Guest blog by Thirdfort, a Know-Your-Customer and Anti-Money Laundering provider.
Whether estate agents are required to carry out source of funds checks, and what that should or should not entail is an often misunderstood subject. Depending on who you ask you can get very different responses. What does the guidance from HMRC say that agents should do?
What should estate agents actually do?
The first thing you need to do is ensure you have the right controls and procedures in place in relation to identifying higher-risk customers such as politically exposed persons (PEPs). Why is this important? Depending on the nature of the risk in transactions that involve a PEP, you must establish their source of funds and source of wealth; this is set out in legislation. As such, it is critical firms have a process in place in relation to how they are going to identify a customer and their source of funds/wealth. These controls and procedures need to be clearly documented and easy to follow for your staff; they should also have a practical process captured. That also means that as a minimum you need to train all staff on how to follow these procedures.
For some, low-risk, customers simplified due diligence is appropriate. Does this mean you don’t need to carry out a source of funds check? Perhaps you only need to verify that the buyer has the necessary funds. The guidance from HMRC says otherwise. Even when simplified due diligence is appropriate you still need to make sure that your business understands the customer’s source of funds. That means verifying that your customer has the funds, but also ensuring that the origin of those funds is transparent and understood. Depending on the explanation and alignment, you may feel documentary evidence is not required. However, there may be situations where a low-risk customer may still require a level of verification in regard to the source of funds explanation. The evidence will be determined by the customer’s explanation of their source of funds. Seeing that the funds have come from X or Y is not enough, ultimately an understanding of the ultimate origin is required and, where appropriate, enhanced due diligence applied.
In these cases, the guidance from HMRC says you must carefully consider your customer’s source of funds (origin of the funds in hand for the transaction) and source of wealth (origin of the customer’s overall wealth). It is important to appreciate that you cannot do this by simply getting six or 12 months of bank statements from the customer. This may be your starting point. But it is highly likely you will need to go further than that. In addition to the source of funds, a picture of your customer’s overall wealth will be critical in satisfying yourself that the transaction makes sense in the context of the customer’s wealth. This will typically include the customer responding to various questions to help you understand their wealth and then gathering supporting evidence to corroborate what they have told you. You also need to monitor this over the course of the transaction. If the source of your customer’s funds changes over the course of the transaction, this should be a red flag that triggers you to look for an understanding as to why.
Is it right that estate agents have to do this?
There are many different schools of thought here and often it is heavily impacted by who the question is raised with as to where the burden should sit. It is often a process that is repeated at numerous points in a transaction by an estate agent, solicitor, financial advisor, bank and so on.
On the one hand, the estate agent is often the first point of contact and requiring estate agents to perform source of funds checks right at the outset can help prevent money laundering. It also protects estate agents themselves from being implicated in such activities.
On the other hand, conducting source of funds checks places an additional burden on estate agents and can slow down the property buying process. Customers are not always clear at the point of time of engaging an agent on the exact funds. It also requires multiple parties to take on the role of financial investigators, which they may not always be equipped to do. There is also a risk that overly stringent checks may discourage some legitimate buyers.
While source of funds checks have some downsides, the benefits to the integrity of the property market and financial system outweigh the costs. Estate agents should not turn a blind eye to where the money in property deals comes from. With the support of streamlined regulatory guidelines, they can strike a reasonable balance between efficient deal-making and financial probity.
How can technology help?
There are a number of ways that technology can help reduce the burden and the time it takes to verify the source of funds for a property purchase, in a secure manner. Open banking is a government-backed technology that allows consumers to provide bank statements directly from their bank rather than needing to download PDF bank statements or send paper copies. Open banking technology has clear advantages for both the consumer and estate agents. The first is speed. The connection from the consumers’ bank to an electronic provider can be created in seconds, with information exchanged instantly in a secure process. It’s also incredibly simple. With a few clicks, consumers can share financial information with their estate agent. Perhaps the most attractive benefit for many is that open banking is anchored to a secure process. Information comes directly from the bank, it cannot be doctored or tampered with. And unlike sending documents via post or email, the information cannot be intercepted.
But gathering bank statements is not enough to truly understand a customer’s source of funds. Technology can also help reduce the burden by further supporting estate agents to gather additional evidence. For example, using digital forms, estate agents can gather information which can help build a picture of a buyer’s source of funds and inform follow up actions. Digital forms can help gather information about any gifts and giftors, how their salary appears on their bank statements or any other income that is being used for the purchase.
Responsibility cannot be outsourced when it comes to assessing a customer’s source of funds in its entirety. The evidence obtained will ultimately still need to be reviewed and in some instances, a certain amount of ‘gut-instinct’ applied to the customer and transaction based on what other information is known about the customer. But technology can be used to make this process less painful for consumers and estate agents alike and much faster and more secure for all.
