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AML – CDD on property Transactions

 AML – CDD on property Transactions

The accountancy sector quite regularly account for the treatment of rental income from second homes or holiday lettings or advise on the capital gains tax on disposal of such a property.

This article may be of importance to the accountancy and tax sector because on 1 April 2014 HMRC take over the supervision of the estate agent sector from the OFT, this experience gained from the OFT staff will be brought across into HMRC and the supervision of the accountancy service providers.

CDD Breaches on Property Ownership

In January this year I came to the aid of a sole practitioner estate agent who had a penalty of over £38,000 about to be imposed by the Office of Fair Trading (OFT) in their role as AML Supervisor for breaches of the Regulations discovered as a result of a visit.

These breaches mainly concerned the customer due diligence process, or the lack of it. On reviewing the report from the OFT on all the cases they reviewed, there was one common fault running through each and every case file. The line went;

No information on sole/joint ownership contained on file. CDD measures not compliant.

To clarify this point concerning ownership it is worthwhile revisiting a paragraph from the OFT core AML guidance for estate agents.

For the purposes of the ML Regulations your customer is the person(s) or legal entity who instructs you, who you may refer to as your client. For sales agents this will usually be the vendor. For relocation agents this will be usually be the prospective buyer.

Most residential homes lived in by the owners are owned by either as a sole owner or just as commonly in joint names, for example Mrs and Mrs Smith. In this day and age it is not uncommon for it to be Mr Smith and Ms Jones who jointly own the property or indeed civil partnerships may have to be taken into account.  

So for estate agents you have to ascertain is the vendor a sole or joint owner, if a sole owner you verify his identity. If the vendor is a jointly owned property then your customer is the two named owners. Your obligation then is to identify and verify each joint owner. That is verify by documents, data or information from reliable and independent sources both parties, for example, a copy of each person’s passport.  

Failure to ascertain the ownership and verify accordingly means you fail the CDD process. This was the basis of the breaches in the case of the estate agent.

When any of you have been in the situation of buying or selling a home in joint names your solicitor would have verified both parties as joint owners. Therefore we should be familiar with this concept.

The pressure to have correct CDD concerning property transactions will increase as Letting Agents are brought into the Regulated Sector under the next Money Laundering Regulations, also under the supervision of HMRC.  They too when letting a property will have to ascertain sole or joint ownership and verify accordingly.    

For accountants and tax advisers we are in exactly the same position. When dealing with what is in effect a simple letting of a property and accounting for the rents and expenses, we must ask ourselves, have we been through the appropriate customer due diligence process?

Not understanding or ascertain the true ownership of a property you are asked to account for may cause problems. For example, a property solely owned has its rental profits divided between two related parties, this may be caught by the settlement legislation since it is a right to income only and not capital. This could be made more astute if the sole owner is a higher rate tax payer and this is seen as a way of avoiding the extra tax due.   

CDD Procedure for property

 So for your customer file for AML purposes you need to;

  1. Enquire as to the ownership of the property in question. Is it sole or joint ownership? Or another structure or entity?
  2. Have you recorded this onto file? Simply noting Ownership- SOLE or JOINT
  3. Have you verified both joint customers if joint ownership?
  4. Is evidence of verification on file?
  5. Ascertain the purpose of the relationship e.g. accounting for rental income or potential CGT on disposal.
  6. Ask about the initial purchase of the property, the source of funds e.g. any mortgage
  7. Ascertain any risk
  8. Does your letter of engagement reflect the ownership ascertained? E.g. Dear Mr and Mrs Smith.

Failure to note and verify according the ownership of a property transaction will cause you to be in breach of the Money Laundering Regulations, the same as the estate agent and open to a similar size of penalty.

For More Information on verifying the client see our page on Customer Verification

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