AML essentials: Beneficial ownership and effective customer due diligence in conveyancing

Customer due diligence (CDD) is a cornerstone of AML compliance. This blog outlines the importance of CDD in the conveyancing process and provides guidance on conducting checks in the UK.

Customer due diligence (CDD) plays a pivotal role in unmasking beneficial ownership and combatting financial crime in real estate transactions. As conveyancers facilitate property deals, thorough CDD can help reveal whether complex corporate structures and overseas entities are being used to obscure ownership or facilitate money laundering.

But what constitutes effective CDD when it comes to identifying beneficial owners in property transactions?

Scrutinising corporate structures

First and foremost, conveyancers should strive to understand the purpose and rationale behind multi-layered corporate structures and chains of ownership. If shell companies and trusts seem to serve no legitimate economic purpose, it could point to illicit activity.

This is, of course, easier said than done. Complex ownership structures and offshore entities can obscure accurate ownership details and make it tricky to unpack ownership structures. What’s more, varying compliance processes and regulations from country to country can cause conveyancers quite the headache with offshore buyers, with a difficult trend towards privacy in some jurisdictions – illustrated for instance with the EU changing its access rules to its UBO register, further inhibiting the ease of verifying ownership details. 

Verifying identities

Verifying the identities of all parties involved is also essential, including buyers, sellers and anyone exerting control or significant influence over the deal. Official documentation should not necessarily be taken at face value. Independent research and probing are vital to determine true ownership.

 Identity verification provides a defence against registration and identity fraud. Conveyancers must confirm the legal entitlement of individuals to buy or sell property, aligning with the requirements outlined in HM Land Registry's Practice Guide 67. Conveyancers, guided by forms ID5, ID1, and ID2, inspect primary photo ID or secondary non-photographic documents, like utility bills or mortgage statements, ensuring a robust confirmation of involved parties' identities.

Online identity verification, conducted through video calls or biometric tools, adds an extra layer of security. Features like live video verification and anti-spoofing measures in biometrics deter fraudulent attempts, while randomised phrases and anomaly detection algorithms enhance fraud prevention.

Conveyancers and the Register of Overseas Entities

The recently launched Register of Overseas Entities (ROE) now legally requires foreign companies buying or selling UK property to disclose details on their beneficial owners to Companies House. The Register was a key milestone for transparency of beneficial ownership in the UK.

To register with the Register of Overseas Entities, foreign companies must provide proof of beneficial ownership and legitimacy to an “Agent” subject to UK anti-money laundering regulations. Agents are usually financial institutions, accountants, lawyers or estate agents responsible for verifying the overseas entity's submissions and attesting to their accuracy before filing the registration.

The Law Society has released its own guidance on ROE and counselled conveyancers to consider avoiding being Agents, citing that it is a ‘very different task to the risk-based approach to client due diligence under the money laundering regulations. It’s probably, in the main, not for property lawyers to provide this.’

Tech as part of the CDD toolkit

HM Treasury, as well as HMRC, have noted that there are benefits to be gained from utilising platforms to pick up the ‘grunt work’ that CDD can entail (eg downloading company extracts and shareholding information from company registers, electronic verification, etc). These platforms can integrate with multiple company registers spanning multiple jurisdictions and often update information when company data changes. 

By compiling corporate records and flagging updates, these tools can overcome barriers stemming from opaque offshore structures and disjointed regulations and give a clearer idea of linked companies across complex transactions. Equipped with more holistic views, conveyancers can better determine whether corporate structures seem legitimate or potentially suspicious.

 The tenacity imperative

 As this article outlines, customer due diligence is integral for conveyancers seeking to unravel beneficial ownership and guard against financial crime in property transactions. Effective CDD requires conveyancers to act with a combination of vigilance, astute judgement, and tech-savvy to piece together opaque corporate puzzles and ensure bad actors don’t burrow their way even deeper into the UK’s property market.