Do you remember your recent property transaction? Maybe you’re involved in one or several now? Then you probably know about the vast range of KYC and AML checks every party to a property transaction need to go through. These checks are a hassle and take a lot of time and effort.
But they are necessary. This is simply because property transactions are an increasingly popular target for criminals who want to perpetrate financial crimes. Between 2004 and 2015 corruption and crime in the UK property industry reached £180 million. This figure is now estimated to be a lot higher. In simple terms, it’s a growing problem that needs an effective solution.
KYC checks and, by implication, AML checks aim to be this solution. These checks allow parties and other stakeholders like banks and solicitors involved in property transactions to know who they’re dealing with and where the money for the transaction is coming from. As a result, these processes reduce the possibility of financial crime.
But what checks are necessary and which are nice to have when it comes to property transactions? Let’s have a look at the required checks in more detail.
What is KYC?
Know Your Customer or KYC is a series of steps that buyers, sellers, tenants, and landlords need to go through during a property transaction. KYC aims to identify potential risks for illegal activity with the transaction.
As such, KYC has four primary objectives. These are:
- Identifying the relevant party.
- Verifying the party’s true identity.
- Understanding the party’s background and where the funding for the transaction originates from.
- Monitoring the party’s activities.
When done right, KYC checks protect all parties to a property transaction against dealings like fraud, money laundering, bribery, and other forms of crime. It also shows whether a party can complete a transaction.
The further aspect that should be kept in mind in respect of KYC is anti-money laundering regulations or AML. While KYC is an effective tool to detect and prevent fraud and determine customer viability for a property transaction, it’s not a mandatory requirement. In contrast, AML refers to regulatory requirements that the parties to a property transaction need to comply with to prevent money laundering or other financial crimes.
So, in a sense, one could look at KYC as a process that makes up one aspect of an overall AML framework. As such, KYC is a vital part of complying with AML requirements and there may be some overlap in the KYC checks and necessary AML checks.
Considering the above, let’s look at the different checks that typically need to be done for property transactions.
The first check that’s probably necessary for any property transaction is an identity check, whether it’s for the buyer, seller, tenant, or landlord. Identity checks aim to ensure that the respective party is who they say they are. So, in simple terms, identity checks aim to verify a party’s true identity.
Typically, identity checks are done by using two or more of the following documents:
- Valid passport
- Residence permit
- Current UK or European photo driver’s license
- HMRC tax notification
- State pension or benefits book or notification letter
In addition to the above documents, it’s also necessary that parties to a property transaction provide proof of their address. This can be done with any of the following documents:
- Current tax bill from a local authority
- Rent card or tenancy agreement
- Recent mortgage statement
- Bank statement
- Utility bill which does not include a mobile phone bill
- Electoral roll search
Identity checks go further than just verifying identity, though. A party’s identity can also be used to determine whether they’re not on any sanction lists like the OFAC or Interpol lists. Likewise, it can be used to confirm whether the party is a Politically Exposed Person (PEP), which is deemed to be more susceptible to corruption and considered as high risk.
Affordability checks give insight into whether a tenant or a buyer of a property will be able to pay the monthly rent, purchase the property outright or afford monthly mortgage payments. As a result, with property rentals, the landlord will typically do an affordability check on the tenant simply because a landlord’s primary concern is whether a tenant can pay the monthly rental.
Likewise, banks will typically do affordability checks on property buyers to establish whether these buyers will be able to comply with their mortgage obligations.
Typically, when an affordability check is done, the following documents will be used:
- Proof of employment.
- Recent payslips.
- Bank statements, especially if a party to a property transaction is self-employed.
- Proof of benefits claims.
To determine affordability, a landlord, banks, or other credit institutions will look at a buyer’s or tenant’s income and their expenses to determine whether they have the necessary disposable income to comply with their obligations in terms of a lease or mortgage agreement.
For most, if not all, banks, credit checks are vital in their decision whether to loan money to a buyer to buy a property in terms of a mortgage. Typically, if the buyer’s credit record is not favourable, the bank or credit institution will more than likely decline a loan application.
For many landlords, credit checks are also seen as essential when considering letting a property to a tenant. However, unlike banks, landlords often don’t have access to detailed credit records as only civil court judgments and bankruptcies are public information. So, for landlords, affordability checks may be more helpful in deciding whether to let the property out.
Proof of Funds
In a certain sense relating to affordability and credit checks, anti-money laundering regulations require that buyers need to provide proof that they acquired the money used to buy the property legally. This information generally needs to be provided by the buyer to an estate agent after the buyer has put in an offer on a property, and also to the solicitor or conveyancer and the mortgage provider.
Some of the documents that a buyer could use to comply with this requirement include:
- An agreement in principle or mortgage in principle proving that a mortgage has been granted to the buyer.
- Bank statements showing the deposit amount. This will typically be used by mortgage buyers.
- Bank statements showing the total cash amount available in the case of cash buyers.
- Evidence that a buyer is selling their property. This will be the case when a buyer wants to use the proceeds of the sale of their property to buy the new property.
- Evidence that the buyer has received the funds to buy the property as a gift.
Property Ownership Checks
For sellers, property ownership will also need to be confirmed. This will in all likelihood happen after an offer has been accepted, and the solicitor has been given instructions to transfer the property. They will then use the sellers’ identities and the descriptions of properties to do Land Registry checks to confirm who the owner is.
Landlords need to go through a similar verification process, but only in the case where they rent out commercial or residential properties for more than £8,800 per month.
The Bottom Line
Doing all these checks during a property transaction is a tedious process that takes a lot of time and effort. Considering the goal of doing this, it is, however, necessary to prevent possible financial crime.
At Checkboard, we make this process a lot easier by allowing buyers, sellers, tenants, and landlords to have all their information available in one place, ready to be shared with the right people. In this way, we simplify tenant checks, landlord checks, and the other checks referred to hereinabove.
To find out more about our platform, visit our website for more details.