Despite predictions that the property market might struggle during the first quarter of 2023, the market has remained buoyant. While the market hasn’t slumped, its been an unusual time with properties coming on and off the market at a rapid pace, mortgage products changing almost every week and a rise in gazundering.
All of this means estate agents are under increased pressure with more and more to juggle. When this happens, operational tasks like ID checks and sanction screening often get pushed to the back burner. When the real estate sector is under pressure, it becomes a more attractive proposition for money launderers, hoping to take advantage of overworked agents.
We recently caught-up with our Risk and Compliance manager, Louis Lancaster, to discuss the latest AML trends impacting the Real Estate sector.
Is Money laundering via property transactions becoming more frequent?
The National Crime Agency reported a 21% increase in the number of Suspicious Activity Reports (SARs) submitted and processed, and a 120.6% increase in the amount of money denied to suspected criminals when comparing the 2020/21 and 2021/22 financial years.
The Estate Agency sector has historically been known to submit a disproportionately low number of SARs compared to the number of housing transactions that take place.
Contributors of SARs include the legal sector and the financial services sector; both of which are usually involved in property transactions and therefore if the number of SARs submitted has increased, one can comfortably assume the number related to property transactions has also increased.
A key reason for this might be the state of the property market since property transactions were permitted to resume in May 2020; the market has been extremely active, with house prices dramatically climbing. It’s only in the last quarter, when mortgage interest rates have doubled due to the mini budget and the Bank of England raising the base rate that the market is starting to slow.
Is AML becoming harder to administer for in-house Estate Agents and if so, why?
Since May 2020, the property market has boomed and estate agents have been busier than ever. With an increase in transactions, it’s harder to give AML the attention it requires; agents simply don’t have the time.
Another reason is legislation. There is a constant stream of reports coming out of different governmental departments, as well as pending legislation. For an agency to keep up with what laws are in flux, what the changes entail, whether they’ve yet passed, when they’re expected to pass – it’s too much to keep tabs on whilst trying to complete their primary objective of selling/letting property and land.
Should agents be focussed on AML or should their job be finding the buyers, sellers, landlords, and tenants?
Unhelpfully, it is a case of agents needing to focus on both.
Of course, there is the ability to outsource AML compliance, which can help agents with a lot of the administrative burden. An outsourced company can do identity verification, determine source of funds, verify proof of funds as necessary, and assist an agency in following its internal risk assessment, but it’s harder for outsourced AML providers to detect suspicious activity.
This is because so much of suspicious activity is in the way an individual acts, or speaks – it’s where the transaction doesn’t make sense, or their story contradicts something they’ve said during a previous conversations.
An outsourced provider wouldn’t have access to these suspicious activity indicators, and therefore whilst outsourcing AML checks can ensure compliance with Regulations, it cannot ensure compliance with suspicious activity legislation; this is where an agent needs to remain cognisant.
Do you think enough agents know that AML outsourcing exists?
Due to the pandemic and the restrictions imposed on individuals and agencies, awareness of external AML solutions has significantly improved. Agencies know they exist. The issue seems to be engagement.
Although AML Regulations, and HMRC guidance, permit the use of technology when undertaking AML checks, a lack of clarity as to what technology would be satisfactory (levels of confidence or verification methods) has been spoken about. Agents are therefore cautious about parting with hard earned money on solutions they’ve not had sign off from HMRC.
The good news is that HMRC is speaking with the technology sector about their solutions, as well as meeting with stakeholders in relation to the UK Digital Identity and Attributes Trust Framework – so further clarity should be on the horizon for agents.
What is involved in AML? What checks must an agent perform? What training must they have? How much of the working week would AML take up?
AML is a broad subject and there are dozens of nuances that need to be considered.
However, generally, from an agent’s point of view, AML would include: a firm-wide risk assessment identifying the money laundering risks they might face and how they plan on mitigating those risks, verifying the identity of their clients, determining source of funds, and, where necessary obtaining proof of funds, running PEP/Sanction checks to ensure they’re not transacting with sanctioned individuals and are undertaking enhanced due diligence when transacting with PEPs.
Amongst all this, risk assessing the individual transaction; is the customer based in a high-risk country? Are any funds coming from a high-risk country? Does the transaction make sense?
All agents need to receive AML training which needs to be refreshed regularly e.g. once a year or sooner if there’s a significant change in legislation or the agency’s risk assessment. Training should include what is required under AML regulations as well as how to identify and report suspicious activity internally.
Using the traditional method of manually undertaking AML checks this can take days if not weeks.
When an agent requires a purchaser to come into the branch with their identity documentation, they face scheduling issues e.g. the purchaser works Mon-Fri and can’t get to the branch during the week so the transaction is delayed until the weekend.
Agents have also encountered cases where a purchaser viewed a property before going on holiday, and whilst they’re away their offer is accepted. Using the traditional method means the agent has to wait for the purchaser to return before proceeding, wasting precious time.
Manually navigating to PEP and Sanctions list for each and every individual and transaction (as lists can be updated daily) is time-consuming and runs the risk of a complacent employee using an existing (potentially outdated) list from yesterday rather than check for a new list today.
How many man-hours could outsourcing AML save an agents?
It’s difficult to quantify the man-hours saved by outsourcing AML, given the myriad of possible scenarios. However, through working with our existing clients we estimate that your average branch could save £2,500 a year by switching to digital ID verification.
There’s also the time saved in progressing the transaction. If we take the scenario of a purchaser viewing a property on a Thursday evening, emailing an offer overnight, or calling the agent first thing Friday morning, the agent speaking to the vendor and calling back to say the offer has been accepted all by lunchtime – if the purchaser is at work and can’t get to the office Friday and can only attend with relevant documentation on Saturday; you’re immediately looking at 24 hours. Add to that the time to navigate to websites for PEP/Sanction lists and you’re looking at 25 hours.
The reality, however, is that agents have more viewings on Saturdays than any other day. So, when the offer is received by the agent Monday, and the offer is accepted on Monday, there’s potentially 120 hours wasted.
Have you detected any criminal activity or money laundering on behalf of an agent? If so and if it had gone undetected in the agency, what punishment would the estate agent have faced?
Realistically, an identity service provider is only really able to detect fraudulent documents. Even when other data checks are undertaken such as PEP/Sanctions; we don’t have the relationship with the end user to determine whether a match is related to criminal activity or money laundering.
We detect fraudulent activity on a daily basis and report these back to clients, the majority of whom are estate agents. Usually, the documents are well created and would likely be missed by agents manually reviewing them.
This further demonstrates the benefits of outsourcing these checks as forgeries can be identified where they wouldn’t have been in-house, and therefore the agency reduces its risk of being used for money laundering.