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Money Laundering: learning from the mistakes of others

Speed read: In a second article focusing on money laundering in the real estate sector, Jonathan Fisher QC discusses recent cases in the High Court and tribunal examining property professional liability for anti-money laundering breaches.

Three cases recently decided in different tribunals, and two cases decided in the High Court, contain important lessons for property professionals about how to keep out of trouble with the anti-money laundering (AML) legislation. Sometimes, the consequences of AML breaches can extend beyond regulatory enforcement action in the tribunals and expose a property professional to unexpected liability in the High Court for damages under civil law. In this respect, the High Court cases are more significant than the tribunal cases. Nevertheless, although the fines in the tribunal cases were puny, the facts serve as a useful reminder of the technical nature of AML requirements which must be observed.

HMRC v Jackson Grundy

The first of the three tribunal cases involved hearings in both the First-Tier Tribunal (FTT) and the Upper Tribunal (UT). In March 2016 the FTT allowed an appeal by Jackson Grundy Ltd, an estate agency, against the amount of a penalty imposed under the AML regulations. In its decision the FTT reduced the penalty from £169,652 to £5,000 on the basis that the original penalty was disproportionate. Leaving aside the successful appeal on penalty which would not be repeated today, the case is interesting because it conveys the clear expectation that customer due diligence procedures must be applied by an estate agent in every case. A compliance visit revealed fundamental breaches of the regulations and these will not be overlooked by regulators in the current climate. The estate agent had failed to apply adequate customer due diligence measures when establishing business relationships in respect of properties which it marketed. In addition, it had not conducted ongoing monitoring of business relationships and failed to establish risk sensitive procedures with professional training for employees on the law relating to money laundering and how to recognise transactions which may be related to money laundering and terrorist financing. Ref: HMRC v Jackson Grundy [2017] UKUT 0180 (TCC); [2016] UKFTT 223 (TC).

Blackhorse Property Management v HM Revenue & Customs

The circumstances in the Blackhorse Property case were starker, in that the estate agent had failed to register its estate agency business with HM Revenue & Customs (HMRC) at all. As the FTT commented, it is clear from the regulations that if a person carries on an estate agency business they are required to register with HMRC, and a person must register under the regulations before beginning to carry on that business. Blackhorse Property contended that although the company had been incorporated in August 2014 it had not started trading until September 2015, and a notification had been filed with HMRC in April 2015. However, the FTT rejected the argument on the grounds of evidential insufficiency. Apart from anything else, the company website had claimed that a company in the Blackstone Property organisation had been dealing with property sales in 2012. Again, the tribunal imposed a tiny fine, the level of which would not be repeated today, but there are more far-reaching concerns than the fine. A record of non-compliance is damaging for the future in so far as it impacts adversely on the fitness of company directors to operate an estate agency business, or for that matter any other business in the regulated sector. Although historically the estate agency sector had been unregulated, there is no room for laxity in the approach to regulation today. Ref: Blackhorse Property Management v HMRC [2016] UKFTT 223 (TC)

Dion Beard v RICS

The third case involves a disciplinary tribunal established by the Royal Institute of Chartered Surveyors (RICS) to consider three charges against Dion Beard for breach of AML regulations. The breaches arose out of a television documentary focussing on the purchase of high value central London property by Russian nationals with the alleged proceeds of corruption. An actor using the name of Boris approached several estate agents, of whom Mr Beard was one, posing as a Russian Government minister wishing to use monies he had corruptly acquired. The tribunal found the three charges of professional misconduct proved and concluded that Mr Beard should be excluded from RICS membership.

The interest of the case to property professionals lies in the detail of the three charges. First, Mr Beard had acted improperly when, after having been informed by the potential purchaser that he was intending to use criminal funds to purchase the property, he continued to market the property to him. Secondly, despite coming into possession of this information, Mr Beard failed to make a report to his firm’s nominated officer for money laundering. Thirdly, the RICS discovered that Mr Beard had failed to record his CPD activity for 2015 online.

The message delivered by the tribunal is clear. The time has passed when a property professional can ignore what a purchaser may say, sometimes boastfully, about the unlawful origin of the purchase funds. The suspicion does not need to be as clear as the representation made by Boris that funds emanated from the Russian government. An indication from the purchaser which is out of the ordinary will be sufficient to trigger further enquiries about the origin of the source of funds. Ignoring a suspicion that a purchaser’s funds may be criminally tainted is no longer an option. An internal suspicious activity report must be made to the property professional’s money laundering reporting officer as soon as suspicion arises. Finally, as Mr Beard’s experience demonstrated, during an investigation a regulator may identify other unrelated regulatory breaches which bite the heel of the subject whose professional conduct is under scrutiny. Ref: Dion Beard v RICS, 8 September 2016, available on the RICS website.

Purrunsing v A’Court

For an entirely different perspective to consider, the Purrunsing case demonstrates the importance of a property professional properly applying the AML regulations to avoid liability for damages in a civil claim. If customer due diligence is not performed adequately, a property professional may fail to identify that his client is a fraudster, and by continuing to represent a client in these circumstances the professional – here, typically a solicitor working in the property sector – becomes exposed to compensating an innocent party from their own funds. In Purrunsing, a fraudster impersonated the registered proprietor of a property. The purchaser’s registered conveyancer transferred the purchase price of around £470,000 to solicitors retained by the fraudster. The money was then paid away. There had been several irregularities in the customer due diligence exercise conducted by the fraudster’s solicitor including the failure to obtain any documentation linking the fraudster with the property which was being sold. It was clear that a reasonably competent conveyancing solicitor carrying out customer due diligence ought to have considered whether the fraudster was the genuine owner of the property he was attempting to sell. A more rigorous approach to the AML regulations should have been applied in this case, and in an action brought by the purchaser to recover his lost monies which the fraudster’s solicitors had paid away, the High Court refused to relieve the fraudster’s solicitors from liability as a constructive trustee. The property professional’s failure to adequately apply AML procedures increased the risk of fraud and the solicitor could not benefit from the relief which would otherwise have been available under section 61 of the Trustee Act 1961. Ref: Purrunsing v A’Court, [2016] EWHC 789 (Ch).

RTA (Business Consultants) v Bracewell

A failure to adequately apply AML procedures can have wider implications when the criminal law is invoked. Omitting to apply key elements of the money laundering regulations constitutes a criminal offence, punishable by an unlimited fine or a maximum sentence of two years’ imprisonment. And criminality may operate to vitiate commercial arrangements made between contracting parties. The circumstances in RTA (Business Consultants) v Bracewell [2015] EWHC 630 provide an interesting illustration. In this case, the defendant instructed the claimant as an agent for the sale of his property businesses. Under the agreement the defendant had to pay commission and a non-refundable registration fee. There was an option to revoke the agreement within the 12-month agency period which was conditional on the fact that at the time nobody was expressing an interest or negotiating to purchase the businesses. Subsequently, the defendant informed the claimant that he wished to take the businesses off the market and made an agreement with a third party to let the properties instead. The claimant submitted that the agreement to let the properties triggered the defendant’s liability to pay the commission, as it amounted to a disposal of the properties within the terms of the agreement. The claimant issued a claim for the commission and the registration fee. The money laundering issue arose because the High Court had to consider whether the entire agreement between the parties was void as the claimant had breached the regulations by failing to register as somebody carrying out estate agency work. The High Court found that as the claimant had failed to register his estate agency with the regulator, the contract was void for reasons of criminal illegality. Therefore, the claim (and a counterclaim) were dismissed. Ref: RTA (Business Consultants) v Bracewell [2015] EWHC 630.

The lesson to be learnt from the two High Court cases is a simple one. Failure to adequately apply AML regulations not only triggers enforcement action if the circumstances become known, but it also exposes a property professional to hidden consequences in civil law which he might not have expected. Imprisonment is only the start of the problems!

Jonathan Fisher QC is Lead Counsel at Bright Line Law and specialises in money laundering cases, www.brightlinelaw.co.uk

This piece was originally published in the Estates Gazette.

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The views expressed in this article represent those of the author and not Bright Line Law.

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