Letting agents have been required to comply with anti-money laundering rules since 2019 – what do you need to know?
Since January 2019, letting agents have been required to comply with anti-money laundering (AML) legislation for the first time.
AML rules, which have traditionally applied only for sales agents, are designed to crack down on the use of the financial system – and in this case specifically property purchases – for funding of criminal activities via money laundering.
“As a result of current legislation parts of the lettings industry are having to fall into line with the legal obligations placed upon the sales aspect of the property sector. The recently published UK AML National Risk Assessment highlighted the fact that the lettings market potentially brings even greater risks: organised crime groups have the opportunity to launder funds under the guise of rental payments; the mere fact that Letting Agents handle “cash” payments directly in the form of deposits potentially exposes them to significant risk; and the difficulties in establishing the beneficial ownership of property held by complex opaque corporate structures is another key factor.”JERRY WALTERS MICA DIP. AML/CTF
Managing Director, FCS Compliance
Below, we take a closer look at the rules letting agents are now required to follow and a recent Government report which looks at levels of compliance so far.
What AML rules do letting agents have to comply with?
As part of the 5th Money Laundering Directive, letting agencies are required to register and carry out checks if they let land or property for a month or more at a rent of €10,000 (equivalent to approximately £8,500) or above.
The relatively high threshold has been set as it is believed properties and land above this value are considered attractive to money launderers.
Alongside compulsory Right to Rent checks for all transactions, agents are required to carry out customer due diligence for transactions above the threshold.
The rules also require affected agents to register with HMRC by May 2021, while also paying consideration to Politically Exposed Persons.
As part of the 5th Directive, affected letting agents are required to appoint a Money Laundering Reporting Officer who is responsible for compliance. There is also an obligation to provide regular staff training on how to recognise and manage transactions which could be related to money laundering or criminal activity.
HMRC is known to be strict in its enforcement of AML rules and so any agencies found to be breaking the law could be hit with a significant fine.
Report suggests it’s too early to ascertain lettings compliance
A national risk assessment on money laundering and terrorist financing in the UK was published by the Government in December; It provided an update on estate agents’ compliance with AML rules, as well as the progress made by letting agents since last January’s rule changes.
The report suggests that around half of all estate agencies selling homes for £5 million or more have not registered with HMRC or registered for AML processes.
On the lettings side, the report suggests that it is too early to tell if agents are complying with the 5th Directive as it had been in place for less than a year when the report was compiled.
It also says that due to the nature of lettings there is often high levels of anonymity which can provide the ideal conditions for money laundering and criminal behaviour.
“Landlords may have purchased the property with illicit funds, tenants may be paying rent with illicit funds (as a realisation of their proceeds), or the landlord and tenant may be part of the same criminal group, laundering their funds under the guise of rent payments,” says the report.
“This anonymity is exacerbated by the potential exposure to high-risk jurisdictions when letting agents pay rent into offshore accounts without knowing the ultimate beneficial owner.”
Could more agents be required to comply with AML rules in the future?
Due to the high threshold set by the 5th Directive, only a relatively small number of letting agents operating in the high-end market are required to comply. However, many firms – particularly those working in big cities or with more expensive properties – have already voluntarily registered with HMRC.
It is interesting to note that there was almost a decade between the 3rd and 4th Directives, with the 5th Directive introduced just over two years later. This could suggest that further AML rules could be on the way in the not-too distant future and they may affect a higher number of letting agents.
It is good practice for all letting agencies to review their due diligence processes, ensuring staff are aware of what checks need to be made when transactions are being carried out.
HMRC is very active in its enforcement of AML rules, with a range of fines for agents over the years, so it’s important that lettings firms are well-prepared and clear on what they do or don’t need to do.