On 26 June 2017, the Money Laundering Regulations 2017 came into force. The Regulations implement the EU’s 4th Directive on Money Laundering (often called 4MLD) which replaces the Money Laundering Regulations of 2007.
Those organisations covered by the 2007 Regulations are also covered by the 2017 Regulations. However, the new regulations aim at a far more risk-based approach. The new Regulations do not apply to those engaging in financial activity on a very occasional basis, with a turnover of less than £100,000.
Money laundering is used by criminals to clean money to disguise any obvious links to their criminal origins. As such, money laundering in the property sector can take many forms including:
- Buying a property using the proceeds of crime and selling it on to give the criminal a legitimate source of funds;
- Letting agents who undertake the sale of leases for a premium (where a large proportion of the rent is paid up front); and
- Paying a large deposit and then reclaiming it later.
The Regulations apply to many businesses including:
Estate agents, which includes those with a lettings department;
At the moment, the regulations will not apply to ordinary letting work but the government will reconsider this later in 2017.
For the purposes of this blog post we will only refer to the property sector.
Customer Due Diligence
The 2017 Regulations do not allow any “Simplified Due Diligence” equivalent seen in the 2007 Regulations. Instead, businesses will be able to “adjust the extent” of due diligence measures where a business relationship / transaction is determined to present a lower risk of money laundering. This means that, a relevant person needs to consider both customer and geographical risk factors in deciding what due diligence approach is appropriate. The 2017 Regulations also see the creation of a “black list” of high risk jurisdictions which, if involved in a transaction, makes enhanced due diligence and additional risk assessment compulsory. Under the 2017 Regulations there are also enhanced due diligence requirements for both foreign and UK Politically exposed persons (PEP) i.e. those with prominent public functions.
Under the 2017 Regulations the risk-based approach elevates the importance of an organisation-level risk assessment considerably. The new Regulation requires firms to consider specific heads of risk – customer, geographic, products, transactions and delivery channels – when carrying out the risk assessment. The result of this does mean that the risk assessment is fundamental to the day to day conduct of a risk based approach to compliance.
As part of the organisational risk assessment and procedures that are created on the back of it there will then be a need to carry out an appropriate risk assessment of each customer and manage the risk of money laundering related to them accordingly.
The 2017 Regulations creates an obligation on larger businesses to conduct initial and periodic “screening” of “relevant employees.” The requirement not only applies to compliance staff, but also employees in the front office, who introduce business and engage with clients. Screening of relevant employees means an assessment of the skills, knowledge and expertise of the individual to carry out their functions effectively and the conduct and integrity of the individual.
As regards training the 2017 Regulations requires that relevant employees are made aware of the law relating to money laundering and terrorist financing, and to data protection; and regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering and/or terrorist financing. Training should therefore be arranged now that the Regulations are in force.
New criminal offences are created by the 2017 Regulations. Any individual who recklessly makes a statement which is false or misleading, commits an offence, punishable by up to 2 years’ imprisonment. Consequently, breaches are likely to be treated with increased severity by Supervisors.
The FCA have indicated that it would seek to utilise its power to prosecute under the Money Laundering Regulations:
“Where firms have poor AML controls, we will use our enforcement powers to impose business restrictions to limit the level of risk, provide deterrence messages to industry, or both.
We will generally use our civil powers, but if failings are particularly serious or repeated we may use our criminal powers to prosecute firms or individuals.”.
The HMRC is the designated supervisor for the property sector. They have provided guidance for estate agents. This guidance is still in the draft stage as it has not yet been approved by HM Treasury but is a useful resource in terms of summarising the key obligations.
In light of the criminal sanctions and enhanced due diligence procedures Businesses are advised to ensure that staff are trained and made aware of the new Regulations. Staff need to ensure that they recognise and deal with any transactions and activities which may be related to money laundering or even terrorist financing to avoid any criminal proceedings.