New money laundering regulations clause is either wrong – or means big impact for agents

Everyone in estate agency is now conducting ID checks on buyers, given the requirements of the new Money Laundering Regulations that came into force in June.

The concept of having to conduct ID checks on purchasers is in my opinion ridiculous, as I have previously stated on EYE.

It is the wording in Regulation 4(3) that drags in purchasers, and who knows if anything will ever change.

We will need a successful legal challenge to the Government to get a change to the obligation.

However, on closer reading of the wording in this Regulation there may be a major flaw that has gone unnoticed.

“4(3) For the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller), at the point when the purchaser’s offer is accepted by the seller.”

The Regulation outlines that for the purpose of these Regulations estate agents enter into a “business relationship” with a buyer. Everyone has read the wording in that way and so ID checks are carried out on buyers, once an offer has been accepted.

But, read the Regulation more closely? It specifies that an agent enters into a business relationship with a buyer, as well as a seller at the point when the purchaser’s offer is accepted.

As this Regulation defines the meaning of business relationship for the purposes of the Money Laundering Regulations only, it must be concluded that agents only enter into a business relationship with their client, the seller, at the point the purchaser’s offer is accepted by the seller.

If that interpretation is correct (unintentionally or otherwise) it changes the game massively for agents, because they will not be required to carry out ID checks on clients at or before the point they accept instructions to market a property by a seller: they will be able to wait and conduct ID checks much later in the selling process.

This would make life so much simpler for agents!

I fully accept that this is an interpretation argument, and lawyers might make lots of money out of arguing it both ways, but when you read the Regulation from that slightly different perspective it does feel persuasive.

It could be argued, of course, that agents enter into business relationships with sellers at the point of instruction, and so there is no way around that. But look again at the wording in the Regulation.

It states that for the purposes of these Regulations, agents enter into business relationships with purchasers.

Agents don’t enter into such relationships in reality, but now they do ‘for the purposes of the Regulations’.

That being the case, then surely, the same logic must apply the other way round? Agents do enter into business relationships with sellers at the point of instruction, but the wording states that for the purposes of these Regulations, they do not enter into business relationships with the seller until the offer is accepted by the seller.

If the Regulations can change the meaning of business relationship one way, surely it must also apply the other way.

There is another linked argument that says acceptance of an offer can only take place at exchange of contracts, because any informal agreement to sell a property is not binding and an offer is only accepted at exchange of contracts.

If either of these interpretations is correct, it does change the whole shooting match for agents and for HMRC, and it potentially makes a complete mockery of the Regulations in their application to estate agents.

However, I am sure that those very intellectual lawyers who wrote Regulation 4(3) will be able to come up with an amendment to correct the flaw in no time at all!

David Beaumont runs EYE’s free compliance helpline for our subscribers, and heads up Compliance-Matters, a business specialising in providing compliance services to agents on money laundering and the many other compliance requirements agents must meet.

The free helpline is on 0161 727 0798 

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17 Comments

  1. Chris Wood

    Good spot David. As you say lawyers will love it and agents will be the ones left playing chicken with interpretation of the law again.

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  2. Rob Hailstone

    I think the brackets are telling. “Brackets are punctuation marks used within a sentence to include information that is not essential to the main point.” Surely the main point is that a business relationship with a seller has already been entered into?

    “4(3) For the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller), at the point when the purchaser’s offer is accepted by the seller.”

    “4(3) For the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser as well as with a seller, at the point when the purchaser’s offer is accepted by the seller.”

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    1. Chris Wood

      Punctuation; saving lives and keeping lawyers gainfully employed for hundreds of years.

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  3. Rob Hailstone

    Most legal documents are not punctuated, because in many cases punctuation is a matter of personal choice. Did I really need that comma?

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  4. MichaelDay

    David may be technically correct here (or at least flagging a possible poor drafting) but I think the regulations and interpretation are actually pretty clear on this point.

    Agents enter a business relationship with the seller when taking instructions and therefore need to carry out customer due diligence at that stage for money laundering compliance purposes. They need to have carried out customer due diligence (ID checks etc) on the buyer at the point an offer is informally accepted – i.e. at memorandum of sale stage.

    I think David is unfortunately potentially confusing the picture here as I cannot see HMRC taking any interpretation other than what I have stated above and agents should be mindful of that in their systems and procedures.

     

     

     

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  5. DavidCompliance

    We all know, of course, that selling agents enter into business relationships with sellers at the point of instruction; however, Regulation 4 specifically defines when an agents enters into a business relationship and so the natural interpretation we have all used ceases to apply because the definition in Regulation 4 takes over!

    We have all read the clause thinking it simply brings buyers into the equation, but, if you look at the draft Regulations the definition in Reg 4(3) was different and it was changed at the last minute and that causes this potential problem.

    Maybe it was changed to deal with the question of when acquisition agents enter into business relationships with sellers, but it looks to be an anomaly at least and if big penalties are being handed out in the future I suspect someone will challenge it.

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  6. J1

    It’s a bit of a stretch to make this into a Monday morning headline, don’t you think?

     

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  7. Richard Copus

    “Charles I walked and talked.  10 minutes after his head was cut off”.

    “Charles I walked and talked 10 minutes after his head was cut off”.

     

    I’ve never understood lawyers habit of not using punctuation.  It can lead to misleading interpretations as we are seeing.

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  8. NickTurner

    An interesting point here is the  initial legal relationship formed between the agent and the vendor at the point of instruction where normal rules of agent/principal kick in. Agent is acting for vendor.

    If after an offer has been submitted and accepted( agent now has business relationship with purchaser ), should the purchaser then come back to re negotiate the price for whatever reason, is the agent acting for the vendor or purchaser. Perhaps the initial agent/pricipal agreement  takes precedent over the 4(3) regulation?. The legal beagles will win whatever happens!

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    1. DavidCompliance

      You are right the lawyers will win whatever, but remember the natural interpretation would apply but because there is a definition in the Regs that takes precedence!

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  9. aSalesAgent

    I read “(as well as with a seller)” as ‘(as well as the relationship already established with the seller)’.

    We have a business relationship with the Seller at the point they sign contracts, but we also enter into one with the Buyer when their offer is accepted.

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    1. DavidCompliance

      I am afraid you are missing the point. You are assuming agents only act for buyers!
      Selling agents act for sellers but acquisition agents act for buyers and so inserting tyoyur additional words does not work.
      Furthermore, you do not enter into any business relationship with a buyer because there is no agreement or contract or money changing hands for services. 

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  10. simonkensington

    Dancing on the head of a pin!

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  11. cyberduck46

    >If the Regulations can change the meaning of business relationship one way, surely it must also apply the other way.

     

    The regulations do not change the meaning of the business relationship. The scope is purely in respect of the money laundering regulations. It has no bearing whatsoever on other regulations.

     

    >For the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller), at the point when the purchaser’s offer is accepted by the seller.

     

    I really don’t see any other interpretation “For the purposes of these Regulations”. Key words “these regulations”.

     

     

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    1. DavidCompliance

      You are of course absolutely correct and so for compliance to these Regulations you must first look at the statutory definition of business relationship in the Regulations, which states – For the purposes of these Regulations, an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller), at the point when the purchaser’s offer is accepted by the seller.
      Had it not been there we would use the ‘normal’ accepted definition, but the Regulation definition takes precedent otherwise there is no point in it being there!

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  12. thefinalcomment03

    I saw this last week and it raised an eyebrow. The issue isn’t punctuation or a matter of interpretation. The clause is clear, whether sandwiched between commas, brackets or exclamation marks.

    If acting for the seller with signed terms, one cannot, at the same time or later, enter into a contract with the purchaser. There’s a moral, ethical and legal conflict of interest. This needs to be reworded as a matter of urgency.

    Moreover, it was reported a while ago on Property Eye that it will also be necessary for agents and individual negotiators to be ‘checked’ using HMRC or DRB. Does anyone know if this is still the case? If so, when?

    Thanks

     

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    1. MichaelDay

      Since the beginning of November 2017 and by June 2018 HMRC will be approving Directors/Owners/Partners as part of their supervision checks. This will involve a Disclosure and Barring Service type check. No plans announce yet to extend to all staff although was mooted in consultation on the latest Regulations.

       

       

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