From Russia With Cash - Roger Sahota writes for Property Drum Magazine

The recent Channel expose “From Russia With Cash” will have made uncomfortable viewing for many property professionals. Most worryingly, the programme revealed that many agents are still unaware of their full extent of their money laundering reporting and compliance obligations.  With heavy civil and criminal penalties for agents found to be in breach of the law, keeping on top of the regulations must be a priority for anyone working in the sector. 

 

What is Money Laundering?

 

The Proceeds of Crime Act 2002 (POCA) defines this as “the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled further into criminal enterprises.”The three principal money laundering offences are contained in sections 327, 328 and 329 of the Act.  They are broadly drafted to cover almost any form of dealing with criminal money, assets or property and are punishable by a maximum of 14 years imprisonment and/or a fine.

 

Ignorance is No Defence

 

Criminals often use estate agents to launder criminal money or property which is why they are considered a high risk group by the authorities.  Transparency International highlighted the scale of the problem recently when it estimated that 36,000 London properties are owned by hidden companies registered in offshore havens and that more than £180million worth of property in the UK has been investigated by police as suspected proceeds of ‘grand corruption’ since 2004.

Special rules apply to estate agents and other financial professionals who are deemed to operate in the “Regulated Sector.” Anyone working in the Regulated Sector is expected to comply with the Money Laundering Regulations 2007 (MLR) and to have a reasonable grasp of the law, including the MLR, POCA 2002 and the reporting provisions of the Terrorism Act 2000. Managing agents and letting agents are not in the Regulated Sector but Estate Agents who also perform these functions are.

HMRC, which took over the supervision of estate agents in 2014 from the Office of Fair Trading, provides guidance for Estate Agentswhich the courts expect firms to follow. Agents will be generally familiar with requirements to have adequate systems in place to avoid money laundering and terrorist financing, and the reporting requirements. Below we explore what these provisions mean in practice.

Suspicious Activity Reports (SARs)

 

Anyone working in the Regulated Sector must make a report to their companies nominated Money Laundering Reporting Officer (“MLRO”) if they know or suspect (or have reasonable grounds to know or suspect) a person is engaged in a POCA money laundering offence. If the conditions for reporting are met, the MLRO must disclose a SAR to the National Crime Agency “as soon as is practicable” once this information comes to a firm’s attention in the course of their business.Failing to make a SAR is a criminal offence carrying a maximum sentence of 2 years imprisonment.   By seeking the consent of the NCA to undertake an activity which may constitute one of the three money laundering offences the reporter will have a defence to any prosecution.

 

When ToReport

 

A clear cut case where an agent should make a SAR would be that depicted in the C4 programme. “Boris”, a Russian government official who is the prospective buyer of a Mayfair townhouse, says he intends to pay for it from money he has embezzled from the nation’s health budget. In this situation the Agent would be deemed to have “knowledge” that laundering was about to take place. He should inform is MLRO immediately and a SAR should have been lodged.

A more commonplace situation where a SAR may be required is when you don’t know for certain but suspect a customer is engaged in money laundering. Examples where suspicions may arise include:

·         brand new customers carrying out large one off cash transactions

·         overseas customers

·         an individual in a public position that carries a higher exposure to the possibility of corruption (including politically exposed persons)

·         complex business ownership structures with the potential for concealing beneficiaries

·         reluctance to provide identification

·         where the customer appears to be acting on behalf of another person and is unwilling to give details of those they represent

·         non face to face customers

The obligation to report is far reaching. For example, in the case of Boris, the agent would be expected to make a SAR even where he thought that Boris was not a credible buyer and no transaction took place.

What to Report

HMRC expect the SAR to contain as much information as possible. Both the HMRC and NCA have set out guidelines as to the content and format of a report. If no response is received from the NCA within the next 7 days the agent can proceed with the transaction. If the agency refuses consent, you cannot go ahead for a further 31 days until you hear back from them.  

“Tipping off” a customer that a disclosure has been made by providing information that could prejudice an investigation is a separate offence that applies to those working in the regulated sector.It carries a maximum two year sentence.

 

 

Personal Liability 

There are also heavy civil penalties for those firms that do not maintain adequate anti-money laundering systems and procedures. Last year three firms in London, Northamptonshire and Cardiff were fined a total of £229,665 for failing to comply with the 2007 Money Laundering Regulations which left them vulnerable to money laundering or terrorist financing. Business owners and Directors should also note that the HMRC holds that Senior Managers are personally liable if they don’t do everything they need to do to protect their business from money laundering and terrorist financing.

The key obligations on the regulated sector include:

  • Providing staff training – this extends to all staff, including receptionists, admin and finance staff as well as agents
  • Customer due diligence, which involves knowing the customer/business (including client identification)
  • Record keeping
  • Having systems and controls in place to prevent money laundering/terrorist financing,
    which include the internal reporting of suspicions or knowledge of money laundering
  • Identifying a ‘Nominated Officer’, to oversee the submitting of SARs to the NCA and the implementation of the MLRs and appropriate guidance

Identifying Risk

HMRC recommends that every agent should have a policy statement based on an assessment of the level of risk posed by the type of clientele they serve. So a business servicing many high net worth individuals from abroad will present a higher risk profile than a conventional high street agency. Enhanced customer due diligence procedures for higher risk customers will be appropriate. International customers might therefore be asked for additional information to verify their identity and it may be wise to verify this material – by asking for bank certification or ensuring that payment is made through an account in the customer’s name. Similar enquiries should be made of the beneficial owners of trusts or companies, which can be problematic. Where politically exposed persons – government officials like Boris – or non face to face customers are involved enhanced due diligence is always required.

Know Your Client

Estate Agents should read the HMRC guidance on due diligence carefully. A primary obligation is a requirement to check that customers are who they say they are. The HMRC guidance does not specifically require agents to make enquiries of the source of funding for a purchase. Where, inadvertently or otherwise, information which suggests a transaction may facilitate laundering comes to light however, careful consideration should be given as to whether to file a SAR.   

Buyer Due Diligence

Contrary to widely held opinion, the HMRC draws no distinction between buyers and sellers when it comes to the requirement for customer due diligence – this must be carried out on whomsoever agents have a “business relationship” with. 

Outsourcing

Due diligence enquiries should be completed before an agent enters into a business relationship with a customer – so relying on the vendors or purchasers solicitors to complete these enquiries is not an option. Agents can, in certain circumstances, outsource their customer due diligence to solicitors, accountants and other financial professionals. The use of electronic data agencies may not however satisfy the HMRC that you have met your responsibilities.

The anti-money laundering regulations can seem like a minefield. With reports from the NAEA that the HMRC are now conducting spot checks on Estate Agents it’s more important than ever you are properly advised. If you are not sure whether you should make a SAR or need advice on whether your money laundering procedures meet the required standards you should take independent legal advice from a qualified lawyer.

A copy of this article appeared in the August 2015 edition of Property Drum Magazine.