Why Proving Your Source of Funds in Conveyancing Transactions is so Important
Source of funds in conveyancing transactions is always a somewhat sensitive topic. The obligations placed on conveyancers to establish the source of a buyer’s funds in a conveyancing transaction arises from the Money Laundering Regulations 2007 (recently revised) and the Council of Mortgage Lenders’ Handbook. The Money Laundering Regulations 2007, mention the requirements for source of funds at two places:
Regulation 8 – Scrutinise transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure the transactions are consistent with the relevant person’s knowledge of the costumer, his business and risk profile.
Regulation 14 – Take adequate measures to establish the source of wealth and source of funds which are involved in the proposed relationship or occasional transaction.
Proving source of funds therefore is a crucial aspect of the conveyancing process and failure to do so would cause severe difficulties for the conveyancer in progressing the conveyancing transaction.
We recently had this with two clients within the space of two weeks.
In the first, it was a Middle Eastern client whose source of funds, according to him, was the sale of a property in a Middle Eastern country, which has recently gone through a war. We know from news sources that the aftermath of the war has meant that there has been some questionable circumstances and as such, conveyancers have become more cautious as to the source of funds especially where there is a possibility that the funds could have arisen from illegal means or through politically exposed individuals. The client in this matter said that there was no documentation relating to the sale of the property as it was done on a handshake.
We explained to the client that this is not satisfactory and he needs to provide some documentary evidence to substantiate the source of funds and also the remittance of those funds to the client, in the UK. We waited a few weeks for the client to provide this information and followed up with the client during that time but to no avail. Indeed, the client stopped responding to us. Finally, we spoke to the estate agent who confirmed to us that the buyer client had in fact instructed another firm of solicitor. Whilst we cannot of course comment on how other conveyancers comply with the Money Laundering Regulations, it is questionable how the source of funds requirement was satisfied in this particular situation.
The second client was a local teacher who had inherited most of the funds for the purchase following her dad’s demise about four or five years prior. The client struggled to provide the source of funds because, according to her, of the time that had passed since she received the payment. This seemed odd to us because surely, there must be a completion statement issued by the solicitors acting for the executors of the her late father’s Will or at the very least, a bank statement showing the receipt of those funds. Despite numerous requests for such documentary evidence, the source of funds documentation was not forthcoming and regrettably, we had to decline the engagement.
Under the Proceeds of Crime Act 2002 (‘PoCA’) conveyancers are required to report any suspicions they may have of someone engaged in money laundering, which usually involves a suspicion that someone has criminal property. Failure to report such suspicion could result in the conveyancer being charged with criminal offences. If convicted, the conveyancer could lose their ability to practice.
It is for the above reasons that the Law Society recommends that on each file/transaction, it is important for the conveyancer to have an understanding of where the funds to finance the transaction is coming from. Documentary evidence should be obtained and kept on file, so that if there is any investigation in the future, the conveyancer can prove that reasonable steps were taken to comply with the relevant laws. That information will then help to decide the level of scrutiny, if any required of that source of funds.
To be clear though, the relevant laws do not require conveyancers to question a wealthy private client about their entire financial history just because they may at some point have avoided paying tax.
Whilst we continue to have a zero tolerance policy on compromising on our compliance with money laundering regulations, we do take a pragmatic approach with obtaining documentation for the source of funds in a conveyancing transaction. Occasionally however, where clients are reluctant or find great difficulty in providing us with the documentation to establish their source of funds, we have no option, unfair as it may be, but to cease acting for those clients simply because we are unable to comply with the requirements placed on us under the Money Laundering Regulations 2007 and PoCA along with the requirements set out in the Council of Mortgage Lender’s Handbook. This is the reality of a conveyancing transaction in the modern age and it would be prudent for a conveyancing buyer client to ensure that they have satisfactory source of funds documentation well in advance of engaging their conveyancer.
About the Author
Tariq Mubarak is one of the top property solicitors in England and he has helped hundreds of clients achieve success with their property goals.