5th EU AML Directive Guidelines

December 10, 2019
Posted by: FCS Compliance
Category: Blog, News

5th AML EU Directive update from Financial Crime Services

UPDATE: 9 January 2020

As of today, the details for the amendments to the 5th EU Anti-Money Laundering (AML) Directive have now been confirmed. From 10 January 2020, lettings agents will need to adhere to the latest legislation or risk significant penalties from HMRC.

What are the key points to be aware of?

Lettings agents working in the commercial or residential sector with a property worth over 10,000€ (or currency equivalent) per calendar month are now be subject to the ML Regulations 2017. These legal obligations relate to landlords, tenants, guarantors and authorised occupiers.
Effective Customer Due Diligence (CDD) must be undertaken on an individual client/customer.
- For tenants, this consists of establishing their identity, proof of address and source of funds.
- For landlords, confirmation of the ownership of the property through the land registry title and identification of the landlord and proof of address needs to be acquired. In the case of a property being owned by a company or a trust, the ultimate beneficial owner of the property will need to be established.
The CDD for both the landlord and the tenant needs to determine whether either party is a Politically Exposed Person (PEP) or subject to financial sanctions.
CDD must be carried out at the start of a business relationship. For lettings agents, this is formed with a tenant, authorised occupier, guarantor or other relevant party at the point in which the tenants offer is accepted, and before the tenancy agreement is agreed.
Firms should not be in receipt of a tenancy or holding deposit from a tenant until satisfactory CDD has been undertaken.
On a firm-wide basis, every letting agency falling under the ML regulations must undertake an AML Risk Assessment in line with regulation 18, comprehensive written AML Policies & Procedures in line with Regulation 19 and all staff must undertake AML training in respect of regulation 24.
Those working in lettings are now subject to HMRC inspections to ensure that they are adhering to the latest legislation.

Please note: the rules governing sub-agency will fall in line with sales. A sub-agent or property finder is required to ascertain the CDD undertaken by the main agent. For lettings agents, this is the landlord and ultimate beneficial owner of the property. The main agent is now required to obtain CDD on the tenant, guarantor or authorised occupier.

UPDATE: 11 December 2019

As some property professionals still struggle to get to grips with the 4th EU AML directive, along comes the 5th next month to place even greater pressure on the industry. The legislation was passed in 2018 giving jurisdictions who signed up to the directive, including the UK, two years to transpose the legislation into domestic law. Despite the looming possibility of Brexit, the clock is ticking toward the 9 January 2020 when the UK should have amended the Money Laundering Regulations 2017 “Regulations” to reflect the proposed changes.

The 4th Directive saw radical changes to the sales aspect of the real estate profession with the obligation for agents to undertake Customer Due Diligence (CDD) on the purchaser of property, and also allowing other regulated entities i.e. solicitors, accountants, tax advisors etc to place “reliance” upon the CDD undertaken by estate agents.

In order to tighten up the AML legislation further, it seems that Letting Agents, and especially those at the higher end of the market, are the focus of attention for the legislators. The recommendation is, and all the evidence points to the fact that this will be case that letting agent dealing with rental properties attracting a rental figure of 10,000 Euros (or its equivalent in another currency) in a calendar month will be is subject to the “Regulations”. It is yet to be clarified, but early indications are that this threshold will relate to both residential and commercial property.

Of course, the irony is that it could be argued that the level of CDD currently undertaken by Letting Agents is more extensive than that currently carried out by sales agents, with the referencing of tenants, proof of income etc. Therefore, the day-to-day obligations placed upon letting agents may not be too onerous when it comes to tenants.

However, where letting agents may see a difference is not the tenant aspect, but the obligations that are possibly going to be placed upon them, and their business relationship with a landlord – on whom they are likely to have to undertake CDD on. This is going to consist of confirmation of not only their identity, but also their ownership of the property concerned and clarification of their status as to whether they are or aren’t a Politically Exposed Person (PEP). In addition, one of the grey areas concerns deposits.

As things currently stand, the “Regulations” state that a transaction should not be undertaken prior to forming a business relationship. This has proved problematic in the past where a substantial deposit has been paid by a prospective tenant. and the agent has then raised concerns about the origin of the funds concerned but is not in a position to consider returning the funds whereby leaving them exposed to transferring criminal property. Therefore, every firm going forward will have to ensure they have robust CDD procedures in place to establish clearly the authenticity of rental monies prior to their receipt.

The other key areas that the new directive will impact upon the lettings industry is the requirement for a letting agent to have in place comprehensive AML written Policies & Procedures that are in line with Regulation 19 of the “Regulations”. A firm-wide Risk Assessment will also need to be undertaken, in accordance with Regulation 18. It will also be expected that all staff will have received some form of recognised AML training as per Regulation 24.

FCS have been in consultation with HMRC over the impact of the new legislation and made several recommendations to clarify the guidance, as it currently stands, with the aim of simplifying the new guidance that will be issued to agents from both a sales and lettings angle.

Regardless of changes to the “Regulations” on the horizon, it should not be forgotten that both the sales and lettings aspect of any real estate business are under a legal obligation to report any suspicion of money laundering to the National Crime Agency in accordance with the Proceeds of Crime Act 2002.

The introduction of the Criminal Finances Act 2017 in January 2018 has seen the introduction of civil court orders namely an ‘Unexplained Wealth Order’ and an ‘Asset Freezing Order’ has led to some high profile cases that have only increased the spotlight on the London property market, especially the selling and letting of real estate in the prime resi market over the last number of years which is now being scrutinised perhaps like never before.

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