With the deadline of January 10th, 2020 for the implementation of the European 5th Money Laundering directive (5MLD) fast approaching, estate agents must fully equipping themselves to deal with the new regulations. Under 5MLD there will be a greater emphasis placed on these businesses to detect and prevent illicit financial activity. It is quite obvious why the European Commission has chosen this sector to shift part of its focus on from an anti-money laundering perspective (AML), as it is all too common that criminals have abused high value assets, such as properties, to launder dirty money.
One of the biggest changes that is coming into force in the 5MLD is that letting agents will be included in the new AML regime. The directive states that estate agency/letting firms will need to carry out client due diligence (CDD) when the monthly rent exceeds €10,000 on a property. There has been a debate that the UK will potentially lower the threshold to £5,000 a month. Full CDD will need to be undertaken before two parties are allowed to enter a relationship – for letting agents this is prior to the first deposit being taken. There is the potential for an alternate approach which would mean that the CDD process is undertaken when the rent exceeds the threshold. The UK Treasury (HMT) have issued a consultation paper detailing how the process should correctly be undertaken and are still considering the response from the industry.
The inclusion of letting agents into the AML regime is one small step to improving the fight the private sector is bringing against financial crime; however, a major problem the sector is facing within the UK is that they lack the education and understanding to file adequate suspicious activity reports (SARs). There is a growing anxiety amongst estate agency firms as they fear facing massive fines and lengthy investigations for non-compliance as failings in AML controls as the government ramps up its pressure on the sector.
Currently, estate agencies are reportedly filing SAR’s merely to cover their own backs as a tick-box exercise; the inevitable outcome of this is below par reporting and ineffective investigations. This practice is not only substandard in identifying any form of criminal activity but is also resulting in firms being fined by the regulator for poor practices.
In an investigation recently conducted by Credas, a supplier of ID and anti-money laundering services to estate agents, it was discovered that nearly one in five estate agents have been fined or directly warned by the HMRC, the UK regulator, for failing to comply effectively to the AML regulations. A key problem in the approach estate agencies take to developing AML frameworks, is that there is a heavy reliance on lawyers to help with their AML controls. Some of these controls have included using solicitors to verify identity documentation.
Such an approach can technically be an infringement of the AML regulations because a regulated/obliged institution, such as estate agents, are required to complete CDD before entering into a business relationship with the client. A business relationship is entered at the point when one of two events occurs: the estate agent is instructed by the seller/buyer or when a memorandum of sale/purchase is formalised; these both occur before a solicitor would become involved. The use of a proxy additionally sends a poor message and displays a lack of pro-activeness, instead of the documents being perceived as important and essential, they will just appear to be another item an over pedantic lawyer wants. Thus, slowing the whole process down and inevitable ending with poor documents being submitted.
In order to meet the requirements of AML regulations, estate agents should:
Consider using a managed service provider to undertake the processing of CDD requirements;
Ensure all staff are regularly trained on AML requirements and their associated responsibilities;
Ensure a robust reporting process is embedded within the organisation;
Carryout regular and independent reviews of the organisation’s AML governance framework and associated controls.