Why has this change been brought in?
Over the last few years it has become apparent to the government that criminals sometimes rent properties in order to launder their dirty money.
The link between real estate and money laundering is a global phenomenon that has been perpetrated for decades. Criminal investments into real estate is today considered one of the most common methods of laundering illegal funds. Property is attractive due to its profitability and crucially, investments in property can allow criminals to add a veil of legitimacy and normality to their ill-gotten gains.
What is Money Laundering and what is AML?
Money laundering happens when criminals use rent payments, deposits, or property deals to hide stolen or illegal money, to move illegal money, to avoid taxes, or to fund further criminal activity.
Criminals will use fake identities or stolen documents to rent properties for illegal purposes, such as:
- Hiding illicit money through rent payments.
- Setting up fraudulent businesses at rented addresses.
- Using property for criminal activity, like drug operations, human trafficking or even illegal subletting.
Anti-Money Laundering (AML) aims to prevent money laundering through a set of laws designed to stop criminals from using rental properties to facilitate their money laundering activities.
The Anti-money Laundering Regulations add compliance obligations to the UK rental market to ensure that everyone involved in the rental transaction is who they say they are, thus reducing the risk of fraud, illegal activities and financial crime.
What does this mean for Letting Agents?
Previously, in order to prevent money laundering, letting agents were expected to verify the landlord’s identity and ownership of a property before taking them on as a client, as well as confirm the real identity of tenants before enabling the signing of a rental contract . The aim was to ensure AML compliance within the (unregulated) UK rental market.
It is however important to note that neither letting agents or landlords were obligated to formally register for AML supervision with HMRC unless they arranged a tenancy where the rent exceeded €10,000 per month threshold set out in the Anti-money Laundering Regulations.
This meant that most letting agents were simply required not to facilitate fraudsters from posing as landlords to illegally rent out properties they don’t own or letting property to tenants who aim to use the property for criminal activity or illegal gains. Letting agents were not required to formally report illegal or fraudulent activity.
In one of the biggest changes in the rules for most letting agents however, a new requirement to verify the identities of both tenants and landlords before a tenancy agreement is signed, to ensure that none of the parties to a proposed tenancy are subject to sanctions and, crucially, to report any confirmed or suspected sanctions breaches to the Office of Financial Sanctions Implementation (OFSI).
All letting agents and landlords in the UK must comply with these new requirements, regardless of the size of the letting agency, the nature of their clients or tenants, or the value of the rent per month.
The sanctions regime applies alongside the existing money laundering regulations.
What are Sanctions?
A sanction is a restriction or a prohibition from trading with or being traded with and are are applied to people, organisations, commercial entities and even countries. Sanctions are applied when the authorities have identified that a party is involved, or suspected of being involved, in illegal activities. These restrictions are set by the government to prevent financial crime, protect national security and uphold the UK’s international obligations.
There are a variety of sanctions that can be applied but financial sanctions, which block access to assets, restrict financial services, or stop services from being provided to specific individuals or entities, are the sanctions that are relevant under the new rules for letting agents.
All letting agents and landlords are now required to check tenants and landlords to make sure they are not involved in crime, fraud, or financial wrongdoing or subject to financial sanctions.
Identity and Sanction Checks
In essence, the letting agent must verify the identity and check for sanctions against every adult tenant who will be living at the property, as well as the identity of every landlord.
The timing of the reporting obligations is defined under the AML regulations as being at the point when the landlord or the applicant tenant enters into a ‘business relationship’ with the agent. A business relationship for landlords means once the landlord has formally instructed the agent and the letting agent commences work for the landlord in response to that instruction.
In practice it is recommended that the landlords should be checked as early as possible in the onboarding process when the landlord instructs you to let a property. Tenants should be checked after a landlord accepts the tenant’s offer but before the tenancy agreement is signed.
If a significant amount of time has passed between the check and the signing of a tenancy agreement, or if the start of the tenancy is delayed by weeks or months, or if you are renewing a tenancy that started before these obligations came into effect, to be safe and for your own peace of mind, it is also recommended that you re-run the checks at a point closer to the start of the tenancy or before you renew the tenancy.
How to Check for Sanctions
Manually checking each person is time-consuming and risks human error, especially with individuals with common names, multiple names or spelling variations in names. It is also worth noting that the UK sanctions list is long and constantly changing, sometimes as frequently as on a daily basis. Therefore, it is recommended that letting agents use a third party online verification process rather than a manual process for undertaking these checks.
What to collect from Landlords:
- One official photo ID document (passport or driving licence).
- Proof of address (a recent utility bill, bank statement, or council tax bill, dated within the last 3 months).
- Proof of property ownership (Land Registry records, mortgage statement, or recent utility bill in their name).
What to collect from Tenants:
- One official photo ID document (passport or driving licence).
- Proof of address (a recent utility bill, bank statement, or council tax bill, dated within the last 3 months).
Red flags to watch out for:
- The tenant or landlord refuses to provide ID or makes excuses to avoid providing their ID.
- The landlord refuses to provide proof of ownership of the property.
- Documents that are provided look fake, edited, have inconsistent details or have signs of tampering (e.g., blurry edges or misaligned text on documents).
- Documents that show a different name than the one given by the landlord or tenant.
- The address on the ID doesn’t match the address on the other documents.
- The tenant insists on paying in large amounts of cash.
- The landlord asks for the rent to be paid to a third party or an offshore account.
If anything seems suspicious, do not proceed with the rental until you have verified the documents properly either manually or through your third party verification service provider.
Record Keeping
Proper record-keeping protects landlords and agents from legal risks and helps demonstrate that all necessary checks were completed correctly, providing a clear record of due diligence in case of an audit.
Under the new rules, landlords and letting agents must store copies of all identity documents and verification checks for at least five years to ensure compliance with regulations.
To keep records secure, digital storage with encryption is recommended. Access should be restricted to authorised personnel only to prevent data breaches.
Summary of the changes in the rules for Letting Agents Landlords
| Before 14 May 2025 | After 14 May 2025 |
|---|---|
| Only properties renting at a threshold of €10,000 (+- £8,300+) or more per month needed AML checks | Every rental, irrespective of the rental price, now needs to be checked |
| Letting agents’ AML duties only applied when the threshold was hit or exceeded | Letting agents (and private landlords) must now check tenants and landlords |
| No legal requirement to check the UK sanctions list | All agents (and landlords) must now check if tenants are on the UK sanctions list |
| Reporting requirements were limited to cases where the threshold was reached or where a suspicion arose under the Proceeds of Crime Act (POCA) | Agents (and landlords) must report suspicious activities to Office of Financial Sanctions Implementation (OFSI) without delay |
| Few penalties for non-compliance | Failure to comply can lead to huge fines (up to £1 million or 50% of the transaction value, whichever is higher), or even up to 7 years in prison |
By maintaining well-organised and protected records, letting agents and landlords can safeguard themselves against penalties and legal issues, while ensuring a smooth compliance process.