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Comment: Work to be done in fight against money laundering threat

Fraud issue looms large over the mortgage industry, but risk can be mitigated with sensible procedures

Anti-money laundering regulations that came into force in June 2017 warn that “mortgaged property as a money laundering vehicle may become more popular” as criminals start to take advantage of what has, up until recently, been a fairly under-utilised route for money launderers to take.

There are a number of ways a mortgage can be used as a route to clean dirty cash. One is by using laundered money as a deposit, but the more common method is to overpay a loan.

There is also the potential for money launderers to target a lender to secure a buy-to-let mortgage, and then launder money through rental income.

With the increased threat of money laundering in the mortgage business, plus the fact that lenders face the risk of regulatory action if they are not clear on the borrower’s source of deposit, it has never been more important that networks and brokers are performing proper AML checks.

Brokers and networks may find that lenders will be unwilling to work with them – and may even de-list them from their panels – if they do not have proper checks in place, while brokers may not be accepted on to networks if they cannot demonstrate they take AML seriously.

The regulations make it clear that all brokers and networks should adopt a risk-based approach to their business relationships and should have policies and procedures to assess the risk they are exposed to, whether these are associated with the types of customers they have on board, the products and services they offer, or simply the geographical areas they operate within.

One of the biggest threats in terms of money laundering in the mortgage business is the use of fake identity documents to pass the checks needed to take out a mortgage in the first place. Documents needed for a mortgage application can now be forged so well that the fake versions are impossible to detect manually.

This, coupled with the quick development and ever-changing requirements under new AML legislation, makes it very difficult for firms to adequately protect themselves and remain compliant, particularly smaller firms who simply do not have the resources.

It is worth noting that all mortgage fraud has been perpetrated on the back of forged documents – there has never been a fraudulent case linked to electronic verification.

HM Revenue & Customs recently cracked down on estate agents for not having the proper AML procedures in place, which included a record fine for Countrywide.

And while there is no concrete evidence to say brokers will be targeted next, a recent Transparency International report highlighted that the UK could be doing more. In the wake of this and increasing pressure on the regulators, we have seen an increase in the auditing of all sectors, not just estate agents.

The FCA has always taken a very robust stand for firms it regulates, whereas the estate agency sector has been pretty lax in AML compliance. Brokers who stick to the guidance issued by the Joint Money Laundering Steering Group should not have anything to fear.

The penalties for failing to have adequate supervisory and AML procedures in place, and the under-reporting, may be a factor in the recent rise in cases, and firms are advised to continue to be vigilant. Those who do file suspicious activity reports in instances where there is actual suspicion at least have a defence.

The most efficient and reliable way to ensure you are complying with the AML regulations is by adopting an electronic platform. The fifth money laundering directive stipulates that electronic checks should be used wherever possible, and therefore, the increase in demand for electronic AML solutions is at an all-time high.

Good electronic solutions will offer a one-stop-shop where all checks – verifying individual and corporate clients, both in the UK and overseas – can be done in one place, as well as enhanced due diligence, PEP and sanction screening and ongoing monitoring. The smart solution is to pick a fully automated system driven by top-quality data.

John Dobson is chief executive at SmartSearch

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