Nicola Gifford, general counsel & company secretary, SmartSearch
Why is fraud a big problem in the UK’s property market?
The high value of assets in real estate is a huge contributing factor to it being targeted by financial criminals, as are the current conditions of the lettings market which offer an optimum environment for laundering dirty money.
35.2% of the UK population rents property, with the average monthly rent sum being £1,270. The volume of money flowing through rental agreements every month makes it difficult for letting agents and regulators to monitor the legitimacy of each payment. Bad actors are aware of this ideal opportunity to wash their dirty money, disguising it among perfectly legitimate rental payments.
Limited regulatory oversight of rental agreements has contributed to this issue. Prior to January 2020, letting agents weren’t subject to the UK’s Money Laundering Regulations (MLRs) and landlords, tenants, and other parties involved in rental agreements also weren’t obliged to verify themselves. In 2020, the MLRs finally extended to letting agents, but only those handling rental agreements exceeding €10,000 per month. A minority of lets met these criteria, meaning most of the sector did not have to register with HMRC or carry out customer due diligence.
The good news is that the UK government introduced new regulations from 14th May this year that will significantly improve transparency within the rental market.
What has changed under the new regulations?
From the 14th May, all letting agents are required to carry out customer due diligence, regardless of the size of rental agreements. They must report any suspicions of financial sanctions breaches – whether related to landlords, tenants, or other parties involved in their transactions – directly to the Office of Financial Sanctions Implementation (OFSI). They must include the nature of business conducted and the amount of any funds or economic resources held for that customer.
This applies if the lettings agent only suspects a person is a Designated Person (DP) – individuals or organisations subject to sanctions; if they know for certain that they are; and if the DP is known to have breached a prohibition or failed to comply with an obligation under sanctions regulations.
What are some of the obstacles letting agents face in complying with the updated regulations?
The letting agents market largely welcome the regulations given the scale of financial crime within the industry. However, the process of identifying a DP or a breach is by no means easy.
Many letting agents have never had to comply with financial sanctions requirements before, or been obligated to carry out customer due diligence checks. This is understandably seen as an obstacle to compliance, with letting agents confused about which steps to take to ensure they don’t fall foul of the regulations. Propertymark reported lingering confusion on ensuring compliance among its membership and independent research conducted by SmartSearch found that 37% of letting agents are worried about complying with regulatory changes.
How can letting agents ensure compliance today, and tomorrow?
With the rules now in place, a change is needed in how letting agents approach compliance. They will need to complete enhanced customer due diligence, ensure they have adequate monitoring systems in place – both in terms of the status of their clients and their funds – and deliver robust training so staff can confidently identify and report suspicious activity.
A digital-first approach offers the most efficient, cost-effective and accurate route to compliance. Digital solutions enable letting agents to perform instant global sanctions checks – including screening for Politically Exposed Persons and Relatives/Close Associates – receiving a clear pass or refer result in seconds. Businesses can also continuously monitor clients against real-time sanctions lists, alerting agents immediately of any changes to their clients’ sanctions status.
Automating compliance processes also reduces the risk of human error, with most solutions operating a central system that is constantly being improved and updated, helping businesses remain compliant even as rules continue to evolve.
Partnering with digital solution providers helps transform compliance from a burden to a growth tool, freeing up the enormous time and resource it would take to complete thorough background checks and verify client identities using manual approaches. Letting agents can concentrate on delivering outstanding service and winning customers through trusted identities, confident that their regulatory obligations are met.
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