If you keep up to date with the latest goings-on of the private rental sector, you’ve probably came across the Fifth Money Laundering Directive several times over the last couple of months. But what exactly is the Fifth Money Laundering Directive? And what does it have to do with rental properties?
What is the Fifth Money Laundering Directive?
The Fifth Money Laundering Directive – known as the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 in the UK – aims to combat against terrorist financing, financial crime and money laundering.
The directive is essentially an amendment to the EU’s Fourth Money Laundering Directive that introduced a stricter risk-based approach to money-laundering in the UK – know as the Money Laundering Regulations 2017.
How will the Fifth Money Laundering Directive affect the rental sector?
The Fifth Money Laundering Directive came into force in the UK on January 10, 2020. From this date, all letting agents who manage any properties with an individual rental yield of 10,000 Euros a month (approx £8,718.45 as of time of writing) must comply with the regulations.
The regulations require that any legible agents or property management companies carry out comprehensive customer due diligence on any landlord or tenant involved in a tenancy with a monthly rent of 10,000 Euros or more. Properties with a monthly rent of 10,000 Euros are quite uncommon in the UK, making likelihood of letting agents falling under the scope of the Fifth Money Laundering Directive relatively low.
All letting agents that meet these requirements must take appropriate steps to assess the risks of money laundering and appoint a Money Laundering Reporting Officer who is responsible for the company’s compliance with the regulations.
What is money laundering and how are rental properties at risk?
To put it simply, money laundering is the illegal process of disguising the origins of criminally obtained money – otherwise known as ‘dirty’ money. The money is passed through a sequence of transactions and eventually returned to the launderer from a seemingly ‘legitimate’ source.
Purchasing and letting out a property is a common way for criminals to launder their money in the UK. The large sums of money and single transactions that are often involved with property give criminals an ideal chance to swap their dirty money for clean cash without rousing suspicion.
A property owner may attempt to launder their money by ‘letting’ out their property to someone who’s in on the crime – or even creating a made-up tenant – and disguising their dirty money as clean rental payments. Similarly, a tenant (with no association with the landlord) may launder illegal cash by using it to pay the rent or by using it to pay a security deposit that will eventually be returned clean.
What anti-money laundering responsibilities do letting agents have?
Estate agents and companies that carry out property sales have been required to comply with the Money Laundering Regulations and register with the HMRC since 2017. Letting agents will have to register with the HMRC when the online system becomes operational in May 2020. Letting agents that also carry out sales should already be registered, but should inform HMRC that they carry out lettings when the online registration system is available in May 2020.
Although letting agents can’t register until this date, they must comply with the regulations in every other way.
All members of staff should be made aware of the Money Laundering Regulations and the consequence responsibilities they have to fulfil. Relevant training should be given, a regular risk assessment should be carried out and a written policy on how to manage the risks of money laundering should be available.
Thorough customer due diligence (CDD) should be carried out on landlords and tenants involved in the specified agreements. This should include verifying the identity of the landlord (and the tenant) and gaining information about the purpose of the business relationship ahead.
Any suspicious activity – including that of colleagues – should be reported to the Money Laundering Reporting Officer (MLRO) and not shared with other members of staff.
Between 2010 and 2018, call centre leader Haroon Cassim took almost £1.5 million from Camelot and Yopa Property. Whilst working for the two companies, Mr Cassim used fake invoices from bogus businesses to transfer between his wife’s accounts. His wife is now on trial for three accounts of money laundering.
What are the responsibilities of letting agents beyond Fifth Money Laundering Directive?
As a landlord or tenant, you may be wondering what if I use a letting agent that isn’t required to register with the HMRC? What anti-money laundering responsibilities do they have that will protect me?
Letting agents have a general responsibility to carry out customer due diligence and protect their landlords, tenants and business from financial crime, money laundering and fraud.
As an online company, all our interactions with landlords and tenants are via phone calls or emails – meaning we are especially vigilant when it comes to the verification of identity and legitimacy of transactions.
As expected of all lettings companies, we will not – in any circumstances – advertise a property on behalf of a landlord without formal authentication of their identity. We will ask landlords to provide:
- A form of photo of ID, such as a passport or driving licence
- Proof of ownership, such as a mortgage statement, title deed, consent to let or land registry certificate
Without these documents, we cannot adequately carry out our customer due diligence or safety confirm that the landlord is indeed who they say they are. Proceeding without this level of verification could lead to somebody falsely letting out a property without the real landlord’s knowledge and leave landlords and tenants vulnerable to fraud.
How can landlords and tenants help to prevent money-laundering and fraud?
As a landlord or tenant, the best thing you can do is co-operate. It’s important to remember that asking for ID or proof of ownership is not meant as a personal insult to you and your integrity. Instead, our customer due diligence is there to protect you and others from financial criminals, impostors and illegal sub-letters.
Take a look at what other legal changes landlords can expect this year: 10 New Rental Laws Landlords Must Be Ready for in 2020.
What are the consequences failing to comply with the Fifth Money Laundering Directive?
If a business is found to be in violation of the Fifth Money Laundering Directive and Money Laundering Regulations, they may be faced with an unlimited fine or prison sentence of up to two years.
The act of money laundering itself – or assisting in money laundering – is punishable by up to fourteen years in prison – depending on the severity of the crime.
Will the Fifth Money Laundering Directive change in the future?
As the new directive is itself an amendment of the Fourth Directive, it’s certainly possible that further changes will be made in the future. In Rightmove’s recent Fifth Money Laundering Directive webinar, NAEA Propertymark Chief Executive Mark Hayward stated that “[10,000 Euros] is a very high figure and I’ve been quite vocal in saying that all it does is signpost to someone who wants to launder money that they should keep it under that and no one is going to look”.
Hayward suggests that a rental minimum “zero” would be the easiest and safest way to protect landlords, tenants and letting agents from money laundering. He added, “[10,000 Euros] is the figure that has come out of Europe, but the HMRC feel that is it too high and at some point it will come down – but we don’t know when”.
Got a question about the Fifth Money Laundering Directive? Leave a comment below or give us a call on 0333 577 8888.