THE NEW MONEY LAUNDERING REGULATIONS 2017- PLUS CA CHANGE?

Washing money

By Trevor Hellawell

 

The new Money Laundering, Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017 were published on 16 March 2017. I shall refer to them as the MLTFR from here onwards. They come into force on 26 June 2017.

 

Ostensibly adding layers of refinement to a regime that was essentially proving itself to be behind the times, the new MLTFR require the following:

 

New risk assessments to be carried out at the levels of

 

  • The Treasury and Home Office (to be completed by 26 June 2018).
  • The supervisory bodies.
  • Relevant persons.
  • Regulators can request to see risk assessments carried out by firms and offer advice.

 

As to what else should be included:

 

  • Risk assessments must take into account client factors, service factors and geographical factors in deciding where the real risks lie.
  • The appointment of a ‘person responsible’ for AML compliance (besides the MLRO).
  • ‘New’ definitions of beneficial owners, new rules on transparency and obtaining information.
  • ‘New’ definitions of politically exposed persons, with new risk-based rules on how to spot and deal with them.
  • New client information regarding the reasons why we collect data and its limited use for Data Protection Act purposes.
  • We can now trust estate agents.

 

Nothing of major significance has changed – much of the wording of the old rules being retained, though the relevant provisions have moved in the document itself – but the emphasis is much more practical than previously.

 

In the light of governmentally-expressed concerns about the porous nature of our defences to terrorist finance and laundered money the MLTFR require all parties – law firms included-to assess a range of factors (customer factors, service factors and geographical factors) in determining the extent of the ML/TF risk and the steps that firms need to take in response to them.

 

For example, the PEP definition now includes UK-based officials, but there is a wide range of assessments one can make about the risks posed by (say) a Nigerian prince, as opposed to a general in the UK army, and the steps that would apply to each of them.

 

There are also provisions which state that one cannot simply rely on Companies House data as to beneficial ownership (it is not updated quickly enough) but it provides that such data should be provided to a firm by the company within 2 working days of a request.

 

Further, reliance on estate agents is also now possible – though I doubt whether reliance will be relied upon much more than before. I think the major pressure on law firms will be essentially twofold:

 

  • To review internal systems and processes to accord with the new provisions and document them.
  • To reinforce my long-held view that it is not the client identification which is the important part (we can all be duped by sophisticated fraudsters) but a full review and assessment of all the surrounding, supporting and peripheral aspects of the transaction and money movements which really matter.

 

We will await a new Law Society Practice Note with interest.

HOW TO GET THE MOST FROM YOUR SUBSIDENCE RISK ALERT

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By Rob Stafford

Are you protecting your clients from risk as well as you could be?

Most conveyancers are fully aware of the risk the legacy of coal and mineral mining poses to homeowners in England and Wales. Examples of the worst-case scenario abound: the “St Albans sinkhole” which appeared on the same residential street in 2015 and 2016, the sinkhole on site at Liverpool docks in February 2017 and recent cases in Norwich, High Wycombe and Reading.

Add the subsidence threat posed by fracking into the equation and it is clear conveyancers need to be more diligent than ever in advising clients on subsidence risk, whether your clients are home buyers or businesses.

This is the part most conveyancers are good at, identifying that the client’s property is in a part of the country with potential risk and ordering a ground stability report (whether that be from the Coal Authority, Terrafirma or Cornwall Consultants).

So far so simple. However, the question that puzzles some of our clients is what to do next if the initial report comes back as having identified a risk?

Of course, it’s very important that you notify your client, but for them to make an informed, decision, it’s likely you’ll need to seek further information and the opinion of an expert subsidence consultant. How to go about doing this, and why should you bother?

I’m going to use Terrafirma’s escalation structure to explain. For two reasons: firstly, their reports interpret the risk posed by over 60 mining hazards across the UK, so you’ll be able to apply this process wherever you are. Secondly, because the process is incredibly simple.

So, picture the scene; Mrs J Jones has instructed your firm for her purchase of 10 Privet Drive, Saltburn by the Sea, an area notable for its history of ironstone mining. You’re aware of the area’s history and duly order a Terrasearch Assure (Terrafirma’s basic postcode-specific certificate).

The report returns with a “further action required” finding. We often see conveyancers relay the information to back their client at this point and leave it at that. This despite the certificate’s warning that it is a search alert and not to be used as evidence in a property transaction.

The response I usually receive to pointing this out is “all very well, but I now have to ask my client for further funds and it’s likely the site will only return a minor risk when I order an investigative report anyway, so why bother?”

Both are true. However, Terrfirma estimate that 1 in every 100 sites they survey requires manual risk assessment by their consultants. Good odds on the face of it, but with an estimated 25 million homes in the UK, there’s still a huge margin for error. Can you really afford to gamble with your client’s investment and the reputation of your firm?

Instead, ordering a comprehensive risk assessment (in this case a Terrasearch Assess) will quantify the risk for both lender and purchaser. If the risk is a minor one, then at least all parties are aware of it and your firm has fulfilled its obligations. If it demands further action, manual assessment or even a site visit, then your diligence in pursuing it further has possibly stopped your client from making a costly mistake or moving into an unsafe property.

The order process is usually a case of inputting an address and most providers will allow you to order via their online platform. For the sake of a 2-minute order process, you could give your client a vital insight into the safety of their property, and in doing so, protect your business from the threat of litigation. Not only that, but Terrafirma (and most established providers) will refund the money for the original certificate of risk. Softening the request for further funds from your client a little.

If this all sounds simple, it’s because it is. Protecting your clients from subsidence risk has never been so simple. Yet many firms gamble for the sake of a “quick win” in not having to ask clients for further funds. Can you afford to be one of them?

For more information on subsidence risk or Terrafirma products please speak to your Brighter Partner or head on over to Terrafirma.

FRAUD, FURTHER LESSONS

stressed woman with computer

By Trevor Hellawell 

 

Following on from the Mishcon case, I have been thinking about how purchasers’ solicitors can protect themselves against the fraudulent seller (who may well have conned his own solicitors too).

 

I think that undertakings are useless, and passing the money to a third party managed account provider is also not going to shift the blame. The banks will have seen us coming on that one.

 

With acknowledgements and thanks to Bold Legal Group and their member Richard Carter of Martin Tolhurst Solicitors, whose ideas these are, I offer the following thoughts:

 

1.You must act to the standard of a competent conveyancer. This means reporting fully to your clients, carrying out searches/enquiries on all cases, pointing out risks where they exist, making sure sellers answer all enquiries fully, preparing/using up to date documents, and (in accordance with the Money Laundering Regulations 2007) checking fully any client ID. The possibility of FOG (fraudulently obtained but genuine) documentation is still a real one and we must spot and check things like odd dates of birth, dates of issue of driving licences and so on. Where a driving licence or passport has been issued recently exercise caution and if necessary ask for a client meeting or further forms of ID.

 

2. Be even more alert to potential fraud circumstances. You should be aware that some properties carry higher risks. The following list of higher risk factors is not an exhaustive list but you need greater vigilance where:

 

  • a property is empty
  • a property has no mortgage or restrictions registered
  • a property is of reasonably high value
  • there is urgency or impatience shown by the seller
  • the replies from the seller seem to lack knowledge or understanding of the property
  • the solicitors acting for the seller are from out of the area or seem to lack conveyancing experience/knowledge.

 

Where any of these factors are present you must query with the seller’s solicitors if they have identified their client and whether they believe their client is the registered owner of the property.

 

Consider the factors highlighted in recent cases and practice notes. If you act for a seller on such a property check matters thoroughly and request a client meeting if necessary.

 

3.Do not send contracts on a sale or a purchase to any client where ID, Terms of Business and instruction forms have not been completed.

 

Occasionally where a client has not signed Terms of Business or the ID produced is not compliant, it may be that fee earners start work including searches or approving contracts on a purchase or issuing sale contracts. You should not be asking clients to sign any contract on a sale or a purchase where full compliance on ID, AML verification, signed Terms of Business and completed instruction forms have not been fully completed and returned.

 

4.Consider adding in a paragraph to your Terms of Business. This will seek to exclude liability to clients where there is an ID fraud and loss resulting from it, by any party represented by another solicitor. I would further suggest that this new inclusion be specifically referred to in any cover correspondence.

 

5.Consider adding in a new paragraph about fraud in your contract report. Standard contract reports should contain a new paragraph warning clients about vendor fraud and bogus law firms, and whilst your firm has taken precautionary steps you are not in a position to guarantee title/registration. You should ask clients to highlight any concerns or factors of which they are aware. This may result in a few enquiries.

 

6.Do not give undertakings about your Client’s ID. After the Mishcon case, there will be firms who will overreact and request undertakings that you have identified your client and they are the registered owner. You cannot give this guarantee. What you can say, is that you have obtained suitable ID documents from the client you represent, you have verified that ID electronically with a suitable company, and that you have no reason to believe your client is not the registered owner.

 

Review your file before making this statement and ensure it is accurate.

 

In addition to these steps, we need to find an adaptable insurance solution to offer to clients who wish to pay for the protection – does this not exist already in the Safe Buyer protocols and fraud prevention policies?

 

While the law is as it stands the buyer is in a difficult position, and we need to protect them and ourselves in the marketplace.

CONVEYANCING FRAUD – WHO SHOULD BE SPOTTING THE CROOKS?

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By Trevor Hellawell

 

Purrunsing, P&P and now Mischon de Reya. The cases keep on coming, and the sums payable keep on mounting up. £1million is the latest hit.

 

All these cases surround one key problem – a fraudster impersonating the seller of property and inducing the buyer into sending money to the wrong account.

 

At its simplest, this places the buyer’s solicitor in a difficult position – he will be in breach of trust unless the money goes to the genuine seller of the property and he ends up with good title. But, and here is the rub, he is powerless to control the steps taken to identify that character and establish that the ‘seller’ is indeed sufficiently connected to the property he is purporting to sell.

 

Whilst it should be an elementary part of money laundering checks and anti-fraud policies to check this simple part of the equation, it was – in these cases at least – the part that was done less well or not at all, either by the solicitors or the estate agents. Hence it was easy to argue that liability should fall where it did, in order to protect the innocent purchaser and his mortgagee.

 

But, what of FOG? Imagine that a fraudulent seller of property provides a falsely obtained but genuine passport or other ID documentation, provides an address that corresponds with the HMLR registered addresses and comes up with a valid and plausible explanation of his title to the property. Would that not convince most lawyers and estate agents, at least to the standards required of most legal transactions?

 

Innocently, both parties would have been successfully duped and the money would have disappeared. Whose fault is it?

 

There is much discussion about the seeking and giving of undertakings from the seller’s solicitor but I don’t think that this resolves the point adequately. A well-advised buyer would always seek it, but a well-advised seller would never give it – at least not beyond saying that he has genuinely done everything reasonable he can to check the position. He would never undertake that the seller is actually the genuine person he purports to be, or that would attach the giver with liability if he wasn’t.

 

PII insurers will write this liability out, if they haven’t already done so.

 

Also, I am not sure that the abdication of responsibility apparently offered by the use of third party managed accounts (instead of each of us holding client money) is right either. The terms and conditions of such accounts regarding liability are likely to place the onus on us, rather than the bank holding the funds.

 

Should the banks not be doing more to check the location of the destination bank account?

 

Do we need some sort of protocol which suspends any money movements (where there is no onward chain) for some period of time until the true owner – who should have signed up to the HMLR’s Alert Service – can be given the chance to intervene?

 

We need some form of concerted response to this, rather than the arbitrary allocation of liability we have at present.

Catch Trevor speaking on Fraud at this year’s LegalEx 28th-29th March 2017. For information head to http://www.legalex.co.uk/

HELP TO BUY…HELPING?

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By Rob Stafford

Help to Buy aids 220,000 purchases

Statistics released by the Treasury at the tail-end of 2016 reveal that more than 220,000 have gained access to the property ladder as a result of the government’s Help to Buy (HTB) scheme.

 

Of those, 180,000 were first-time buyers taking their first steps on the ladder. There’s also some much-needed relief for beleaguered millennials, with the median age of a first-time buyer in the scheme just 27, a 3-year head start on the median age of 30 for first-time buyers nationally.

 

It’s good news for capital too, London HTB helped some 1,500 Londoners onto the ladder between February and September 2016. The capital exclusive scheme offers an equity loan of up to 40 percent for first-time buyers with a 5 percent deposit.

 

As for a breakdown of how the schemes comprising HTB are faring; the HTB Isa has been used on more than 27,000 purchases since its introduction in December 2015. Meanwhile, over 100,000 people used the Help to Buy Equity Loan scheme, which provides buyers with up to 20 percent of a newly built home’s costs (leaving them with only the 5 percent deposit to find).

 

Finally, while the popular mortgage guarantee scheme ended on New Year’s Eve, HM Treasury noted that several commercial lenders will continue to offer 95 percent mortgage products into 2017. Alongside this, the government unveiled plans to offer a new mortgage product, the Lifetime Isa, in the new financial year.

 

When asked about the scheme’s success Chancellor Phillip Hammond said: “Our Help to Buy schemes are helping hundreds of thousands of people, especially first time buyers, achieve home ownership. We are continuing the popular Equity Loan and Isa schemes to ensure people can access support when buying or saving for a property. We are determined to help make home ownership a reality for hard-working people.”

 

So far, so peachy, however, HTB is not without its limitations. The greatest of which, is its failure (in the short term at least) to convincingly address the shortage of affordable homes in the capital. While the 1,500 new homeowners as a consequence of the London program are commendable, it’s unlikely to make a dent in the numbers leaving the city in search of affordability (more than 280,000 in 2015, with a large proportion of those thirty-somethings).

 

Furthermore, it cannot be ignored that the highest proportions of purchases were in regions already known for more reasonably priced stock. Namely; the North-West, South-West, Yorkshire and the Humber. Which is not to say that the need isn’t valid in these regions, more that the need is certainly more acute in London and the South East. To give an example, the average house price in London (as of the last quarter of 2016) is £470,000, the price in Yorkshire and the Humber? Just over £178,000.

 

Without being too cynical, it’s difficult not to harbour the sneaking suspicion that the scheme may be better geared towards easy wins (and the resultant political capital). Rather than the sweeping social change that is its mission statement.

 

So, while the inroads made by HTB in 2016 are welcome, it needs sharper focus upon the regions in most desperate need of affordable housing. Namely, the South East, take the city of Oxford as an example, first-time buyers battle house prices 16 times average earnings. Yet, according to an Oxford Times article penned in April 2016, in the first two and a half years of HTB, not a single home was sold under the scheme.

 

If the government is to convincingly address the housing crisis, then more tangible progress needs to be made in the high density, high demand and expensive boroughs of the capital and its commuter belt. It is these areas who suffer most acutely from an astronomical rental market, high demand for property and spiraling house prices. To fail them is to undermine the success of the scheme on a national scale

THE END OF RIGHT TO BUY?

young sad beautiful woman suffering depression looking worried a

 

By Rob Stafford

 

Following the Scottish decision in July to scrap the “Right to Buy” (RTB) program from 1st August, Wales are set to follow their Caledonian cousins in the next 12 months. Which poses two questions, how is the alternative going to work and is England about to follow suit?

 

So, how is it going to work in Wales?

 

According to Carl Sergeant Welsh Cabinet Secretary for Communities and Children; the scaling back of RTB is running concurrently with fresh plans to build more social housing and an increase in saleable stock. Government investment of an additional £290 million in Wales’ “help to buy”(HTB) shared equity loan scheme proposes to make some 6,000 additional houses available to first-time buyers by 2021.

 

It is hoped that further investment in HTB, alongside a commitment to build social housing will provide a ‘decent place to live’ for all; whether first time buyers or society’s most needy. At the same time the prohibition of sub-letting HTB properties and the end of RTB; should keep social housing and stock targeted at first time buyers in circulation, rather than in the hands of private landlords.

 

Are we likely to see something similar in England?

 

Simply put, it’s likely to depend upon who our political masters are. The Labour Party has attributed the loss of around 45% of the social housing stock to RTB and pledged to end the policy should they come to power in 2020.

 

Alongside this, there has been pressure in sections of the media and a damning analysis of RTB by the Local Government Association (LGA); which revealed in August that the replacement of RTB stock with new homes dropped 27% in 2015-16 from the equivalent period in the previous year.

 

The LGA’s analysis showed that in 2015-16 for the 12,246 council homes sold under RTB, just 2,055 replacements were started by councils. These figures also represent part of the reduction in social housing from 31% to 17% of total housing stock since the scheme’s inception in 1980. To this backdrop, the LGA has warned that continuing RTB risks further stagnation in affordable housing, increased pressure on the council home waiting list (which already numbers 1.4 million people) and even an increase in homelessness.

 

Despite this pressure, the current government has so far shown little interest in ending RTB. The scheme did appear to be slowing towards a natural demise before its relaunch in 2012, with an offer to quadruple discounts for London council tenants.

 

Since then the government announced plans in 2015 to extend RTB further, with up to 1.3 million housing association tenants now eligible (previously the scheme only included council tenants). An increase of 800,000 properties on the 500,000 housing association properties currently eligible.

Furthermore, in an August statement The Department for Communities and Local Government (DCLG), simply reiterated its commitment to invest in affordable homes. Promising to step in and build homes for local authorities who fail to begin building replacements within the 3-year deadline from sale, by which they are supposed to abide.

 

So, the simple answer is no. The earliest we’re likely to see an end to RTB is the end of the current parliament in 2020, and even that is likely to be dependent on a Labour win. Of course, it’s entirely possible that media or public pressure may change the current administration’s view, politicians are beasts of opinion if nothing else. But in the immediate term, RTB in England is going nowhere fast.

Following the Scottish decision in July to scrap the “Right to Buy” (RTB) program from 1st August, Wales are set to follow their Caledonian cousins in the next 12 months. Which poses two questions, how is the alternative going to work and is England about to follow suit?

 

So, how is it going to work in Wales?

 

According to Carl Sergeant Welsh Cabinet Secretary for Communities and Children; the scaling back of RTB is running concurrently with fresh plans to build more social housing and an increase in saleable stock. Government investment of an additional £290 million in Wales’ “help to buy”(HTB) shared equity loan scheme proposes to make some 6,000 additional houses available to first-time buyers by 2021.

 

It is hoped that further investment in HTB, alongside a commitment to build social housing will provide a ‘decent place to live’ for all; whether first time buyers or society’s most needy. At the same time the prohibition of sub-letting HTB properties and the end of RTB; should keep social housing and stock targeted at first time buyers in circulation, rather than in the hands of private landlords.

 

Are we likely to see something similar in England?

 

Simply put, it’s likely to depend upon who our political masters are. The Labour Party has attributed the loss of around 45% of the social housing stock to RTB and pledged to end the policy should they come to power in 2020.

 

Alongside this, there has been pressure in sections of the media and a damning analysis of RTB by the Local Government Association (LGA); which revealed in August that the replacement of RTB stock with new homes dropped 27% in 2015-16 from the equivalent period in the previous year.

 

The LGA’s analysis showed that in 2015-16 for the 12,246 council homes sold under RTB, just 2,055 replacements were started by councils. These figures also represent part of the reduction in social housing from 31% to 17% of total housing stock since the scheme’s inception in 1980. To this backdrop, the LGA has warned that continuing RTB risks further stagnation in affordable housing, increased pressure on the council home waiting list (which already numbers 1.4 million people) and even an increase in homelessness.

 

Despite this pressure, the current government has so far shown little interest in ending RTB. The scheme did appear to be slowing towards a natural demise before its relaunch in 2012, with an offer to quadruple discounts for London council tenants.

 

Since then the government announced plans in 2015 to extend RTB further, with up to 1.3 million housing association tenants now eligible (previously the scheme only included council tenants). An increase of 800,000 properties on the 500,000 housing association properties currently eligible.

Furthermore, in an August statement The Department for Communities and Local Government (DCLG), simply reiterated its commitment to invest in affordable homes. Promising to step in and build homes for local authorities who fail to begin building replacements within the 3-year deadline from sale, by which they are supposed to abide.

 

So, the simple answer is no. The earliest we’re likely to see an end to RTB is the end of the current parliament in 2020, and even that is likely to be dependent on a Labour win. Of course, it’s entirely possible that media or public pressure may change the current administration’s view, politicians are beasts of opinion if nothing else. But in the immediate term, RTB in England is going nowhere fast.

FRAUD- WHOSE FAULT IS IT NOW?

Business fraud

By Trevor Hellawell 

 

 

It seems unclear.

 

Purrunsing, earlier in the year, held that professional representatives for both a buyer and a seller were jointly liable for failing to undertake due diligence in respect of a fraudulent seller of vacant property who had a (dubious) job in Dubai.

 

Now we have P&P v Owen White and Catlin. This case also concerned the fraudulent sale of a vacant property in London on behalf of a seller with a (dubious) job in Dubai.

 

In OWC though, there was no liability to the purchaser who was duped into remitting over £1million to the fraudster, primarily on the basis of different wording in the 2011 Law Society’s Code for completion by post. The 2011 edition contained wording that provided that completion take place immediately upon receipt of the funds sent by the buyer, and thus those funds were never held “on trust” by the seller’s solicitors.  The claim, on that and other bases, thus failed.

 

In the earlier case, the 1998 edition of the Code was used that contained (unexplained) differences in wording that did require that the funds be held on trust pending satisfactory completion, thus opening up the lawyers to the successful claim by Mr Purrunsing.

 

That OWC succeeded where Mr Purrunsing’s lawyers failed is due to the accident of the wording of the Law Society Codes, and lawyers will no doubt be reviewing that aspect of their completion arrangements as we speak. Attempts to seek undertakings to the buyers will be resisted by the seller’s lawyers as they seek to hide behind the protection of the judgement, which says that sophisticated frauds can still occur notwithstanding our attempts to avoid them.

 

It is however to that aspect that I want to turn. What steps should we be taking to avoid falling into the trap of paying money over to a fraudster?

 

In both cases, the seller was a fraudster who produced an apparently genuine passport (which had been fraudulently obtained) and gave an address for correspondence. In both cases there was pressure for a swift completion, the property was vacant and the client had un-interrogated interests in Dubai. In the one case, he failed to appreciate the reason for recent works on the property and gave an un-investigated reason for how he came to own it. In the later case, details on his passport would have indicated that he would have been only 23 when he bought the property and would have been much older than he appeared when the solicitor met him in person. Also, the e-AML search was returned as referred, the solicitor assumed because he was working in Dubai. Further, the solicitor failed to ask him questions that should have been asked – for fearing of annoying him.

 

So in both cases, the possibility of relief under s61 would have failed.

 

To my mind, the critical question is – were all the questions asked that should have been? The answer appears to be no.

 

So there is all the more reason to apply the strictures of the MLR 2007 fully – ID and ongoing monitoring – and if anything crops up ASK ABOUT IT.  A failure to do so would have meant a potential liability to the client.

 

As for the estate agents, the court was scathing in its comments about their abject failure to undertake any duties of their own, instead trusting the solicitors to do all the work.  That is where most work needs to be done in order for us to stand some chance of evading the fraudsters.

 

That said, we can take comfort from the fact that we are not expected to be perfect in our duties, only reasonable, honest and competent.