All practitioners are required to carry out Customer Due Diligence (CDD) under the Money Laundering Regulations 2007. Part of this process is to obtain clients’ identification documents and verify these electronically. However, it is important to remember that this is only a small part of the CDD process and increasingly our industry is adopting what is termed a ‘risk based approach’ to ensure that they know their client and understand their business needs and instructions when acting for them. A risk based approach is increasingly important to assist our industry in recognising suspicious cases and is now a crucial defence to the alarming increase in cybercrime and online money laundering.
What is KYC?
As you might have already guessed, KYC stands for ‘Know Your Client.’ Any firm dealing in property transactions should therefore ensure that they know their client’s identity, their financial dealings (including sources of any funds to be used in a transaction), understand the purpose of the transaction and what the client expects to achieve from the transaction.
KYC and Lenders
As property transactions involve a chain of people buying and selling properties, lender’s funds can end up travelling through several vendors and purchasers. Consequently, lenders’ are increasingly aware of the need for tight KYC and often insist on further transaction information to ensure they know where their funds will ultimately end up. The further information required is usually in the form of an agreed sales contract and, at the very least, the immediate vendors solicitor’s written confirmation that they have carried out all appropriate KYC on their client and are satisfied with the same.
So, why is KYC so Important to Lenders?
Put simply, lenders need to specifically know what their loan monies are to be used for and where they will be going. In many cases, ‘the where’ is a vendor selling a property or another lender being redeemed courtesy of a remortgage. KYC helps lenders to ensure they have as much information as possible about the purpose of the loan and that the person ultimately receiving the loan monies is who they believed them to be.
Whilst this seems obvious, we are unfortunately still, with an alarming regularity, met with queries from other solicitors as to why we need another solicitor’s KYC confirmation or even their own further KYC confirmation and certified client identification documents.
The recent case in the news involving Sir Max-Hasting’s wife puts our and our lender clients’ requests for KYC confirmation into perspective. Here, a ‘Mr Hafter’ became a tenant of Penny Hastings’ property and then subsequently sold it for £1.35 million using Mrs Hastings’ name. It transpired that the solicitors acting in the sale had received identification (whether this was a photocopy, certified or original identification is currently unknown) for a Mr Hafter and Mrs Hastings, but never actually met Mrs Hastings as she was conveniently ‘living in Chicago.’
Ultimately, the purchaser, who was a cash purchaser, transferred and lost £1.35 million pounds when the purchase monies where transferred to ‘Mrs Hastings’ preferred account and HM Land Registry became suspicious of the transaction. Whilst Penny Hastings does in fact still own the property due to the Land Registry’s refusal to register the transfer, the purchaser has lost £1.35 million as the funds have now disappeared. Following on from this, if a lender had been involved to raise funds for part of the purchase price both the lender and the purchaser would now be missing significant sums of untraceable money. This clearly highlights the importance of initial and continuing KYC throughout property transactions and more significantly throughout the chain.
Moreover, bridging and development finance lenders generally tend to take on more complicated or fast paced matters meaning that their assessment of potential risks are, and need to be, more stringent. Whilst funds for bridging loans are usually required urgently, the speed of the transactions should not be a reason to refuse to carry out the required KYC, obtain the lender’s requested KYC confirmations or just generally depart from procedures that have been introduced as a necessary good practice. The bottom line is that such measures could save both the Borrower and Lender from fraudulent activity and obtaining written KYC confirmation from the next solicitor in the chain is a small price to pay to ensure both the Borrower and the Lender are protected.
Ultimately, it is time for all property solicitors to realise the importance of KYC and a risk based approach to their own CDD. A copy passport taken on a camera phone and a year old gas bill are simply not enough!