On 10 January 2020 the 5th money laundering directive (5MLD) will come into force in the UK. The government is obligated to do this despite Brexit.
The 5MLD was introduced following a review of the 4th money laundering directive. It is hoped that the 5MLD will further strengthen transparency and counter-terrorist provisions. Despite Brexit, the UK government had been heavily involved in the draft of the 5MLD and is likely to implement it into UK legislation in some form or other now and following any EU withdrawal.
The 5MLD will directly impact lettings agents who carry out high value transactions with a monthly rent of EUR 10,000 or more a month. This means that for high value transactions lettings agents will be obliged to carry out customer due diligence. The customer in lettings situations is usually the landlord but in some cases, it could be the tenant especially where agents collect the rent on behalf of a landlord. However, the consultation carried out on the 5MLD is not clear on this issue as it talks about agents as “intermediaries” and we will need to wait for the final guidance which should be released soon.
The consultation document suggests that at the very latest the due diligence should be carried out prior to any terms of business or tenancy agreements being signed. However, there is discussion about it being required earlier, as it is for estate agency. Therefore, it is possible that this could change following an analysis of the feedback to the consultation. The obligation on agents is to ensure that they know who they are contracting with before they enter into any high value transactions. Whether it is possible to know your customer before they contractually become your customer is therefore an issue that we expect the guidance document to address.
The obligation to know your customer also extends to properties that are owned under the cloak of beneficial ownerships registered abroad. Obviously, this obligation will only be met where registers or electronic data retrieval systems, such as the land registry, are available to agents. The draft bill was produced summer 2018 to establish a register of beneficial owners of overseas entities that own or buy property in the UK will apparently be brought back to come into force in 2021. This will increase transparency in the UK property market and make it somewhat easier for agents to comply with their money laundering obligations.
Many agents will fear the introduction of the 5MLD in the absence of any guidance. We are already seeing differences in opinion as to what constitutes a high value transaction. Therefore, at the current time we advise that agents carry out due diligence for any property where rent is above EUR 10,000 or above a month. When the guidance is issued we will update this post however, it may be issued very late as was the case with the 4MLD.
Until the guidance is issued some may find this check list helpful. However, it is important to stress that once the guidance is issued there may be some changes to this list or it may need to be abandoned completely.
- Consider your company risk assessment and risk policies
Anyone involved in regulated money laundering transactions should have a full risk assessment and appropriate policies and staff training in place to mitigate the assessed risks.
- Is this transaction covered by 5MLD
5MLD only applies to higher value lettings where the rental is EUR 10,000 or more a month.
- Have you obtained satisfactory ID
All the information needed can be viewed here .
- Do the funds for the transaction come from an acceptable source
People often confuse money laundering compliance with identity checking. While identity checking is a key part of this compliance it is not the sum total or even the most important part of anti-money laundering processes. Simply knowing who a fraudster is does not prevent the fraud occurring. Therefore, it is important to consider where the money from the transaction is actually coming from, whether a proper explanation can be advanced and whether that source demonstrates that the money has been lawfully acquired. No body is expecting agents to play detective but reasonable enquiries must be made.
- Any negative PEP or sanction data
Any money laundering process must consider whether the individuals involved are likely to have access to stolen government funds or come from a country or a personally on a list which prohibits them from having dealings in the UK.
- Does the transaction seem unusual
This might be most reasonably thought of as a ‘smell’ test. Does the transaction fit with what you know about the parties? For example, a tenant who has previously rented a small flat in Southwark who now wants to rent a large house in Mayfair should arose suspicion regardless of satisfactory ID.
The contents of this blog post is not legal advice and is provided for general information purposes only. If legal advice is needed readers should contact a solicitor. No responsibility for any information contained within this post is accepted and PainSmith solicitors accepts no liability in respect of the contents or for action taken based on this post.