Estate Agents and AML compliance: cause for alarm?

Introduction

The National Crime Agency’s Financial Investigation Unit (FIU) report in to Suspicious Activity Reports (SARs) and Defence Against Money-Laundering (DAML) requests for the period 2018/19 was published recently. It makes for fascinating reading, especially coming so soon after the Transparency International Report (TI) setting out the influx of £4bn in ‘suspect’ funds into the UK.

The FIU report is the first one where the provisions of the Criminal Finances Act 2017 have had a significant impact on the headline figures.

Breaking down the figures: the eye-catching impact of Account Freezing Orders

UK Law enforcement intervention after DAML requests were made and refused resulted in £131,616,100 restrained (including restraint, Account Freezing Orders, Cash seizure and Funds recovered by HMRC). Of that figure, £66,972,971 was restrained, £7,501 cash was seized, £7,947,889 was recovered by HMRC and £242,552 was subject to indemnity procedures. That means the remainder: £56,445,287; was the subject of Account Freezing Orders (AFOs). Without AFOs the headline funds restrained increased 29% (from £51,907,067) but add in AFOs and the increase was 153%. Given the number of AFOs are still small this is a staggering impact.

Comment: Progress but cause for alarm in the property sector?

There is much progress to admire in the FIU report – the significant increase in staff (80 to 118) has almost offset the large increase in SARs ( 463,938 to 478,437) and DAML requests (22,619 to 34,543)and meant there is been a relatively small rise in the response time (4.23 to 5.12 days). Digging a little into the categories of sector that generate SARs it will surprise no one that the largest reporters are banks (383,733). The fact that only 635 SARs were made by Estate Agents will probably surprise no one either but that is troubling. More troubling still is that it was 710 in 2017/18.

Examining that figure in the context of the TI report, it’s clear that the ease of setting up a UK company with an opaque ownership structure (usually several foreign ‘parent’ companies) and the laxness of Companies House in bothering to check that there is a person with significant influence listed, leaves Estates Agents in an unenviable position. If they conduct Know Your Customer (KYC) checks properly and take, as they should be entitled to, the Companies House register at face value then there may be little grounds for criticism: if, for example, Companies House refuse to strike off a company because the significant influence individual is not named then Estate Agents must be entitled to take at face value the assertion, by virtue of its presence on the register, that a company is a legitimate commercial enterprise.

But given that the Money Laundering Regulations 2017 (MLR 2017) apply to Estate Agents and HMRC have issued guidance to the sector that explicitly sets out the methods by which illicit funds can be laundered:

• ‘… 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 hiding behind complex company structures involving multiple countries and multiple bank accounts to disguise the real purpose of a transaction and hide its beneficial ownership
• a more direct method of paying an estate agency business or lettings agent a large amount and reclaiming it later
• the money for a purchase resulting from a mortgage fraud operation. …’

; and that is almost identical in detail to the examples in the TI report:

‘Using open-source data we have identified 421 properties, worth £5 billion, bought with suspicious wealth. This may just be the tip of the iceberg because 87,000 properties in England and Wales are owned by companies based in secrecy jurisdictions, where there is no information about their beneficiaries. These ‘anonymous’ companies appear regularly in corruption and money laundering schemes. Using Land Registry data on property that offshore companies currently own, we found…4,200… transactions involving secretive corporate vehicles, which are a common feature of high-end money laundering. Due to the opacity of the structures involved, we do not know who owns these properties at present.’

It is clear that the mismatch between the number of Estate Agent SARs and the volume of property sales involving ownership opaqueness is sign that the sector is falling short in its AML compliance.

HMRC fines Countrywide: Light at the end of the tunnel?

The existence of the 2018 £215,000 fine of Countrywide by HMRC for failing to comply with MLR 2017 was noted by the TI report and was a welcome example of enforcement intervention. It is almost certain that the number of AFOs will continue to rise and with that will come greater scrutiny of the role of property sector professionals by law enforcement and the courts. If Estate Agents are going to continue to affect transactions like the purchase of Mill Ride Golf Club by a Guernsey company Natura Limited then strict compliance with MLR 2017 is a commercial necessity.

The author of this blog is Tim Thomas who has left the firm. If you have a question about the issues raised in this blog, please contact Raj Chada on 0330 822 3451.