Following the release of a report by the UK Chapter of Transparency International (“TI-UK”), businesses and professional services, particularly those involved with the estate agency sector, should consider an audit of their systems and controls to identify and manage the risks posed by money laundering.
TI-UK recently released a report, “Don’t Look, Won’t Find”, which reviews the state of the UK’s anti-money laundering (“AML”) regime and draws out several key themes: the fragmentary nature of the current regime; issues with the volume and quality of AML activity reporting; and the identification of the property sector specifically as being at significant risk of exploitation.
Fragmentation of AML regime in the UK
Responsibility for AML monitoring and enforcement in the UK lies with 27 different supervisors. The recent TI-UK report examines the performance of 22 of these supervisors.
The majority of the UK AML supervisors are professional bodies that have AML as part of their wider remit. The report states that this potentially creates a conflict of interest between the promoting (i.e. lobbying) and scrutinising functions of these bodies. The report comments that only seven of the UK supervisors sufficiently separate conflicts of interest, the remaining supervisors being directly at odds with the principle of the Clementi Review published in December 2004 that these functions should be split. The TI-UK report therefore concludes that this is something which needs to be addressed by the UK Government.
The report states that as “the UK has experimented with a low-cost model of supervision by outsourcing regulatory oversight responsibility to wide range of private sector bodies” this has led to a situation where standards of supervision vary widely and there is poor overall understanding of risk which in turn leads to inadequate compliance, poor quality reporting of suspicious activity and inconsistent approaches to enforcement. The report expresses concerns that the effectiveness of the AML supervisory regime in the UK is inconsistent and that many supervisors are failing to properly adopt the risk-based approach advocated by the 2005 Hampton Report, in not assessing which firms within their purview bear the greatest risks for money laundering.
Volume and quality of reporting
Various sectors, including accountancy and estate agency sectors, were criticised in the report for the low number and quality of suspicious activity reports (“SARs”). TI-UK identify the FCA as providing a reasonable level of reporting of SARs with 320,851 made for the year October 2013 – September 2014. This contrasts with just 4,930 and 179 for the accountancy and estate agency sectors respectively. The report concludes that the SAR volumes are very low for these sectors which may indicate a failure of the current regime. The report also highlights an attitude of defensive reporting sufficient information in a SAR to protect the reporter, but not sufficient information for the National Crime Agency to take further steps.
Furthermore, TI-UK considers many supervisors are deficient in publishing their reporting statistics and guidance.
Concerns in relation to the Estate Agency sector
A particular risk area identified in the report is the UK estate agency sector, with the London property market highlighted as being particularly vulnerable to money laundering.
According to another report from TI-UK, “Corruption on your doorstep” published in March 2015, over £180m of property in London is or has been investigated by the Metropolitan Police’s Proceeds of Crime Unit as suspected proceeds of international corruption since 2004.
The London property market is particularly vulnerable to foreign investment and research has found that much investment comes from high risk countries such as China, Russia, Saudi Arabia and the United Arab Emirates.
One of the major criticisms in the TI-UK report is that UK AML regulation only requires estate agents to conduct due diligence checks on their ‘customers’ (and beneficial owners), which is, typically, the seller of a property and the requirement to conduct due diligence on the purchaser falls on other regulated bodies, such as solicitors. What the report does not address, however, is the practical difficulties it would cause the UK estate agency sector (and indeed any other regulated sector) if it were required to conduct due diligence on individuals/companies which were not their customers.
Other weaknesses in the AML regime for the estate agency sector include:
- a lack of enforcement and sanctions for AML breaches;
- the risk of offshore property ownership and the need to increase transparency to assist in identifying beneficial owners;
- low levels of awareness in the sector of AML responsibilities;
- the fact there is no “fit and proper” test operated by HMRC;
- a poor level of understanding of money laundering threats by the relevant AML supervisor coupled with the fact that HMRC has conducted no thematic reviews or compliance risk reviews in connection with money laundering; and
- a lack of SARs made by the sectors. Despite the risk associated with the sector, the estate agency sector has one of the lowest SAR reports for the period October 2013 to September 2014, with a 16.74% reduction in reports from the previous year. In addition, out of those reports made there were issues identified with the quality of the reports.
The TI-UK report recommends that the UK government:
- overhaul the way AML standards are overseen in an effort to achieve consistency, including consolidating the number of AML supervisors;
- ensures adequate levels of enforcement against AML failures; and
- provides better information regarding money laundering risks in relevant sectors.
The issues raised by this report are likely to prompt a response from the relevant supervisors and the government to increase enforcement and review the current AML regime. Indeed, the influential all-party parliamentary group on anti-corruption has recently heard recommendations relating to overhauling the UK‘s AML regime.
It is, therefore, imperative for businesses to understand the risks and their potential exposure to money laundering. This is particularly true for those involved in the property sector and estate agents especially. An audit of AML procedures can provide a cost-effective way of identifying and managing these risks, while ensuring that your business is able to operate as efficiently and flexibly as possible.