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Guide to money laundering

ESSENTIAL GUIDE TO MONEY LAUNDERING REGULATIONS 2007

SUSPICIOUS MINDS

Six months after the new law was introduced, some estate agents are still failing to comply with the latest money laundering regulations – legislation that requires you to verify clients.. Malcolm Parker from D&B explains what is involved

It is now more than six months since the Money Laundering Regulations 2007 became law, and any unofficial grace period from the authorities is well and truly over.  Yet there remain a significant number of estate agents and other regulated businesses that have not yet managed to put their compliance houses in order.

It’s worth reminding ourselves why we are bothered about money laundering and what concerns lie behind the regulations since we’ve come a long way since the launch of the first anti-money laundering legislation in the United States in 1986, which was followed by the EU’s version in 1991. The main focus back then was to combat illegal narcotics trafficking. The new rules, Money Laundering Regulations 2007, that came into force in December are much more stringent and targeted. Businesses that are affected by the new legislation now have an increased responsibility to prevent, detect and report money laundering.

Of course, it is up to the individual estate agents to decide how to carry out a risk assessment that is appropriate to their business. Estate agents should ‘…assess risk in the context of how their business may be used by those involved in money laundering and terrorist financing.’ (OFT Guidance, Section 5.5)

It’s worth looking in more detail at what the OFT guidance has to say on what constitutes potentially suspicious circumstances and/or behaviour. Below is taken from Section 5.6:

“In identifying and assessing the risks of money laundering and terrorist financing that the business faces, businesses may consider it appropriate to consider (this list is not exhaustive and will depend on how the business operates):

What risk is posed by particular customers?

  • brand new customers carrying out large one off cash transactions
  • customers that are not local to the business
  • overseas customers
  • an individual in a public position and/ or a location that carries a higher exposure to the possibility of corruption (including politically exposed persons)
  • complex business ownership structures with the potential for concealing beneficiaries

Is a risk posed by a customer's behaviour?

  • reluctance of the customer to provide identification or the evidence produced is unsatisfactory
  • where the customer appears to be acting on behalf of another person and is unwilling to give details of those they represent
  • transactions that do not appear to make commercial sense’

How does the way the customer comes to the business affect the risk?

  • non face to face customers
  • occasional transactions as opposed to ongoing business relationships

Does the pattern of behaviour or changes to it pose a risk?

What risk is posed by the products/ services the customer is using?

  • is the main risk that of inappropriate assets being placed with, or
  • moving from, or through, the business?
  • does the product allow payment to third parties?”

More than a passport!

As anybody reading this website will most likely be aware, all commercial and residential estate agents (as defined by the Estate Agency Act 1979) are subject to money laundering regulations, alongside all other regulated businesses such as banks, insurance brokers and law firms. In other words estate agents are now required by law to verify the identity of their clients (usually vendors): both individuals and businesses.

In practice, this means much more than just checking a vendor’s passport before you enter into a business transaction.

The key point about the Money Laundering Regulations 2007 is that they create more focus than previous legislation in permitting “simplified customer due diligence procedures” in low risk activities while requiring “enhanced customer due diligence and on-going monitoring” in higher risk areas of activity. For example, they impose stricter requirements than before for identifying the true beneficial owners of trusts and company shares. 

Given the administrative burdens posed by the new law it perhaps not surprising that even some of the UK’s largest firms are currently facing a sizeable backlog of compliance checks dating back to December 15, 2007. 

Ed Balls, Economic Secretary to the Treasury at the time the Government first announced its AML plans in January 2007, made it clear that the aim of these “tough and targeted” measures was to "crack down further on illegal activity and help force criminals and would-be terrorists out of the shadows".

According to the Treasury’s analysis, around 100,000 UK businesses are affected by the law, including external accountants, auditors, tax advisors, company formation agents, financial institutions, law firms, estate agents and dealers in high value goods – essentially any business that might carry out a cash transaction greater than £15,000.

But a large number of UK businesses are simply not aware that they need to comply, and an even larger number are oblivious to the risks they are incurring by not complying. 

Have you considered, for example, that police investigating a money laundering case in, say, five years’ time will be at liberty to trace any AML regulated business or individual that has transacted with a suspected individual or business since 15 December 2007?

Or, that they have the right to demand to see records of the anti-money laundering checks carried out at the time? Non-compliance leaves businesses open to large fines and even personal prosecutions.
 
If you are reading this and feeling a twinge of recognition, now really is the time to act.

A useful guide is the OFT’s Core Guidance, published in November 2007, which you can download at http://www.oft.gov.uk/shared_oft/business_leaflets/general/oft954.pdf

Section 10 is written specifically for estate agents (who are of course supervised by the OFT) but you will find useful practical guidance in sections 6 and 7.

It’s worth noting that while estate agents are required to undertake what the legislation refers to as ‘customer due diligence’ only for vendors when acting as their agents,  ‘best practice is to identify the purchaser in addition to the seller once an offer has been accepted’ (see the OFT Guidance, 10.8.).

Another good source of guidance is the Joint Money Laundering Steering Group (JMLSG), which is made up made up of the leading UK Trade Associations whose industries are affected by the new regulations. The JMLSG’s Final Consultative Text (FCT) of revised guidance for the UK’s AML regime received HM Treasury approval late last year. You can read it at http://www.jmlsg.org.uk/bba/jsp/polopoly.jsp?d=751&a=11454] or scroll down to read the relevant extracts below.

So what do estate agents need to know about vendors?

The information you need in order to verify the ID of an individual customer is different from the information you need from business customers.

Here are some examples of the types of question that you can expect an electronic database to help you answer, without you having to do your own labour intensive searches. This list is by no means comprehensive.

1. What is the registered name and address of the individual or business you are dealing with, as well as the trading address if it is different?

2. How will you carry out checks against relevant sanctions or checklists (e.g. official lists of known terrorists held by the Bank of England)?

3. Is the individual customer in a public position and/or a location that carries a higher exposure to the possibility of corruption, for example, politically exposed persons?

4. How will you document and archive the identity checks you carry out in order to be able to provide proof at any point that your checks meet the requirements of your risk based policies and procedures and you can demonstrate to the OFT (that you have taken appropriate measures?

5. Do you have in place a risk-based money laundering policy that outlines the extent of customer due diligence measures required, based on risk assessment and depending on the type of customer, business relationship, product or transaction?

If you are checking the ID of a business customer, you also need to know, for example:

6. What are the names of those with a controlling interest in the businesses, i.e. the directors, and what are their backgrounds? And who are the owners of the business, i.e. those with a beneficial interest of 25% or more? Also, how do you carry out the necessary checks on those with a controlling interest or beneficial stake where they are private individuals?

7. Are there any other credible third party sources you can use in order to triangulate the identification of the business, i.e. central registries equivalent to the UK’s Companies House, central regulators or stock exchanges, since the guidance is that you use multiple sources to verify the identity of your customers?

These questions will give you a flavour and will help you understand why automating the process  – and outsourcing to an electronic data provider that specialises in compliance – is a good idea and will save you time and money. You will still however need to invest in some training for your employees.

Online checking sources

Gone are the days when you can just check a vendor’s passport, log his name and address and Bob’s your uncle. So in practical terms, how does an estate agent interpret the nuances of the new legislation? And what is the easiest way for an estate agent to be compliant with AML 2007?

The JMLSG advises that when verifying the identities of customers, estate agents (alongside all other regulated businesses) may consider using online sources of real time data as well as, where possible, refer to data from multiple sources in order verify a customer’s identity. In other words the common practice of gathering hard copy from a customer as well as from, say, Companies House is no longer sufficient, primarily because two sources do not equate to ‘multiple sources’.  So a passport is not enough.

The JMLSG’s Final Consultative Text (FCT) in June 2007 points to one potential solution for estate agents (and all regulated businesses) who do not have the resources to conduct these rigorous checks in order to be compliant with the Money Laundering Regulations 2007.

“A number of commercial agencies which access many data sources are accessible online by firms, and may provide firms with a composite and comprehensive level of electronic verification though a single interface. Such agencies use databases of both positive and negative information, and many also access high-risk alerts that utilize specific data sources to identify high-risk conditions, for example, known identity frauds or inclusion on a sanctions list…” (JMLSG FCT, 27 June 2007, Paragraph 5.3.34.)

Not surprisingly, regulated businesses have been signing up with ‘commercial agencies’ or credible ‘third party data organisations (the JMLSG seem to use theses terms interchangeably) to provide them with 24/7, online access to packages of real time information that they can store themselves.

But before you decide to outsource to a third party data provider, it is important that you do not choose the first one that comes along. Do your research; since your report is only as good as the data the agency collects. You need to be confident that the data provider gives you all the information you need – in the correct format.

In JMLSG parlance: “Before using a commercial agency for electronic verification, firms should be satisfied that information supplied by the data provider is considered to be sufficiently extensive, reliable and accurate.” (FCT, 5.3.38.)

Fortunately, technology is far enough ahead of legislation to allow regulated businesses to access quality data in real time through a single interface. This allows them to verify the identity of those they do business with, ensuring that they are compliant.

While it’s true that advances in technology, notably the Internet, have had the effect of facilitating criminal activity – anyone can go online, type a few words into a search engine and find sites that sell false passports, driver’s licenses, utility bills and any number of false identities. But by the same token, technology is helping Business wage a global war on money launderers. Think of it as a circular arms race.

At my company, we’ve spent two years developing a set of cost-efficient reports that employees can access immediately from their PCs.  These reports mean estate agents can easily and immediately verify the identities of individual vendors, as well as business customers, and ensure they are compliant with the legislation. It also saves the embarrassment of an estate agent having to repeatedly ask a customer directly for extra information.

CASE STUDY – TEAM ASSOCIATION

Peter Byrne is IT Director of Team Association, a membership network of independent estate agents spread across the UK. Team Association members have approaching 400 branches, of which the largest individual member has a network of eight branches.

He says: “The Money Laundering Regulations are an additional challenge for estate agents, many of whom will say they have never encountered anyone who has seemed suspicious or given them cause for concern,” says Peter Byrne. However, we all accept that property can be an attractive route for laundering large sums of money.”
Peter Byrne began his career in estate agency in 1964, although he hasn’t worked ‘front of house’ for the last six years.  “When I started out, a regime of Know Your Customer was drilled into me,” he says.  “Not then for money-laundering reasons, but simply because an estate agent always needs to assess the financial capability and intent of a purchaser.  We weren’t overly concerned about the seller other than to the extent that they were intent on selling. 

“Now that estate agents are compelled by law to verify the identity and intent of their seller, it can only help drive best practice throughout the industry, and encourage everyone to raise their standards.  Yes, the new regulations will require many estate agents to put in place new processes for assessing risk, but the requirements make good business sense.  After all, no one wants to be doing business with criminals or terrorists.”
Key to the legislation is the issue of identity verification.  The advice from the Joint Money Laundering Steering Group is to use online systems and ‘credible third party sources’ as part of the process of verifying the identity of clients and prospective clients.

“We decided to investigate how our members might comply as efficiently as possible,” says Peter Byrne. “We wanted to relieve some of the administrative burden of manually carrying out all the necessary checks on clients; compliance does not have to be burdensome.”

After thoroughly reviewing everything available in the market, Team Association recommended D&B’s AML Report to its members.
“The comments we have received from our members so far have been excellent,” says Byrne.  “Whether it is checking out an individual through the link up with Call ML or a full company check with the AML Report, D&B is able to provide our members with a simple, reliable, one-stop shop for complying with the legislation.  For our agents, this is welcome reassurance in what for many is unfamiliar territory.”

For more detail visit http://www.oft.gov.uk/shared_oft/business_leaflets/general/oft954.pdf

For more information about D&B’s AML compliance reports visit www.dnb-compliance.co.uk or contact Malcolm Parker, International Programme Director for D&B UK and Ireland on +44 (0)1628 492197 or parkerm@dnb.com.