In recent years concerns have been voiced around the importance of anti-money laundering (AML) procedures within the property sector. The UK government estimates that serious organised crime in the UK costs tens of billions of pounds per annum. The purchase of property has always had the potential to be utilised by criminals to launder the proceeds of crime. It's important that all property professionals are aware of the Money Laundering Regulations 2017 that came into force on the 26th June 2017 and recognise the importance of putting procedures into place to identify and report suspicious activity, SAR.
Implementing AML procedures at your workplace may be a costly task – not only in terms of financial, but especially human resources. That's why many property developers are considering outsourcing AML checks, i.e. delegating them to a 3rd party solicitor.
In this blog we will consider who is best placed to carry out AML checks within the property sector and the issues associated with outsourcing.
4th Money Laundering Directive
To set the scene, we will consider the importance of the 4th Money Laundering Directive and compliance procedures for property developers and estate agents.
It is recommended within the 4th Money Laundering Directive that the following procedures are implemented Confirming a client's identity before entering a business relationship (buyers and sellers)
- Checks and controls to anticipate and prevent money laundering (including company-wide AML evaluation)
- Staff training
- Appointing a nominated officer or money laundering reporting officer (MLRO) and giving them suitable resources to carry out that function
- Retention of client records in-keeping with GDPR 2018 Regulations
Who should carry out an AML check?
Questions arise about who should carry out an AML check, and who should be responsible. Often firms choose to use either a 3rd party solicitor, their own in-house sales team who are the first point of contact, or utilising in-house resources.
Each have advantages and disadvantages that we'll explore in more detail.
Using 3rd parties for AML checks
Many in the housing sector have considered whether a 3rd party solicitor can run an AML check on behalf of their client, i.e. house builder.
There are 2 primary reasons why this might not be possible:
- The Contract between the data provider and the client
- Leaving a soft footprint
Data services – contractual issues
First, let's look at data services and how it works as this will explain some of the issues around using 3rd parties to conduct your AML check.
The data industry's specific contracts of sale between their clients are based on the sole use of the AML checks being carried out by the business or persons with whom the contract is originally signed. Therefore, if the AML provider signed a contract with a solicitor, the solicitor may only conduct an AML check on their client. The solicitor cannot carry out checks on their clients' client.
The data industry does enter into reseller agreements which means the person or business receiving the data can resell the data to a third party. This is specific to a set of contractual conditions before the data provider agrees the contract.
Therefore, if you don't have a resellers agreement with your AML provider, you're breaking the terms and conditions of your contract.
Soft footprint - what is it and why is it a concern?
Let's discuss soft footprint in more detail, as here we enter the remit of client's data privacy. We'll call our client John Smith.
A soft footprint means that, under data protection, it shows on John Smith's credit file that a person or company has looked at his address and checked that he is the person he claims to be. Soft footprint is also known as a soft credit check. It doesn't affect John Smith's credit rating as it doesn't look at payment performance data or the key financials on his credit file that will in turn affect his credit rating.
Identity checks, quotations and other types of soft search are recorded on each person's credit report so that there is a transparent record of who has been viewing an individual's credit history, but does not affect their creditworthiness.
Here's an example. John Smith is buying his dream house from the property developer called ABC House Builder. John Smith checked his credit file and it shows that an AML check was carried out by the ABC House Builder. No issues here.
What if we had a different scenario? What if a 3rd party solicitor carried out the check on behalf of ABC House Builder? Should John Smith check his credit file, he would be surprised to find that a solicitor had run an AML check. John does not have any relationship or contract with the 3rd party Solicitor, he only has a relationship with ABC Housebuilder.
Therefore legally, it is not possible for the property developer to outsource AML checks to 3rd party solicitors. Not only does it break the terms and conditions of the contract between the solicitor and AML provider, but could also negatively impact the developer's credibility and the supplier-buyer relationship. It also carries the risk of loss of reputation and sanctions.
Keeping all this information in mind, who is then best placed to carry out AML checks within the property sector?
Responsibility at point of sale or reservation
It's important to look at what issues are raised by conducting AML checks at point of sale or at time of reservation.
We do not want to hold up the sales process or make it difficult for the client to purchase the property. It's recognised that the process could be delayed if the sales person carries out an AML check face to face. Also, what if potential buyer is an alert on an AML check?
An alert can be caused by problems with a client's passport or driving license. Does the passport or driving license belong to that person? Are there any PEPs, Sanctions or enforcements? Or indeed has this person come up as an alert because it cannot be verified that they live at the address they've given?
A sales person can be more prone to tipping off, even inadvertently i.e. giving the information about that alert status to the potential buyer. There is also a possibility of more input error of clients' details as the sales person has the client present with them. . Moreover, the sales person is under pressure to get the process right, to get the sale and the reservation done quickly.
We've got to make the reservation professional and easy for the purchaser, therefore such issues need to be considered and highlighted when implementing an AML system within your organisation.
Should an in-house team carry out all AML checks?
This is probably the most reasonable option. The advantages are that the client information is passed from the point of sale through to a central team who will input the data and compile results. Should there be a client with an alert through false information, then correct procedures for reporting can be carried out. Also, data is captured and stored compliantly in accordance with the latest GDPR regulations. Naturally, this option is resource heavy, and can be costly for businesses to implement.
To conclude, each house builder is responsible for carrying out their own AML procedures and checks on their clients. To overcome the contractual and soft footprint issues associated with outsourcing AML checks those in the property market are left with two routes to carrying out checks;
- Checking at point of sale
- Creating and using an in-house team
With responsibility lying in-house it's vitally important that sales and in-house teams have training and access to systems that support their AML procedures. Finding a system that allows meticulous checks to help make informed business decisions is therefore crucial.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.