On 4 March, Her Majesty’s Revenue and Customs (“HMRC”) announced that they had imposed a £215,000 fine on Countrywide estate agents for failing to register the company as required under the Money Laundering Regulations 2017. This was the largest fine ever imposed on this basis and signals that HMRC are running out of patience with non-compliers, especially those involved in the property market.
Ben Wallace, Minister for National Security and Economic Crime, said of the fine:
“Estate agents are a crucial line of defence against [money launderers] and that’s why they’re under a legal – and moral – obligation to file a report when they spot something amiss.”
John Glen, Economic Secretary to the Treasury, said:
“The vast majority of estate agents play by the rules and help us to crack down on dirty money. But I have zero tolerance for firms prepared to turn a blind eye to the law.”
Although information provided by HMRC is not expansive, fines were imposed against Countrywide for “failing to ensure policies, controls and procedures at group level; and for failures in conducting due diligence; timing of verification and proper record keeping.” This illustrates well the breadth of obligations now imposed on those in the regulated sector under the new 2017 version of the money laundering regulations.
This announcement was swiftly followed by the publication of the Treasury Committee report on economic crime on 8 March, where estate agents came in for stinging criticism for failing to have proper regard to money laundering compliance and risk assessment in their dealings. Indeed, estate agents were described as one of the “weakest links” in the anti-money laundering regime. The report identified an adverse incentive issue within the industry: estate agents dealing in high-end property are incentivised not to check the provenance of funds, since such checks or associated questions could put buyers off and prevent a sale. This incentive is particularly acute in small, boutique estate agents whose business model relies on a few high commission sales: where each sale is crucial, estate agents are less likely to undertake compliance measures which may hamper chances of successfully closing the deal.
Another reason that high-end estate agents have a particularly important job when it comes to regulatory compliance is because of the likelihood that they will be dealing with politically exposed persons (PEPs). For a long time, UK property has been viewed as a lucrative market for international investors, and Brexit worries have only increased interest in luxury property in the capital and elsewhere. Inevitably, this goes hand-in-hand with dealing with high-net-worth individuals who are connected to political regimes outside the UK.
A PEP is defined in the legislation as “an individual who is entrusted with prominent public functions, other than as a middle-ranking or more junior official.” When a person transacts with a PEP, family member of a PEP, or a known close associate, they must apply what is known as ‘enhanced customer due diligence’. This is because the UK legislative scheme proceeds on the basis that PEPs present a higher risk of corruption and, with it, a higher risk of dealing in the proceeds of crime. Amongst other things, enhanced due diligence confers a duty to take measures to establish the provenance of the PEP’s wealth and the specific funds or property with which they wish to transact. The financial outlay involved in undertaking enhanced due diligence is seen as the cost of doing business in a field with higher risk, but also higher reward.
As evidence that estate agents are not taking their anti-money laundering duties sufficiently seriously, the Treasury Committee noted that estate agents were responsible for only 0.1% of the suspicious activity reports filed in the last session. Such reports ought to be filed each time a person knows or suspects that a customer or potential customer is transacting with funds that are the proceeds of crime; the failure to file a report in such situation is itself a criminal offence. Given the inherently risky nature of the UK property market in terms of money laundering, the inference is that the number of suspicious activity reports filed falls far below the expected amount.
There is a clear indication, then, that some estate agents are not doing enough to comply with anti-money laundering legislation, particularly in light of the risks involved in the industry. The Treasury Committee points out that estate agents may be incentivised to ignore their anti-money laundering obligations, and the question now is whether HMRC’s action here is a one-off or a sign that it is starting to focus on the sector: after all, estate agents have been identified as one of the anti-money laundering regime’s weakest links, and they might well find they have their regulator’s prioritised attention until that changes.
Should you have any questions about the issues covered in this blog, please contact a member of our Criminal Law team.
About the author
Alun Milford is a partner in the Criminal Litigation team and specialises in serious or complex financial crime, proceeds of crime litigation and corporate investigations. He has particular knowledge and experience of issues surrounding corporate crime and deferred prosecution agreements.
This blog was co-written by Dorian Robinson in our Criminal Litigation team.
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