A recent case is a stark reminder of the wide-reaching impacts of the Money Laundering Regulations 2007. An estate agent's inadvertent failure to register its business under the MLRs rendered the claimant's commercial contracts illegal and therefore unenforceable.
In RTA (Business Consultants) Ltd v Bracewell, RTA, a business transfer agent, entered into a written agreement with Mr Peter Bracewell in February 2010 under which RTA was appointed as agent for the sale of Mr Bracewell's business and, crucially, the property where it was carried out. In return, RTA would receive £9,000 plus VAT in instalments as a registration fee and would be entitled to an additional amount of £31,000 plus VAT in certain circumstances. In May 2010, after he had paid a third of the registration fee, Mr Bracewell reconsidered his decision to sell the business and property in favour of leasing it to a friend on an informal basis. He purported to terminate the agreement with RTA. RTA claimed that the lease arrangement triggered its commission and brought proceedings against Mr Bracewell for its commission and the outstanding balance of the registration fee.
Mr Bracewell defended the claim on various grounds, of which the most significant was RTA's failure to comply with the MLRs. They apply to a wide variety of businesses, including those carrying out estate agency work. Since RTA was engaged to broker a sale not only of Mr Bracewell's business, but also the associated property, it was acting as an estate agent.
Under the Regulations, estate agents were required to register with their supervising authority (then the Office of Fair Trading, now HM Revenue & Customs) on or before 1 January 2010. RTA had not known of this requirement until told by the Office of Fair Trading on 11 October 2012 and it registered itself on the following day – but this was well outside the time limit and long after it had entered into the contract with Mr Bracewell.
The court accepted that this failure to register was not indicative of RTA's dishonesty or turpitude. However, the court held that RTA was nevertheless prohibited from carrying on the business of an estate agent after 1 January 2010 until it registered with the supervising authority. This was because under the MLRs those regulated businesses required to be registered "may not carry on the business or profession in question" if not registered, and indeed it is a criminal offence to do so. Since it was a criminal offence for RTA to carry on business as an estate agent, the contracts it made while doing so were illegal and incapable of giving rise to enforceable rights.
RTA's claims against Mr Bracewell therefore failed, as did Mr Bracewell's counterclaims based on the agreement. The court held that the losses lay where they fell (without, however, considering whether the fees paid by Mr Bracewell might have been recovered as a payment made by a mistake as to law).
Ultimately, the court held that Parliament had already decided that the public interest in preventing money laundering and terrorist financing trumps the disproportionate effects of the MLRs. The case is a sobering reminder of the importance of compliance for both regulated businesses and their counterparties, whether regulated or not.