On the 10th January 2020, the EU’s fifth Money Laundering Directive (5MLD) was adopted into UK law. The new directive represents an attempt to create a more robust and effective set of measures and controls for fighting money laundering following the increased number of terrorist attacks across Europe, as well as the political fallout from the leaked “Panama Papers,” which identified criminal activity in the global financial systems.
The purpose of the Directive is to increase the overall transparency of the European economic and financial environment, strengthening the measures and controls contained within existing directives.
The new directive is also broader in scope, extending for the first time to include letting agents, who will now have to take extra precautions to ensure that tenancy agreements are not being used for money laundering purposes. All tenancy agreements (whether commercial or residential) with a rent of over €10,000 (approximately £8,500) per month come under the scope of the new regulations.
First and foremost, letting agents will need to:
- Register with HMRC.
- Appoint a Money Laundering Officer (MRLO) and a Deputy Money Laundering Officer (to cover them when they’re off work.).
- Ensure that staff are trained regularly (at least annually) to recognise money laundering and terrorist financing risks and to understand that they are to report any suspicions they have to the Money Laundering Officer immediately and discreetly.
- Maintain documented proof that they are carrying out regular training sessions and applying proper procedures as HMRC will be conducting drop in inspections (“interventions”).
Anti-money laundering procedures that must be carried out start with more stringent “Customer Due Diligence” (CDD) checks on landlords and tenants namely, in-person identification checks as well as verification that the tenancy is genuine. Agents must check beneficial ownership registers before establishing commercial relationships with landlords with regard to specific properties, and must report to Companies House any discrepancies they identify between the beneficial ownership registers and their own CDD checks.
Letting agents will also have to carry out “Enhanced Due Diligence” (EDD) checks in cases where there is an unusual pattern of transactions or where a transaction appears to have no obvious economic or legal purpose. EDD checks also extend to situations where there is a business relationship or transaction with a landlord or tenant from a high-risk third country, such as Iraq, Iran or Afghanistan. Thirdly, EDD checks must be applied in the case of “politically exposed persons” (i.e prominent political figures as well as their close family members and associates). In all of these high-risk circumstances, letting agents should be able to show that the checks they undertook were relative and proportionate to the level of risk identified.
There may be serious penalties if letting agents do not comply with the requirements of the new regulations, ranging from small fines to prison sentences. In 2019, one property agent was fined £200,000 simply for failing to apply the necessary procedures properly. There does not need to be evidence of any criminal wrongdoing for letting agents to face legal penalties, so the Anti-Money Laundering guidelines are worth examining closely.