Where a developer is taking deposits to secure a property, even if there is no guarantee that completed missives and an eventual sale of the property will result, the Money Laundering Regulations 2007 will apply and the developer is under an obligation to obtain the appropriate identification and verification of the purchaser.
The 2007 Regulations implement the provisions of the third EU Money Laundering Directive, which was introduced in part to ensure that 'real estate' transactions come within the ambit of Anti-Money Laundering (AML) Regulations.
A Business Relationship
The situation whereby a deposit is taken to secure a property would constitute a 'business relationship' within the meaning of the Regulations. A business relationship is defined in Regulation 2(1) as "a business, professional or commercial relationship between a relevant person and a customer, which is expected by the relevant person, at the time when contact is established, to have an element of duration" (emphasis added). Therefore whether or not the transaction does in fact proceed is immaterial, provided a completed deal is expected at the time of first contact.
Should the relationship between the parties, for whatever reason, not be immediately apparent as a 'business relationship' then it would most certainly come within the meaning of an 'occasional transaction': "a transaction (carried out other than as part of a business relationship) amounting to 15,000 Euro or more, whether the transaction is carried out in a single operation or several operations which appear to be linked" (Regulation 2(1)). It is important to realise that even if the deposit is less than 15,000 Euro then the Regulations will still apply in most cases as the transaction the deposit is linked to will usually be worth far more than that sum.
General Requirements on House Builders
There is an obligation on developers to conduct Customer Due Diligence to identify and verify the purchaser's identity. Leading on from this will be the obligation to obtain information on the purpose and intended nature of the business relationship, which should be readily apparent in most situations.
The developer then needs to determine what would be the appropriate extent of verification required in the given situation, taking into account the risks involved. This cannot be an arbitrary exercise as the developer would need to be able to demonstrate to the authorities that the measures taken are in fact 'appropriate'. At the very least there would be the standard requirements of a passport/driving licence and a utility bill. Each case must then be assessed to determine the level of risk of Money Laundering. This evaluation will encompass a variety of issues, such as:
- What method of payment is used? A party proffering
payment in cash would, all else being normal, represent a higher risk than a party paying with a cheque drawn on a UK bank.
- Where does the purchaser come from? For example, a purchaser from one of the former Soviet states wishing to make a cash deposit would normally represent a higher risk than a little old lady from Bearsden paying by way of RBS cheque.
- Is the party representing another? If so, has the
represented party been identified? There may be a
situation where, for example, a parent is putting down a deposit for a property on their absent child's behalf (i.e. the property is to be in the child's name). 'Beneficial ownership' is an issue in this situation as the child (along with the parent) would need to be identified and verified as the transaction is in the child's main interest. This example also demonstrates how an ostensibly innocent situation can contain an element of Money Laundering risk.
Partial Exemption from AML Procedures
Generally speaking the AML procedures would have to be completed prior to the establishment of the business relationship. There is a partial exemption to this in Regulation 9(3) where a developer may complete the verification exercise during the establishment of a business relationship if the following conditions are satisfied:
- this is necessary to avoid interrupting the normal conduct of business
- there is little risk of money laundering or terrorist
- the verification is completed as soon as practicable after contact with the purchaser is first established.
An example of a low risk situation where this partial exemption may apply would be where a cheque is drawn on a UK bank and is used by a UK resident who is present at the time of the transaction. In such a situation a deposit could be taken by a developer provided the Customer Due Diligence is carried out within a reasonable period of time thereafter.
Ongoing Monitoring of the Transaction
The developer is then under an obligation to ensure that the transaction proceeds in a manner consistent with what would normally be expected. A particularly key stage in a property transaction would be on completion, as steps should be taken to identify the source of the funds transferring.
Staff should be trained and regularly kept abreast of AML requirements. The developer should also carry out regular risk assessments of their business and ensure that there are up-to-date written procedures in place that are consistently complied with.
NOTE: All references are to the Money Laundering Regulations 2007 (SI 2007/2157) (2007 Regulations) unless otherwise stated.
For further information, please get in touch with your usual contact at MMS or:
0131 228 7282
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.