Letting Agents as Sanctions Police: Obligations Unveiled!

Navigating Sanctions in Property Letting: New Legal Obligations

In this episode of 'That Retail Property Guy,' host Gary Marshall discusses the new legal obligations for UK letting agents effective from May 14, 2025, which require financial sanctions checks on both landlords and tenants. These measures aim to prevent financial crime, safeguard national security and comply with international obligations. Gary explores the implications for letting agents, including the procedural burdens and significant penalties for non-compliance. He also delves into the potential impact on retailers and other businesses, emphasising the importance of thorough checks and documentation in all leasing transactions. The episode underscores the overall significance of these legal changes across various sectors.

00:00 Introduction to the Podcast

00:19 New Legal Obligations for Letting Agents

01:05 Impact on Letting Agents and Compliance

03:07 The Disappearing 10000 Euro Threshold

07:03 Sanctions and Their Implications

07:51 Performing Sanctions Checks

09:31 Challenges and Practical Steps

11:35 Conclusion and Final Thoughts

The UK Sanctions List - GOV.UK

Goodlord's Tenant and landlord sanctions checks FAQs

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Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics from the perspective of a retailer as tenant sharing stories and insights through Gary's unique lens. We hope you'll be entertained, enlightened, and may be a little inspired. International sanctions, financial crime, national security. This might sound like the overture to a spine novel, but from the 14th of May, 2025. This level of involvement in international controls now features heavily in the everyday life of property letting agents. New legal obligations now apply. So all UK letting agents who are involved in putting together deals between landlords and tenants must conduct financial sanctions checks on both the landlord and the tenant before proceeding with any deal that's both the landlord and the tenant, even if the agent is only acting for and being paid by one of those parties. This is a new obligation to the state. It seems a bit draconian, a bit big brother. It's intended as part of a wide scale effort to prevent sanctioned individuals and organizations from exploiting the property rental market to move or launder money to generate income to operate in business. But will the major impact of these new rules fall on those undesirables, or will it mainly fall on the businesses that are compliant while the bad guys simply find a new loophole as a workaround Under these new rules, letting agents are now categorized as relevant firms in inverted commas, meaning they have a legal obligation to conduct sanctions checks when they're putting together a letting deal. And then to report any suspected breaches of the regulations to the Office of Financial Sanctions Implementation, the OFSI. And in fact, the checks don't just apply to the actual proposed landlord and tenant, but to any controlling parties or sources of funding or guarantors or men, anyone involved in the letting transaction who has a controlling interest and could be deemed by the OFSI to be dodgy. There's a lot of chatter on the tinter web about these new rules, and a lot of that chatter seems to focus on just the residential sector, but the rules are not restricted. They apply to commercial and res eAgent alike. At this point, it's interesting to note that the rules apply to agents who conduct this business as a middleman, a broker, a facilitator, but not to direct self-managing landlords who don't need to carry out these checks because they're not categorized within those new rules as relevant firms in inverted comm. Well, not yet. At any rate, so a landlord doing his own lettings can avoid the new red tape, but a landlord who retains an agent to do the heavy lifting passes this huge burden of responsibility onto them. You could almost imagine some letting firms concluding. Bly me, this new scenario is a bit too hot for me. I'm getting outta here. Maybe I'll do estate management or rent reviews instead. Now some agents, particularly those acting in affluent areas or with big space units might think, hang on, this isn't new. We've been doing something like this for years. And that could be because before May the 14th, 2025, letting agents were obliged to conduct sanctions checks where the monthly rent exceeded 10,000 euros, which equates to approximately eight and a half grand depending on the fluctuations in the currency conversion rate. Now this was almost an arbitrary threshold, and criminals or other undesirables could easily evade it by setting up all their deals just below the threshold. But removing that threshold is now striving to close the loophole, denying the bad guys an opportunity to run rings around the system, well at least until they find another loophole. So with effect from the 14th of May, 2025, that 10,000 euro threshold has been removed. And all letting agents, residential or commercial now have a mandatory obligation to act as sanctions police, and there are big penalties for failure to comply. Fines could run into millions of pounds. The penalty could even include criminal prosecution and jail time. This is serious stuff, and yet if you're a retailer, not a landlord or an agent. You might be thinking, what has this got to do with me? I'm not a relevant firm in inverted commas on that list, but in every deal you do from now going forwards, you will be under scrutiny, like never before. Questions will be asked, evidence will be demanded, challenges might be raised, and all of this might seem like bureaucracy gone mad. And of course it could easily add lengthy delays in costs to any letting transaction. Oh, and let's not forget assignments, so it's not just new lettings and renewals. In theory, these transactions are also subject to the new rules. Of course, letting agents will get savvy pretty quickly. It's been a longstanding rule that a good agent should always know their client to avoid delays and to avoid the risk of getting tangled in something unsavory. Previously, this meant doing background checks at the point of instruction alongside the more mundane but obvious checks, like verifying proof of identity and establishing ownership or controlling rights in the property that they're proposing to let, so the letting agent really needs to consider. Just who they might be representing as a landlord. If a potential landlord's credentials look dodgy, they might just be too dodgy to handle. And of course, dodgy now takes on a whole new level of seriousness. Russian Mafia Russia itself, and a long, long list of other social and political pariahs, misfits regimes, organized crime groups or freedom fighters slash terrorists. Of course, a letting agent generally has discussions with any number of potential tenants carrying out deep and robust checks on every single inquiry. Mine a cost, a fortune, and let's consider who's paying for that. Would it be the landlord or should every prospective applicant pay a checking fee? And B, add such delays that good deals founder on the rocks. So the tenant's checks are expected only really to be procured on the winning bidder, the successful party who is most likely to complete the deal. No checks are required on everyone else, only on the likely candidate, but of course, these checks all have to happen before concluding the deal. So at what point does it happen? Is it after broadly agreeing the terms, but before instructing the lawyers? Definitely before concluding the contract itself, whether via lawyers or not, so we could have swift progress through inquiry and negotiations and Degreeing Heads of terms. But they suddenly stall while these checks are carried out and more on the actual checks later for the moment. Let's take a step back. What are these sanctions? Why do they exist? Who's on the list of persona? Non grata sanctions are restrictions that the government sometimes acting together with the international community. Put in place to prevent financial crime, to protect national security and to uphold international obligations. Sanctions can apply to people, to businesses, or even to countries. We're all pretty familiar now with Russia being on this list, but many other countries have sanctions against them, like North Korea. The consequence of sanctions can be financial, restricting financial activity, or freezing assets. Or trade related to prevent or limit the trade of goods or personal, such as blocking travel or immigration to prevent specific named persons from landing on our shores. So how does a letting agent perform these checks? How do they establish if a prospective tenant or landlord, or indeed a person with a controlling interest or their financial backer, et cetera, features on the UK sanctions list? Could they Google it? Well, that could be a start, but it might not be the definitive test. It might not be watertight, resilient, and unchanging. When agents carry out these checks, they need to be sure to be diligent, robust and comprehensive, and they need to keep adequate and competent records. To help them later demonstrate how diligent they were in case the OFSI ever come after them. No agent wants to be in the unenviable position of having done the checks, but not being able to prove it, to not be able to provide clear and unequivocal evidence that they did in fact carry out the checks and they got a clear result. The actual steps to carry out a manual check should, in theory, be pretty simple, but maybe slow, maybe unreliable, and possibly susceptible to error or omission. Technically, the agent just needs to access gov. UK's public domain, which has a readily available list of all the named entities and individuals currently subject to UK sanctions. There's a link in the show notes, check it out, but that list changes every day. Yesterday's result might be useless today. And the agent has to search manually choosing relevant or necessary search terms like a nay or a keyword or some other identifying criteria. If they get that step wrong and therefore they get a wrong or incomplete result, they could face a massive fine or jail time. Now the nice people at Good Lord. And again, there's a link in the notes. Have a look, have a handy guide to these manual steps. Although clearly with a view to convincing agents to sign up for a better automated system that removes the delay and the risks, and maybe that's a good idea. Of course, other support channels are available, but a search might produce a number of potential matches with no guarantee that any of them is spot on. Generally in life, there are no cast iron guaranteed unique identifiers, no one time only references and never repeated code numbers. A lookalike result could be a bullseye hit or a missed by a mile. So the agent carries the burden to investigate further, and if they can't be absolutely sure, then there's no room for error. So the only practical next step is to ask the OFSI to adjudicate to give a pass or a fail. So we should imagine that then there is a long wait for the OFSI response. A bit like communicating with HMRC or running in treacle. With all of these manual checks and manual referrals, there are likely to be backlogs and the agent shouldn't take the risk to proceed until they get the necessary or clear. The delay could put the deal in jeopardy, but that's preferable to putting the agents in jeopardy. Basically, in any case where the letting agent isn't sure, or even if they are sure, but they need a belt and braces clearance to avoid the risk to themselves, then the agent could feel compelled to report everything to the OFSI. And absolutely if they feel anything is less than acceptable. If there's any hint or width, OB dubious uncertainty, they must immediately refer their findings to the OFSI must without delay, no wiggle room, no giving the benefit of the doubt, no bending the rules. It's just not worth the agent's personal risk of either a massive fine or jail time for being complicit. Whether that's wittingly or unwittingly in financial crime or international power struggles. So where does this leave us? Well, all letting agents, commercial or resi, large firm or small practice now have this obligation to monitor and apply the rules of sanctions. They need robust internal processes in place to guard against intentional or accidental avoidance. They need to be aware of who in their organization is the ultimately responsible party that could face the fine or the jail time. Could the managing partner carry the can for an oversight by an inexperienced junior colleague? Is this a business risk that their professional indemnity insurers would even consider covering, who'd be a letting agent with this risk hanging overhead? And retailers may find themselves getting a grilling like never before, as they put forward their best bids for new site acquisitions. As they trigger their lease renewals, as they request approval to assign or sublet, the agents will need strong evidence of who the legal parties are, who provides the money behind them, and where that power is domiciled. It might no longer be sufficient to refer an agent to company's house to check the name directors. It might not be sufficient to provide a glossy pack of credentials that mentions or fails to mention offshore entities, voting rights, and funding arrangements. There's no point in pushing back in frustration if an agent or their lawyer asks more detailed questions, demands more documentation, urges for greater clarity. So astute retailers should probably get ahead of that curve. They should anticipate the challenges, recognize the agent's new obligations, and prepare suitable evidence and be ready to endorse it. And as I mentioned earlier, will all of this actually have a substantial impact on those undesirables or will they simply exploit the obvious loophole to cut out the middleman agent and do deals directly themselves under a corporate banner of convenience, which isn't subject to this regulation. thank you for listening to that Retail Property guy. If you enjoyed the show, please consider leaving a review. Your feedback is greatly appreciated. For more information, visit that retail property guy.com. Thanks again for tuning in.