Often labelled as cumbersome and a hindrance, the importance of KYC (“Know Your Client”) checks must not be underestimated. Money laundering through property is a major issue, particularly in the London market.
Although agents do not handle the transaction monies, they are the first line of defence to money laundering and therefore best placed to identify and verify the parties and report any suspicious activity at the outset of the transaction.
What are the requirements under statute?
Buyers and sellers must provide sufficient information to agents to enable them to comply with their duties under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Agents, together with other advisers involved in property transactions, must:
- Identify and verify the identity of their client;
- Identify and take reasonable steps to verify any beneficial owners of their client; and
- Obtain information on the purpose of the client’s business relationship with them.
Whilst seemingly straightforward, insufficient information is provided more often than not.
Identifying the parties
Agents should identify both their client and the counter-party through verification of company documents evidencing the identity of the ultimate beneficial owner. A beneficial owner is any individual who exercises ultimate control over the management of the company, or who owns or controls more than 25% of the shares or voting rights.
Whilst the Persons with Significant Control Register (the “PSC Register”) at Companies House may be a useful starting point, it should not be relied on. For UK companies, the latest Confirmation Statements and/or Annual Returns should be obtained from Companies House to ascertain the up-to-date shareholdings.
What if one of the parties is an overseas company?
Determining the ultimate beneficial owner can be more tricky when dealing with complex ownership structures and offshore jurisdictions.
Many foreign jurisdictions, particularly tax havens, will not have public registers. Consequently, an open dialogue between the agent, their client and the counter-party is vital to obtain the necessary information. The key documents required are:
- Certificate of Incorporation;
- Memorandum and Articles of Association;
- Register of Directors; and
- Register of Members.
These documents will need to be certified by a regulated source, such as an accountant or solicitor.
Certified identification and proof of address documents are needed for any individual beneficial owner.
Source of wealth and source of funds
Arguably the most important aspect of the KYC checks is understanding both the source of wealth of any beneficial owner and the source of funds for the transaction. Buyers and sellers will want to ensure they are dealing with a reputable counter-party. Buyers want to confirm that the seller purchased the property with properly acquired monies. Sellers will wish to know that the buyer has not generated their wealth illegally.
Once the identity of the beneficial owners of the company have been verified, agents should seek to understand their source of wealth. This includes obtaining a description of the beneficial owner’s personal and business activities, family wealth or inheritance which together make up their total net assets and property. Broad descriptions such as life savings or family wealth are not sufficient for these purposes. It is also important to ascertain the location in which the wealth has been generated.
It is then prudent for agents to request supporting evidence to confirm the information provided by the parties as to the source of funds for the transaction. Supporting evidence may be in the form of bank statements or recently filed business accounts.
Regulated entities are required to have robust internal regimes to prevent, detect and report money laundering. As such, if either party to the transaction is a regulated entity, such as a pension fund or a company listed on the stock exchange, they are likely to have more stringent requirements when it comes to verifying the beneficial owners of a company and evidence of source of funds.
- Agents will need to identify both their client and the counter-party;
- The PSC Register at Companies House should not be relied on – underlying company documents will need to be reviewed;
- Dealing with an overseas company need not be problematic so long as there is sufficient cooperation;
- Evidence should be provided to agents to confirm the source of funds for the transaction; and
- Regulated entities will have more stringent requirements – but should be easier to verify.