HMRC is cracking down on estate agents and letting agents who are not complying with money laundering regulations. It is reported that penalties of almost £800,000 have been handed out by HMRC to estate agents and investigations are being conducted which could lead to up to 2 years of imprisonment and unlimited fines. While estate agency businesses do not commonly handle funds used to buy a property, they are ideally placed to identify suspicious activity as they have contact with all parties to a transaction early on.
With this said, in this article, we will go through when KYC checks should be completed, how best to conduct them in a digital world, and which red flags you should look out for when dealing with customers.
What are KYC checks?
As an estate agent or letting agent, your business is covered by the Money Laundering Regulations which include making sure that you meet customer due diligence (CDD) requirements. The key steps are to identify your customers by checking their identity to verify they are who they say they are and that they don’t pose a risk. For estate agents this will usually be undertaken on a vendor at the point an agreement to market their property is made. CDD must also be completed on purchasers at the point an offer is accepted by the seller. For letting agents, it will usually be both the landlord and the tenant requiring CDD checks, but a guarantor may also be considered a customer depending upon the circumstances.
CDD or know your customer (KYC) checks should be done when:
- You start a business relationship with a new customer.
- When an existing customer’s details change, such as their address or business activity.
- When you suspect criminal activity such as money laundering. Perhaps the customer doesn’t want to meet you face-to-face or you come across other red flags.
- When you question the genuineness of a customer’s identification information.
- When customers make large transactions of amounts over €10,000. HMRC publishes a monthly average exchange rate for Euros to help identify transactions falling within the scope of the Regulations.
- When customers make linked transactions that are broken into smaller amounts to avoid CCD checks.
As part of your KYC checks when you are handling customers who are buying and selling property, you will need to see proof of name such as a passport or driving licence and proof of address such as an official letter like a council tax bill or bank statement. In addition, you will also need to verify the individual’s proof of funds. If the customer is being gifted money, they could provide a letter from the person who gifted the money or a Will if they inherited it. Alternatively, if they are getting a mortgage, they can provide an agreement in principle.
What to look out for when you suspect criminal activity
When you are conducting KYC checks or dealing with customers generally, you should watch out for any red flags that may suggest they are laundering money or engaging in fraudulent activity which prompts you to do enhanced checks. These could include the following:
- A customer doesn’t want to meet you face-to-face either in person or over a video call. This may suggest that they are trying to hide their true identity.
- A buyer is making large one-off cash transactions that don’t seem to be consistent with the circumstances, for example, perhaps they have a low income. You should carry out enhanced due diligence checks requesting further proof of funds to find out how the customer acquired the money. They might have built up the savings over the years which will be visible from bank statements, or they may have inherited a large amount. If the customer is unable to show how they gained the funds or if they came from overseas accounts, this may be a risk that needs to be explored further.
- Transactions between parties based in high-risk third countries. These could be countries where there is political or economic instability or a lack of financial crime controls. The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022 outlines all the third countries that are of high risk. Where there is a lack of financial controls in a country, it may be that it is easier for people to launder money or acquire illicit funds because financial institutions are not heavily regulated. This poses a greater risk that money coming from these countries may be criminal.
- Buyers that use overseas companies to purchase a property. The UK government has introduced new money laundering laws requiring overseas companies that own UK land to register their beneficial owners on Companies House, otherwise, they could face sale restrictions and fines. This is because investigations have found that Russian oligarchs have been using UK property to launder illegal money.
- The customer puts pressure on the transaction to be completed urgently. While many people want their house sale or purchase to progress quickly, if you find that customers are particularly desperate to have a rapid sale for no clear reason, you may wish to question their motives.
- The property sale price is unusual and indicates an overvalue or undervalue for no clear reason. If the property is significantly undervalued, this could suggest that someone is wanting a fast sale so that they can get rid of criminal proceeds quickly. If there is an overvaluation of the property, it may mean that people are trying to clear large amounts.
How to best approach KYC checks
HMRC is strict about how anti-money laundering provisions should be met. They give detailed guidance on how to satisfy CDD requirements through KYC verifications, record keeping, and ongoing monitoring. Since the pandemic and with advancements in technology, it is more important than ever for estate agents to keep up-to-date with new digital KYC methods to remain compliant.
If you are unsure as to whether a customer is who they say they are, you can conduct follow-up checks or use an independent source to do additional checks like digital ID checking systems. Any suspicious activity should be reported to the National Crime Agency or the Land Registry property fraud line.
As solicitors, we are also required to comply with the Money Laundering Regulations. As well as collecting relevant ID documentation and using the latest electronic ID checks to verify their authenticity, at BHW we also hold ‘welcome video calls’ with our clients at the outset. This allows us to check that the person behind the email correspondence matches the person in the ID documents. It also serves as an opportunity for our clients to ask questions and for us to tell them about our conveyancing process. We also warn our clients about the dangers of cybercrime and the need to be alert to fraudulent communications, as well as always checking our bank details with us before transferring any money.
Although we communicate with many of our clients online, all of our conveyancing staff continue to be office-based. This enables us to closely manage the implementation of our anti-money laundering procedures and allows our staff to be more vigilant to the signs of money laundering or fraud, providing greater reassurance to our clients.
BHW Conveyancing is the leading residential property law firm in Leicestershire and is ranked in the top ten real estate firms in the East Midlands by the Legal 500 guide. We pride ourselves on giving our clients a seamless and efficient end-to-end conveyancing service and adhere to high-quality industry standards. We work with many estate agents and financial advisors as their preferred conveyancing partner. Due to our proactive approach to progressing our clients’ property transactions, we are constantly being referred time and time again. Whether you are a property professional, seller, or buyer, we can help with your residential conveyancing queries. To request a personal conveyancing quotation, or to discuss setting up a professional referral relationship with your business, please call us on +44 (0)116 289 7000 or send us an email at firstname.lastname@example.org.