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legal alert: Pinstripes or prison stripes

16 Oct 2017

Many risks faced by professionals will have a financial and reputational impact on their business if not properly managed. But for those professions covered by the Money Laundering Regulations, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations), a failure to comply could result in prosecution and even a custodial sentence. With that in mind, are you aware of your obligations?

We have all heard stories of the risks of money laundering and terrorist financing, and the government estimates that upwards of £24 billion is generated annually by organised crime. Real estate transactions are at particular risk, as these have the potential to ‘clean’ large sums in a single transaction.

Property lawyers and conveyancers should be familiar with the risks, but the Regulations (which came into force on 26 June 2017) now include estate agents as a regulated ‘relevant person’. The Royal Institution of Chartered Surveyors view money laundering as one of the most significant areas of risk facing the property industry, and plan to release updated guidance in late 2017. Estate agents must keep up to date with developments.

One of the key changes introduced by these regulations is the requirement that those providing estate agency services must register with HM Revenue and Customs (HMRC) for anti-money laundering supervision. The guidance provides that if you act on instructions from a client who wants to buy or sell commercial or residential property in the UK or abroad, or introduce your client to a third party who wants to buy or sell a property in the UK or abroad, then you must register your business. If you are unclear about whether or not your firm needs to be registered, you should contact HMRC and act on their advice. Trading while not registered is a criminal offence, and firms who do not register may be subject to a penalty or prosecution.

Protecting yourself and your firm from money laundering threats should begin in the early stages with thorough due diligence and proper identification of your clients. Estate agents should be particularly aware that this due diligence now extends to purchasers of property, as well as sellers. A seller must be checked and assessed when the property is put on to the market and before an offer is passed to the seller, the buyer must be similarly checked and assessed.

Aside from performing identification checks, as a professional you need to ask appropriate questions before taking any instructions and ensure you understand what may be going on below the surface. You should follow this up with constant ongoing monitoring and be mindful of changes throughout the transaction.

These key steps should provide some general guidance and help identify what to look out for:

 Step 1: Know your client

Who ultimately controls your client and have you seen appropriate identification? Can you identify what it is that your client actually does? What is the nature of their business and is the transaction consistent with this? Rather than this being a burden, see this as an opportunity to better understand your client’s commercial background and needs. Few clients will be opposed to you showing an interest in them.

 Step 2: Know the transaction

Who are the other parties involved and what are they trying to achieve? Again, these are sensible questions to ask and fully understanding the transaction will afford you the opportunity to offer the best service you can.

 Step 3: Be alive to ‘triggers’ that can raise suspicions.

Consider the following, for example:

  • Is your client being secretive? A refusal to engage with you on any of the issues above without giving a genuine reason may be an indication that the client or transaction isn’t entirely above board. 
  • Have your instructions changed suddenly? Whilst initial due diligence is crucial, ensure you are always alert and ask questions whenever you notice sudden changes.

Most importantly, trust your instincts. If there is something about your client or the transaction that, from your experience, isn’t usual, do not turn a blind eye. There may be no cause for concern, but reassure yourself of this. Don’t allow yourself or your firm to be known for adopting a lackadaisical attitude in respect of due diligence.

Key things to look out for can include money being paid to you and then a request for it to be repaid or paid to a third party without reason, a request to pay in cash, multiple transactions over a short period of time and clients situated within a suspect jurisdiction.

There is a requirement that a nominated person within your firm acts as a money laundering reporting officer (MLRO) and the new regulations require a member of the management team to take responsibility for compliance with the Regulations. If you become aware of or suspect someone you are dealing with is engaged in money laundering, you must make an internal report with the MLRO, who will then assess the situation. The sanctions associated with failing to report or act upon a suspicious activity can be applied personally to individuals within a firm. It is therefore vital that professionals are able to recognise the warning signs associated with money laundering and report suspicious activities.

Whilst the Regulations place an onus on firms to ensure that all staff are adequately trained in this regard, some of the preventative measures can be implemented relatively easily and will benefit your business. Asking questions of clients and understanding what is happening beyond the transaction is an opportunity to develop commercial awareness and identify commercial opportunities, and need not be seen as a chore. When not doing so could result in prosecution and the loss of your liberty, that choice certainly becomes an easier one to make.

This article originally appeared in the October 2017 edition of Pi magazine, published by Howden Insurance Brokers



Richard Palmer | Partner

0345 901 0944