The weight of compliance has never been heavier

The weight of compliance has never been heavier

Organised criminals have long targeted the UK property market to launder their “dirty” money.

Transparency International UK has even put a price on the size of the problem, calculating that £6.7 billion of suspicious funds has been invested in UK property since 2016. And the Government recategorised the sector as “high-risk” for money laundering purposes as part of its 2020 National Risk Assessment of Money Laundering and Terrorist Financing.

Russia’s invasion of Ukraine has further aggravated the issue. Before the invasion, Russia was already facing almost 3,000 economic sanctions. That number had doubled within weeks of the first attack and has been rising ever since. The new restrictions have introduced further constraints on individuals, entities, and their subsidiaries, and led to legislation to limit deposits held by Russian nationals in UK bank accounts.

But the criminals remain undeterred.

Despite the redoubled sanctions, a damning report from the commons foreign affairs committee claimed that the Government has been unable to stop Russian kleptocrats from laundering cash illegally through the UK – even maintaining that some of it was being used to finance Vladimir Putin’s invasion of Ukraine.

A comprehensive, multi-sector survey of 500 regulated firms in the finance and banking, legal and property sectors from SmartSearch recently found almost one in five (18%) of property firms said they had seen a rise in criminals attempting to launder money or commit financial crime through their businesses last year. Also, one in 16 firms said they had been the victim of money laundering or financial crime in the past six months.

Organised criminals are increasingly active, and the threat of money laundering is very real.

From the start of this month (August), agents are facing yet more AML requirements under the Register of Overseas Entities. The full details are still unclear but, in short, to stop criminals hiding behind complex structures of shell companies, anonymous owners of UK properties will have to reveal their true identities.

This is not just for new property purchases. The register will be applied retrospectively to property bought up to 20 years agon in England and Wales. In Scotland, it’s backdated to December 2014.

In other words, the weight of anti-money laundering (AML) compliance for property firms has never been heavier.

Some property firms have invested in technology to ensure their due diligence and Know Your Customer (KYC) procedures manage their risks of exposure to criminality responsibly and effectively – not just at the start of a transaction but throughout their relationship with a client.

But many haven’t. Many firms are still relying on flawed, time-consuming manual checks to verify customers. More than a quarter of the property firms in the survey admitted that they were still verifying individuals with hard copy documents like passports and utility bills. We know that organised crime gangs can easily make convincing forgeries of ID documents.

More worryingly, up to 70% of the firms questioned said they had not changed their approach to onboarding new customers since further sanctions were imposed on Russia following its invasion of Ukraine.

That could explain why property firms accounted for almost half of those censured by HMRC on a list of 79 firms reprimanded for breaches of the regulations between April and December last year. The censures brought fines and reputational damage for a range of property firms which included estate agents, commercial property firms, valuers and auction houses.

I have huge sympathy for property companies struggling to meet their AML compliance requirements. But there is no excuse for those who continue to do so with flawed, legacy procedures.

The best tool is electronic verification (EV). In fact, the 2020 Money Laundering and Terrorist Finance Act itself recommends that regulated firms use electronic verification as part of their due diligence to make it as effective as possible.

EV can carry out checks on new customers without manual verification. It can identify people on sanctions, Politically Exposed Persons (PEPs), Special Interest Persons (SIP) and Relatives & Close Associates (RCA) in minutes, and it will identify customers operating in high-risk companies and monitor customers – daily, if necessary.

Compared to the level of fines and reputational damage for breaching the rules, the investment required is not significant – and it vastly improves the firms’ customer journeys.

Frankly, as money laundering criminals increase their activity and the Government becomes ever more resolute in its bid to stop them, it’s a no-brainer.

Martin Cheek, managing director, SmartSearch

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