countrywide received a £215,000 fine for money-laundering failures from HMRC has prompted many in the industry to ask whether their AML compliance arrangements are up to scratch. New money laundering regulations introduced in 2017 have brought a raft of changes for estate agency firms, and some businesses are struggling to keep up with the new requirements. Surprise visits to 50 estate agents across the course of just one week have left many questioning whether they are operating within the limits of these undoubtedly complex and detailed rules. In the same week, the Treasury Select Committee published its Report on Economic Crime in which estate agents were criticised for failing to protect the UK from the proceeds of corruption in the property sector, with a recommendation for increased scrutiny over estate agents by the supervisory authorities.

We take a quick look at the key risks, and consider how estate agents can stay on the right side of the regulations.

How does money laundering occur in the real estate sector?

Money laundering is the process used by criminals to change the proceeds of their crimes into clean money or assets with no obvious link to their criminal origins. It can take many forms. Examples of particular relevance to the property sector include:

  • buying a property asset using the proceeds of crime letting it or selling it on, giving the criminal an apparently legitimate source of funds
  • criminals may also hide behind complex company structures and multiple bank accounts to disguise the real purpose of a transaction and hide its beneficial ownership
  • a more direct method may involve paying an estate agency business a large amount and reclaiming it later
  • the money for a purchase may be the result of mortgage fraud
  • setting the sale price of a property below the Stamp Duty threshold by manipulating the price of furniture and fittings.

Money laundering in the UK is illegal, criminalised by the Proceeds of Crime Act 2002, under which it is an offence to possess, convert, conceal, disguise, transfer, or otherwise remove from the UK, the proceeds of crime. It is also an offence to become concerned in an arrangement which facilitates money laundering. The Proceeds of Crime Act is well-used, with prosecutions and investigations aggressively pursued, including 7,900 investigations, 2,000 prosecutions and 1,400 convictions annually for standalone money laundering, or where money laundering is the principal offence.

On top of these general criminal offences, estate agents, along with financial and credit institutions, accountants, tax advisors, and lawyers, must also comply with a very detailed and less-well known statutory instrument known as the Money Laundering Regulations 2017 (MLR), which came into force in June 2017. Breaches of the MLR can result in unlimited financial penalties and prison sentences for individuals of up to two years.

It’s important to understand that no actual money laundering needs to occur in order for a firm or an individual to breach the MLR 2017. The regulations are designed to ensure that relevant businesses implement measures to prevent criminals from using their services to commit money laundering. So a firm may be in breach of the regulations even in circumstances where none of its clients have committed money laundering and no proceeds of crime have passed through its accounts.

What happened to Countrywide?

Countrywide was fined for failing to ensure policies, controls and procedures at group level; and for failures in conducting due diligence; timing of verification and proper record keeping. It was issued with a penalty notice by HMRC using its civil powers under the MLR, for a total sum of £215,000. It did not appeal the penalty and has since told the BBC that had ‘conducted a full review of its anti-money laundering controls and has taken thorough measures to strengthen the processes that support and monitor compliance throughout the business.’

What do the regulations require?

Comprehensive guidance has been produced by HMRC to help Estate Agents comply with the regulations. It’s a lengthy 61 pages and it cross-refers to other detailed guidance produced by the Joint Money Laundering Steering Group. There’s no substitute for considering this document in detail but in summary the key obligations are:

  • customer due diligence  – identifying and verifying clients, and performing additional checks on ‘high risk’ clients including understanding their ‘source of wealth’. These checks are required on both buyer and seller. Beneficial ownership must also be established in the case of entity clients, and there must be an individual assessment of the AML risk posed by each client.
  • reporting suspicious activity – ensuring arrangements are in place for identifying unusual activity or transactions and reporting these appropriately
  • record keeping – maintaining adequate records of customer due diligence and other documentation
  • staff awareness – training staff to ensure they understand their obligations and are equipped to spot money laundering and terrorist financing

On the question of timing of CDD, the client’s identity (and 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. HMRC considers that a helpful trigger point to begin the process of due diligence would be around the time when the terms are agreed, normally on the signing of a Memorandum of Sale in residential sales or Heads of Agreement in commercial sales. In practice this means that customer due diligence should be carried out as early as possible on the other party.

There are other requirements relating to systems, controls, policies and procedures including the following obligations to:

  • Prepare a written risk assessment identifying risks of money laundering and terrorist financing. Helpful guidance on how to do this is contained in HMRC’s guidance at section 3
  • Have in place up to date policy, controls and procedures to explain how the business manages the risks of money laundering and terrorist financing identified in risk assessments. This may take the form of an AML policy, but the firm will also want to consider whether ancillary policies and procedures are appropriate including a transaction monitoring policy, a client onboarding manual and a SARs reporting policy
  • Review and update the policies, controls and procedures to reflect changes to the risk faced by the business. This can be done internally on an annual basis, but independent review from time to time is also advisable
  • Make sure that staff are trained and kept up to date with the policy requirements
  • Make sure that the policies, controls and procedures are communicated to and applied to subsidiaries or branches in or outside the UK
  • Monitor effectiveness of the business’s policy, controls and procedures and make improvements where required. Again, this can be done internally, but independent review from time to time is also advisable
  • Implement systems to identify when you are transacting with persons from or based in high risk third countries identified by the EU or financial sanctions targets advised by Office of Financial Sanctions Implementation and take additional measures to mitigate the risk
  • Appoint a ‘nominated officer’ (often called an MLRO) to report suspicious activity to the National Crime Agency and ensure this person is properly trained in this role
  • Devote enough resources to deal with money laundering and terrorist financing. It is a good idea to discuss this issue at a senior management level and to record why resources are sufficient proportionate to the firm’s risk profile.

In addition, and of particular relevance in the high-end London property market, is the requirement to identify politically exposed persons (PEPS), persons that are entrusted with prominent public functions, held in the UK or abroad.  In these circumstances, enhanced due diligence needs to be carried out over and above standard CDD requirements. This includes obtaining details about a client’s source of wealth and source of funds. The importance of these requirements has been brought into sharp focus by the first Unexplained Wealth Order (UWO) recently obtained by the National Crime Agency against property owned by Mrs Hajiyeva, wife of Mr Hajiyev, the former banker imprisoned for fraud and embezzlement in Azerbaijan. Mrs Hajiyeva was unable to provide information in support of a legitimate source of funds used to purchase of the property (the assessment being that the purchase was most likely funded by the proceeds of her husband’s criminal activity). We can expect to see UWOs used with increasing frequency. For estate agents it is essential that, in higher risk situations (in particular involving PEPs), sufficient evidence is obtained and kept on file explaining a client’s source of wealth. This should include, as a minimum, an estimate of net worth, a description of significant wealth events and, crucially, the source of funds used to purchase the property. Absent this information. estate agents run the risk of criminal prosecution for breaches of the MLR.

It’s not difficult to see why some estate agencies are finding it difficult to navigate these regulations, which are complex to say the least. An effective AML framework and the conduct of a thorough risk assessment will allow firms to see where the individual AML risks reside and to mitigate accordingly.

Treasury Select Committee criticisms

The pressure seems to be dialling up in relation to the estate agency sector’s AML compliance more generally, too. On 8 March 2019, the Treasury Committee published its Report on Economic Crime – anti-money laundering supervision and sanctions implementation. Following its wide-ranging review of current AML supervision arrangements, it has made a number of recommendations for improvements including closer supervision of the estate agency sector. As it remarked in its report, estate agents have been roundly criticised for failing to protect the UK from proceeds of corruption being stashed in the property sector, and have been described as a ‘weak link’ in the AML regime by the Home Office. The Committee concluded that HMRC has further work to do to ensure all estate agents are registered with them for AML purposes, and to ensure that they are adhering to best practice.

We expect to see further AML visit programmes and investigations over the coming months, with estate agencies facing increased scrutiny from a number of angles. Like Countrywide, many agencies will look to conduct a full review of AML controls, ensuring policies, procedures and processes which support and monitor compliance throughout the business.  

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