Anti-money laundering – comply or die!

Anti-money laundering image


Just checking can save your business! Recent legal cases on conveyancing fraud and Anti-money laundering (AML) compliance suggest that you take AML compliance very seriously, says Andrea Kirkby.

The whole area of customer due diligence (CDD) has recently brought a number of interesting cases. A recent judgement looked at a conveyancing fraud. Legal firm Mishcon de Reya was taken in by a fake vendor – a tenant who purported to be the owner of the property that their client had bought.

They had relied on the vendor’s solicitors to make all the necessary checks. Though the court held that they had not been negligent and had acted honestly, it said they had been in breach of their duty of care to their client by not seeking an undertaking from the vendor’s solicitors that they had taken reasonable steps to establish the client’s identity. That cost them £1m. They’re appealing, but many legal experts now think conveyancing firms could see the cost of their professional indemnity insurance shoot up as a result of the case.

REALISE THE RISKS

In a rather different case, a Great Yarmouth solicitor who didn’t carry out the right checks was suspended by the Solicitors Disciplinary Tribunal, despite the fact he had not abetted any crime. He had become “too informal” in dealing with clients he had known for years – the fact that you know someone socially or through contacts does not excuse you carrying out due diligence when they make a transaction. (After all, you may play golf with someone, but do you know where his money comes from?)

‘There is a new AML regime and agents need to understand the risks. You can’t just check five or six boxes, you have to think through and interpret the data.’

These cases involved solicitors, not estate agents, but they indicate that expectations of professionals’ behaviour in regard to AML compliance and customer identification are becoming ever more strict. At the same time, scams are getting more sophisticated and more prevalent. The Solicitors Regulation Authority says email hacking of conveyancing transactions cost over £7million in 2016 – that’s a lot of money going missing!

EXPERT ASSISTANCE

This means outsourcing customer checks is one way to aid agents in their compliance obligations. Systems like ETSOS’ Compliance in a Box don’t just carry out CDD checks, but also provide an interpretation of the result, with a recommendation either to proceed with the transaction or to refer it to the National Crime Agency.

Common sense seems to indicate that paper checks are best; actually getting sight of a person’s passport, for instance, but in fact, that’s not necessarily true. Forged passports are available on the internet for a few hundred pounds, and they’re good enough to fool an estate agent if not the border controls. Anthony Payne says fake utility bills are available, too. “It’s not illegal to sell fake utility bills, and it’s not illegal to buy them, though it is illegal to use them.” The spate of recent identity theft frauds, in which forged IDs have been used to sell empty freehold properties, show just how easy it is to be fooled.

Martin Cheek of Smartsearch says the electronic verification market is growing, though many firms still use paper checks. Electronic verification has several benefits; it’s much faster than paper checks, taking just three seconds for a typical ‘okay’, and since there’s no need for the client to produce documents, that takes hassle out of the relationship between agent and vendor. (Banks which have used electronic verification to enable customers to open accounts online, without having to send in ID and utility bills clearly realise the benefits of a friction-free customer due diligence process.) It’s also easier to keep electronic checks up to date with changes in regulation, and with changes in the customer’s circumstances.

Proper due diligence is more than that just electronic checks. It’s also about consistency of information, financial standing, source of wealth, beneficial ownership etc. The electronic checks really relate purely to identification. An agent could carry out these checks on identify but still be liable for enabling AML if something was missed elsewhere.

Biometric ID could beat the scammers and may well prove to be an exceptionally robust method to identify new potential customers.

Smartsearch has partnered with ETSOS, which provides a one-stop compliance shop. Electronic search is able to check numerous sources, such as the full electoral roll, Experian’s credit score data and address matches, CCJ details, the up to date Sanctions and PEP lists, and so on – providing a fuller picture of the customer than traditional paper checks, and also catching individuals who have been listed on CIFAS for identity or impersonation frauds.

It also provides a full audit trail and easy retrieval of the checks made, and helps provide consistency across the business – not always achievable when checking documents may have to be done by a temp receptionist if all the negotiators are out on appointments, for instance. Electronic search is particularly good for agents dealing with remote clients (such as non-resident landlords) or corporate clients (which can be very complex for an agent to research) – checking out a foreign vendor can be highly complex for an individual agent, while major electronic checking sources tend to have good international connections with multinational sources such as Experian.

Technology may move even further towards easy ID. Arman Khosravi, a partner at Oliver Fisher Solicitors, suggests biometric ID could beat the scammers and prove an exceptionally robust method of identifying customers. It’s early days yet, but fingerprint or retina scanning could eventually vastly simplify the process – as well as offering a secure way of identifying remote customers (such as foreign owners of high end London properties) who may not be too happy to put their passports in the mail.

THE FOURTH DIRECTIVE

Money laundering imageObviously anti money laundering checks are crucial for solicitors and conveyancing firms, who actually handle the money, and it’s not surprising that the biggest slug of Smartsearch’s revenue comes from the legal sector, with accountants a close second. But estate agents need to comply with the regulations, and from June this year lettings agents will also need to vet their clients as the Fourth Directive rules are applied (though Anthony Payne says, “it will be easier for lettings agents, as they already carry out extensive referencing on tenants and have the processes in place to vet their landlords).”

Checking on customers isn’t always enough. Subagents need to make their own checks to ensure the head agent is complying with the rules, and that’s where LonRes comes in.

“We engaged with HMRC and explained to them the way estate agency works. You have to carry out a check on the head agent, so we carry out all the AML compliance for our members and grease the wheels of the London estate agency market.” As the name suggests, LonRes supports mainly London agents – but it’s now moving into the Home Counties as well.

According to Payne, checking companies is more complex than checking individuals. For instance, many companies have a registered address which is different from the operating business address; both need to be checked, and then major shareholders and directors also need to be identified and checked. “We thought it would be a reasonably easy task,” he says, “but it has been really complicated.” That’s one reason that agents might consider outsourcing AML compliance on corporate clients, even if they carry out their own checks on individuals.

AND THERE’S MORE

Checking, also, isn’t all you need to do. Records must be kept for five years, and in a number of cases where agents were fined for non-compliance, it’s been their record keeping as much as their processes that has been at fault. While scanning passports and other documents into the office system is one way of dealing with the requirement, agents may also need to keep a record of their decision-making processes; if a transaction was not referred to the NCA, they may need to demonstrate why they decided not to refer.

Despite the recent high profile given to AML efforts by government and supervising bodies, some estate agents still aren’t up to date with their AML responsibilities. It’s high time they were, though. This January, HMRC – the AML supervising body for estate agencies – announced it would be joining forces and sharing information with National Trading Standards’ estate agency team. A more joined-up approach to the sector is likely to mean it’s more difficult for agents to slip through the cracks, and could put the spotlight on inadequacies in agents’ AML procedures.

January 9, 2019