A drill down into MLR 2017
Let’s face it, as Estate Agents, the industry deals with a lot of the process ahead of ‘law’ kicking in. But more and more the sector is regulatory obliged to comply with many legal obligations that mean the pressures to understand what is what can feel overwhelming.
One of these elements is the Anti-Money Laundering regulations, a breakdown of the regulations can help. Here the Legal Eye team have broken down the key parts of the legislation to help.
What is the legislation?
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 – otherwise known as the MLR 2017 – sets out the obligations placed on private sector firms operating in areas at high risk of money laundering. By stipulating robust processes and procedures for identifying and onboarding clients, the MLR 2017 aims to ensure that the UK adopts a risk-based approach to combat the threat of dirty money.
The MLR 2017 places specific obligations on estate agents, and any failure to meet these could be a criminal offence. Likewise, anyone who provides false or misleading information during a money laundering investigation is also committing a crime which could be punishable by up to two years in prison.
Registration with HMRC
Under the MLR 2017, estate agents must register with HMRC, their supervisory authority. If they don’t, they risk financial penalties and reputational damage. Estate agents pay HMRC a fee for money laundering supervision. It’s a criminal offence to trade as an estate agency business without being registered. It is also a criminal offence to trade if your registration with HMRC has been cancelled.
Section 4 of the MLR 2017 establishes when estate agents legally enter a business relationship with a purchaser and seller. Under the regulations, this happens when the seller accepts the purchaser’s offer.
Crucially, estate agents must now carry out due diligence on both buyers and sellers. While this places an additional burden on those working in the profession, estate agents can use third-party onboarding systems or share customer due diligence information between other professionals involved in the transaction to reduce the load. However, estate agents remain liable for ensuring that they comply with the regulations. As such, robust checks must be in place to ensure this is done correctly.
Regulation 18 of the MLR 2017 states that estate agents must consider a wide range of factors when undertaking a risk assessment, including those relating to:
- Its customers
- The countries and geographic areas in which it operates
- Its products or services
- Its transactions
- Its delivery channels.
In addition, estate agents must keep a written, up-to-date record of all the steps taken when conducting such assessments. This record should be given to HMRC on request.
Extra Territorial Reach
The MLR 2017 applies to estate agents and their subsidiaries, including those outside the UK. Regulation 20 states that all estate agents must ensure that any subsidiaries and branches in the EEA (which includes EU countries, Iceland, Liechtenstein, and Norway) must comply with the relevant money laundering regulations.
In addition, if any subsidiaries operate in a country that “does not impose requirements to counter money laundering and terrorist financing as strict as those of the United Kingdom, the relevant parent undertaking must ensure that those subsidiary undertakings and branches apply measures equivalent to those required by these Regulations, as far as permitted under the law of the third country.”
Where a country’s law does not allow for equivalent measures, the parent estate agent must inform HMRC and “take additional measures to handle the risk of money laundering and terrorist financing effectively.”
Estate agents must appoint a named individual responsible for overall compliance with the MLR 2017. Section 21 states that, where appropriate to the size and nature of the business, this person should be “a member of the board of directors (or if there is no board, of its equivalent management body) or of its senior management”. This requirement does not apply to sole practitioners.
This nominated person can be the same as any existing Money Laundering Reporting Officer (MLRO) (as appointed under the Money Laundering Regulations 2007), as long as they are suitably senior.
Estate agents must also screen any “relevant employees appointed by the relevant person, both before the appointment is made and during the course of the appointment”. They must also establish an independent audit function to “examine and evaluate the adequacy and effectiveness of the policies, controls and procedures adopted by the relevant person”. This independent audit should also make recommendations in relation to MLR 2017, and assess the relevant person’s compliance with these recommendations.
Regulation 24 of the MLR 2017 requires estate agents to train relevant employees on the legal requirements with regard to money laundering and terrorist financing (as well as their data protection requirements). This training must be provided regularly to ensure employees are abreast of any changes and developments when it comes to spotting risky transactions, activities, or situations. Firms must also maintain a written record of this training.
A relevant employee is anyone who contributes to identifying or preventing money laundering and terrorist financing, or the associated risk management.
Customer Due Diligence (CDD)
Customer due diligence (with an emphasis on client ID checks) forms a vital part of the MLR 2017. Estate agents must identify clients (including any beneficial owners) and verify their identity based on a reliable independent source.
Regulation 27 lists situations where CDD must be applied and factors that estate agents should consider. This list includes where there is a suspicion of money laundering or terrorist financing or any doubt over the “veracity or adequacy of documents or information previously obtained for the purposes of identification or verification”.
Regulation 28 establishes the CDD checks required where a client is a corporate body.
Enhanced Due Diligence (EDD)
The MLR 2017 lists the circumstances where EDD must be applied. This is primarily covered by regulation 33 and 35. In short, EDD must be carried out on any transaction or business relationship involving:
- A person established in a “high-risk third country”
- Any transaction or business relationship involving a “politically exposed person” (PEP) or a family member or known associate of a PEP
- Any other situation that presents a higher risk of money laundering or terrorist financing.
This includes any such relationships between beneficial owners and PEPs. Estate agents are encouraged to consider each situation as a whole to assess the level of risk.
In addition, should an estate agent have a business, familiar, or familial relationship with a PEP, the firm must:
- Ensure approval from senior management for establishing or continuing the business relationship
- Ensure adequate measures to establish the source of wealth and source of funds involved in any transaction
- Conduct enhanced ongoing monitoring of the business relationship.
Reliance on Third Parties
Under section 39 of the MLR 2017, any estate agent who uses a third party to conduct CDD must have a written arrangement with that third party. The third party is obliged to provide copies of CDD documents upon request. Crucially, the estate agent remains liable for any failure to apply adequate CDD measures.
Estate agents must ensure that their AML policies (as well as any supporting policies), documents, procedures and training are all relevant, up-to-date, and compliant with the MLR 2017. Not least because HMRC is cracking down on estate agents found to be in breach. Dozens of estate agents have already received fines of more than £500,000, and in October 2022, HMRC named 68 estate agents it had fined for not complying with the rules.
A failure to meet AML compliance obligations can lead to fines, reputational damage, and even closure. And as the authorities get more rigid in their treatment of firms without solid systems and controls, the role of compliance becomes more and more complex.
For many estate agency businesses, understanding and meeting all the necessary legal requirements can be a real challenge. But, without a robust compliance culture, estate agents are likely breaking the law.
Outsourced audits and reviews can help estate agents to understand the regulations and industry requirements and adapt their processes and procedures accordingly. Find out more about our Estate Agent AML Support Services, or get in touch today for an initial chat about how we can help.
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