Gary Murphy, Allsop auctioneer and vice chair of the RICS Auctioneering Group, considers the increased regulatory challenges arising from the switch to online auctions and the massive increase in the number of remote buyers and sellers.
The author and historian Yuval Noah Harari said that history is accelerated by a crisis.
For centuries, the auction room has been the centre of activity for trade in a vast range of commercial and residential property assets. Thousands of bidders, sellers and spectators gather in large hotel ballrooms or conference venues to do battle, witness the market first-hand and exchange views. Despite the availability of multiple channels for remote bidding – online, phone and proxy – physical attendance at these events remained the preferred method. In March this changed overnight. Online auctions, previously operated exclusively by only a handful of firms, became the saviour of the auction world. The transition from room to screen has brought with it new challenges. Among them is compliance with anti-money laundering (AML) regulations.
For the unscrupulous, the purchase, sale or letting of property have long been methods of laundering the proceeds of crime. These transactions facilitate the conversion of dirty money into ostensibly clean assets, potentially providing the criminal with an apparently legitimate source of funds. Although estate agency businesses may not handle money, individual auction firms can receive tens of millions of pounds in deposits each year. With global travel bans in place impeding cash smuggling and other illicit activities, property trading has become more appealing. The prevalence of remote working during the pandemic has made it easier for fraudulent transactions to escape scrutiny and harder for agents to meet customers face-to-face.
Identity checks
Since AML regulations were first introduced, checking the identity of the seller client has been a routine measure for auctioneers. Until recently however, the position in relation to the successful bidder and/or buyer was less clear. The approach adopted by many auctioneers was that the successful bidder in the room would be escorted to a “buyers’ lounge” where proof of identity would be produced. Face-to-face checks would allow photographs on passports and driving licences to be verified. Further “smart” checks against the bidder and, if different, the buyer, could be made online. Remote bidders would be subject to identity checks as part of a remote bidding registration process before being allowed to bid on the day. The auctioneers’ terms of sale allowed the contract to be treated as repudiated if the buyer failed to produce satisfactory documentation. And the special conditions of sale for a lot would often include the ability for the seller to terminate the contract if the buyer failed to comply with AML checks within a short time after the auction. In all of this, the auction contract would nevertheless remain binding while checks were ongoing.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (to give them their full title) require certain businesses, estate agencies and auction houses to verify the identity of customers, including the counterparty to a transaction, before entering into a business relationship. The RICS sought clarity from the Treasury and HMRC on the timing of checks against the bidder and/or buyer. It was suggested that applying the regulations to every potential bidder was likely to slow down the process considerably and impose unnecessary administrative burdens on auctioneers. Thousands might attend the biggest sales and not all intending bidders would even get a chance to raise their hand. So checking everyone was overkill.
The pandemic-induced move to online sales from March this year has forced auctioneers to take steps to identify all potential purchasers before bidding status is granted. With no face-to-face contact on the fall of the hammer, there is no alternative. In any event, it is far safer commercially to have all necessary information ready for the immediate preparation of a written sale contract.
HMRC guidance
Recent HMRC guidance on the regulations is unequivocal. A contract with a buyer who has not been checked, while binding, risks the auctioneer being in breach of the regulations. Two possible routes to compliance are offered. First, pre-register all bidders, all potential buyers, and where different from these, any provider of funds before the auction starts. Secondly, delay the point at which a binding contract is created until such time as all AML checks have been completed on the buyer, the bidder or the provider of funds.
The first option preserves the primary advantage of auction over all alternative methods of sale – the certainty of a legally enforceable commitment on the fall of the hammer. The second avoids the administrative burden of checking all bidders but, in doing so, fails to bind the highest bidder. Until AML checks are completed, a bidder who has a change of heart could walk away or a seller could accept a better offer. This option involves the inclusion of a condition precedent in the contract. In short, until that condition is satisfied, namely compliance with the regulations, there is simply no contract at all. For most involved in the auction process – buyers, sellers, auctioneers and lawyers – there is actually no choice. The protection of the binding contract on the fall of the hammer is paramount. The administration involved with multiple identity checks is now inevitable.
As time goes on, the rising demand for new and efficient methods of identity verification across all regulated businesses will be met with increasingly innovative, cost-efficient and technically advanced service platforms. Biometric authentication involving biological input such as facial or voice recognition and retinal or fingerprint scanning will be used. This will be combined with knowledge-based checks, such as security questioning or passwords, along with contingent safeguards like digital signatures. Paper passports and utility bills, easily forged by the more experienced criminals, will no longer be reliable. Multi-factor verification technology will be integrated within auction platforms to offer buyers a swift and seamless journey to the room.
Despite these advances, a return to the physical room is only a matter of time. Indeed, many Allsop clients and buyers have indicated a strong preference to get back to a multi-channel system. Before lockdown, some auctioneers “in room” were using a paddle system to identify bidders. For most houses, I suspect that much of the information obtained on bidders before sale may not have been sufficiently extensive to have satisfied the regulations in every case. The AML regulations and latest HMRC guidance dictate that full verification is required before the hammer falls.
So it seems inevitable that when auctioneers return to the room, paddles will be necessary to identify approved bidders. Slicker systems for approved bidder status will need to be employed – not just for pre-registration but also for last-minute clearance and admission on the day. I guess we all expected that these measures would be universally implemented one day. We just didn’t expect it so soon. As in many areas of business this year, it has taken a pandemic to accelerate change.
Primary UK legislation for preventing money laundering and countering the financing of terrorism
- Proceeds of Crime Act 2002
- Terrorism Act 2000
- Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations)
- Criminal Finances Act 2017
- Terrorist Asset-Freezing Act 2010
- Anti-Terrorism, Crime and Security Act 2001
- Counter Terrorism Act 2008, Schedule 7
The Regulations
If a business is supervised by HM Revenue & Customs (HMRC) for anti-money laundering (AML) purposes, it will need to meet the approval requirements covered under the Regulations.
If a person or business fails to meet with the Regulations, they may face civil penalties or criminal prosecution. This could result in unlimited fines with a prison term of up to two years.
Not meeting with the Regulations may also lead to money laundering charges under the Proceeds of Crime Act 2002.
The senior managers of a regulated business are responsible for the oversight of meeting the Regulations and can be held personally liable if they do not take the steps necessary to protect their business from money laundering and terrorist financing. They must take a risk based approach that focuses more effort on high risks.
AML requirements
Estate agency businesses must:
- comply with the Regulations. They must not carry out estate agency work if they are not registered with HMRC;
- appoint a money laundering reporting officer (MLRO) from within the business to receive reports of suspicious activity from staff and decide whether to make a suspicious activity report (SAR) to the National Crime Agency (NCA);
- consider whether the size and nature of the business requires the appointment a compliance officer to ensure compliance with the Regulations;
- carry out customer due diligence (CDD) on the customer and the counterparty to the transaction before entering into a business relationship or occasional transaction. The customer can be a seller or buyer. Prospective buyers are not included in a business relationship unless they are a customer. Government guidelines expressly state that a bidder is a customer of an auctioneer. CDD must be carried out before a binding contract is entered into;
- identify and verify the ultimate business owners (UBOs);
- identify and verify a person acting on behalf of a customer and verify that they have authority to act;
- not deal with certain persons or entities if CDD cannot be completed and consider making a SAR;
- take all reasonable measures to establish the source of funds.
Levels of CDD
The Regulations state that every estate agent must determine the extent of CDD on a risk-sensitive basis, depending on the type of customer, business relationship or transaction. The methodology concerned with risk rating the customer should be recorded on a risk analysis form.
Low risk. The business may apply a simplified form of customer due diligence where the business relationship or transaction is considered low-risk in terms of money laundering or terrorist financing. Lower-risk customers might include a public authority or a financial institution. Checks might include a search of the relevant company register or confirmation of the company’s listing on a regulated register such as the FCA.
Medium risk. The majority of CDD referrals will involve undertaking standard due diligence and consist of identification of the customer using documentation, data or information from an independent reliable source.
High risk. Enhanced due diligence must be applied in situations that are high-risk. These might involve politically exposed persons (PEPs), complex transactions or super prime residential properties. Enhanced checks might involve proof of source of wealth or additional identification information.
The Regulations do allow reliance on third parties, provided the other person consents to being relied upon. Persons who can be relied upon include financial institutions, insolvency practitioners, legal professionals and now estate agents. The person making the request remains liable for non-compliance.
CDD records obtained for AML purposes must be retained for five years from the conclusion of the business relationship or transaction.
If an employee forms the requisite suspicion and makes an internal report to the MLRO about potential money laundering, then it is the duty of the MLRO to open a money laundering client file. If a SAR is made to the NCA then a copy of the SAR must be held on the money laundering client file.
It is a criminal offence for anyone to do or say anything that “tips off” another person that a disclosure has been made where the tip-off is likely to prejudice any investigation that might take place.
