UK sanctions regime puts property sector under scrutiny as letting agents face new obligations

Letting agents on 14 May will become subject to mandatory reporting obligations under the UK financial sanctions regime, including firms that may not even be required to be supervised under the money laundering regime.

This follows the publication, in April, of the Office for Financial Sanctions Implementation's (OFSI) most recent threat assessment report focused on the property sector and related services, which expressed significant concerns about financial sanctions compliance across the sector.

It is a time of significant scrutiny for firms in the property sector, many of whom may not have had to deal with regulatory compliance issues of this kind before

The UK financial sanctions regime

The UK sanctions regime is part of coordinated global effort to impose political pressure on other countries by imposing restrictions on certain, otherwise legitimate, economic activities with those countries or persons within those countries.  Traditionally, this has been most prominent in the restriction on trade with regimes – particularly around the export of military and nuclear technology.  

However, since the Russian invasion of Ukraine in 2022, there has been a rapid expansion of the financial sanctions regime – the restriction on providing funds or economic resources to – or taking the fund or resources of – specific "designated persons" connected with the relevant country or regime.

"Economic resources" is construed very broadly under the relevant legislation to mean assets of every kind – from tangible or intangible to movable or immovable. For illustration, in one instance, OFSI imposed a fine on a fine wine competition for accepting the submissions from a designated person on the basis that not only did the wine constitute economic resources but that the mere publicity of entering the competition was a benefit to the designated person. Economic resources certainly include property, and other interests in land.

OFSI's property sector focus

The OFSI's threat assessment report is one in a series published by OFSI addressing sector-specific threats to UK financial sanctions regime. The assessment largely sets out an oversight of what OFSI has seen in the market since the massive expansion of the UK sanctions regime following the Russian invasion of Ukraine some three years ago.

OFSI reached several key conclusions in this oversight, which include stark findings as to the likelihood that the UK property market is being used despite, or in circumvention of, the sanctions regime. OFSI found (to varying degrees of probability) that:

1. UK property and related services firms are underreporting suspected breaches of financial sanctions to OFSI.
2. Designated persons are breaching UK financial sanctions to maintain UK properties.
3. Small-scale property or related services firms are facilitating those breaches.
4. Designated persons are using complex holding structures to mask their wealth and/or transferring ownership to (non-sanctioned) family members.
5. UK property and related services firms are acting as professional enablers to facilitate sanctions breaches.

The seriousness of these findings and the fact that OFSI has issued a report on the property sector at all strongly suggest that it  will be subjecting the sector to additional scrutiny and potentially enforcement action in the near future.

'Red flag' guidance

The report also provides useful guidance on what OFSI considers to be the most prominent "red flags" of potential sanctions breaches and avoidance – opaque ownership structures, disproportionate payments and the unexplained use of intermediary countries for holding companies. Much of this will be familiar to firms conducting anti-money laundering (AML) compliance activities. However, the OFSI's report emphasises that sanctions compliance applies to all firms and that the screening and reporting requirements are slightly different to the AML regime.

The report emphasises that everyone in the sector has a responsibility and potential liability: estate agents, letting agents, landlords, tenants, property managers, property investors and property developers. OFSI also specifically highlights the fact that firms may be conducting "estate agency" work (within the relevant statutory definitions) even if they do not consider themselves to be estate agents.

On the specific issue of reporting, OFSI noted that just 1% of all the reports made to it are made by the property sector but 7% of all reports involved the property sector. This suggests significant under-reporting by firms in the property sector, potentially by a factor of 850%.

While the discrepancy, in part, arises from the fact that the majority of firms in the sector have historically not been subject to mandatory report – unlike, say, the financial sector and legal industry – but it is clear that OFSI expects the sector to be more diligent about reporting. It is likely that OFSI will be following-up directly with firms where they become aware of potential breaches from other sources.

New reporting obligations

The issue around reporting is most likely to impact letting agents. From 14 May, letting agents will be subject to mandatory reporting obligations as “relevant firms” under the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2024.

OFSI has issued some specific guidance to the sector to assist firms in their preparation but the definition of letting agency work mirrors the definition adopted in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), Regulation 71 and OFSI has specifically referred firms to HMRC's guidance on what falls within "letting agency work" for the purpose of the MLRs. 

In short, it encompasses all work done on instructions from a prospective landlord or tenant to find a tenant or rental property. The letting in question needs to be for a term of at least one calendar month but, unlike the MLRs (which have a minimum qualifying rental threshold of €10,000 per calendar month) there is no de minimis threshold for monthly rental amounts.

This means that many letting agents are likely to be caught by these reporting obligations for the first time without any experience or compliance infrastructure in place to appropriately identify and escalate potential sanctions breaches.

Reporting obligation exemptions

There are specific exemptions to the types of firms caught by the reporting obligation. For example, OFSI and HMRC's guidance emphasises that a "mere" listing platform, which only markets available letting listings on behalf of prospective landlords and allows them to communicate with potential tenants, does not fall within the definition.

However, this exemption applies only if the business does nothing else covered by the general definition of estate agency work or letting agency work. If any additional service is provided, including active matching of landlords and tenants, screening of potential clients, or work done to conclude the letting, then the exemption would not apply.  

It also does not apply to landlords who carry out their own marketing, as there is an express exception for "private sales and/or private landlords who do not use a third party to enable the transaction". It is also clear from the guidance that if one company within a larger group provides the letting agency service to a second company within the group that is providing the property to let, the first company is caught by the regulations and would be required to report. Each company is a separate legal identity and is a third party for the purposes of the financial sanctions regime (and, indeed, the MLRs).

What this means for letting agents

A relevant firm is required to report to OFSI as soon as practicable if it knows or has reasonable cause to suspect that a person is a designated person or has committed a breach of financial sanctions regulations. The notification to OFSI must include details of the basis for that knowledge or suspicion and any information held about the relevant person from which they can be identified.  Where the designated person is a customer of the relevant firm, the relevant firm must also report to OFSI the nature and amount or quantity of any funds or economic resources held by it for the customer at the time when it first had the knowledge or suspicion.

In principle the burden on letting agencies could be extremely broad. OFSI has explicitly acknowledged this and, in its guidance on the implementation of these new regulations, has expressly noted the limits on the scope of the reporting obligations, as follows:

• If acting for the landlord, the reporting obligation in respect of the landlord, triggers as soon as the letting agent has a reasonable cause to suspect that the landlord is a designated person. However, the obligation in respect of a prospective tenant is only triggered once the landlord accepts the prospective tenant's offer to let; that is, that the landlord and tenant are "in the course of concluding an agreement for the letting of land for a term or a month or more."
• If acting for the prospective tenant, the obligation only applies in respect of either the landlord or tenant from the point that they are "in the course of concluding an agreement" – that is, an offer has been accepted.

Sanctions screening measures

There is no specific obligation under the UK financial sanctions regime to put in place any sanctions screening measures or conduct any due diligence on customers in order to identify whether or not they are designated persons and there is no express guidance as to the degree of checks which it would be appropriate to put in place. 

However, it is prudent to have measures in place to perform sanctions screening. The relevant sanctions regulations make clear that a knowing or reckless breach of the financial sanctions regime is a criminal offence. That will be committed where the relevant person knows or has reasonable cause to suspect that a person to whom it is making funds or economic resources available is a designated person.

Further, since 2022, OFSI has had the power to impose fines on a strict liability basis – that is, it may impose a fine of up to £1 million or 50% of the value of the value of the funds or economic resources in question, even if the person had no knowledge or suspicion they were doing the act of the offence.

OFSI guidance

OFSI has published extensive guidance on the approach it will take to the imposition of such fines including the mitigating factors which it will consider in deciding whether to take enforcement action. OFSI will take into account, among other things:

• whether there is evidence of neglect or a failure to take reasonable care;
• whether a person seems unaware of their responsibilities; and
• the level of due diligence conducted, and the degree of enquiry undertaken.

Given the potentially significant penalties that could be imposed, it would be prudent to have sanctions-screening measures in place and the degree of investigation to be risk based – for example, with further checks being undertaken where individuals are located in high-risk jurisdictions. 

Osborne Clarke comment

OFSI's report has brought the spotlight onto the whole of the property sector when it comes to financial sanctions, with increased scrutiny on and investigations of the sector expected in the near future.

However, letting agents are likely to be disproportionately affected in the coming months as they get to grips with their new reporting obligations. Firms would be prudent to take steps as soon as possible to ensure they are responding appropriately.

Michelle Tong, a paralegal with Osborne Clarke, contributed to this Insight.