The Economic Crime Levy, a year on

Many housing associations find themselves within the scope of the regulations because they carry out credit-related activities or conduct ‘estate agency business’ (particularly when acting as the estate agent for the co-owner on shared ownership resales).

They may also conduct other activities which fall within the scope of the regulations. Depending on the nature of those activities, housing associations are usually required to register with and be supervised by either the Financial Conduct Authority (FCA) or HM Revenue and Customs.

“The National Housing Federation recently announced that it was preparing an impact assessment to demonstrate how the Economic Crime Levy was adversely affecting housing associations”

The application of the ECL is based purely on revenue, rather than risk. Therefore, even if the part of the business which is within scope is very small or low risk (as is generally the case in the sector), the association’s liability to pay the levy is not lessened, making it rather punitive and disproportionate.

Affected housing associations must pay either £10,000 or £36,000 per year, depending on their level of turnover. For many housing associations, the ECL is an additional burden at a time when resources are already under strain.

The National Housing Federation recently announced that it was preparing an impact assessment to demonstrate how the ECL was adversely affecting housing associations, and the hope is that some degree of proportionality will be applied to the levy in the future.

While the risks around money laundering in the sector remain low, housing associations still have a key role to play in tackling economic crime.

In early March, the FCA delivered a public letter to all organisations registered/supervised by it in relation to compliance with the Money Laundering Regulations, identifying four weaknesses in anti-money laundering compliance and asking those firms to undertake a gap analysis in these areas by early September.

The first weakness related to the business model. The FCA identified significant discrepancies between organisations’ registered and actual activities, and insufficient controls and resources due to not keeping pace with business growth. Housing associations should regularly review their business activities to ensure that their anti-money laundering registrations remain appropriate.

We have worked with many housing associations that are registered for anti-money laundering supervision, but actually fall within various exemptions, meaning they don’t currently require registration. Equally, we have worked with others that were unaware that they fell within the scope of the Money Laundering Regulations. 

The laws and guidance around the scope of the regulations are complex and we would recommend that legal advice is sought.

Given the current appetite for mergers within the sector, anti-money laundering should also be a consideration in due diligence, to ascertain which such registrations any potential merger partner has/ should have. Consideration should also be given to what policies, controls and procedures may be appropriate for a larger business after a merger.

“The FCA observed a lack of resources, inadequate training and a lack of appropriate oversight from senior management”

Second, risk assessment. The FCA found weaknesses in both business-wide risk assessments and individual customer risk assessments, including lack of detail, unclear methodologies, inarticulate mitigation strategies, lack of documentation and even complete absence of a risk assessment.

An anti-money laundering risk assessment is a crucial document which should set the scene for an organisation’s anti-money laundering approach. Any related policies, controls and procedures you put in place should stem from the risks identified in such an assessment. They must be business specific and should consider, among other things, your geographical location and the profile of your customers.

Any anti-money laundering risk assessment must be written and should be reviewed at least once a year. 

Third, due diligence, ongoing monitoring and policies and procedures. The FCA identified that lack of detail in policies creates ambiguity around actions that staff need to take to comply with their obligations under the Money Laundering Regulations. In some cases, they observed a lack of appropriately documented policies and procedures for investigating and recording suspicious activity.

It is essential to have clear, written policies and procedures around customer due diligence and reporting suspicions of money laundering. All relevant staff should be familiar with these processes.

The final weakness involves governance, management information and training. The FCA observed a lack of resources, inadequate training and a lack of appropriate oversight from senior management.

It is recommended that relevant staff receive training at least every two years and it is important to keep records of the type of training received and who has attended/completed it.

There should also be a clear audit trail for financial crime-related decision-making within an organisation, with staff of sufficient seniority appointed as a money-laundering reporting officer and money-laundering compliance officer, where appropriate.

While the identified weaknesses are not specific to the social housing sector, they provide a useful basis for all housing associations to assess and improve their anti-money laundering compliance.

Rachel Orgill-Harris, partner, Devonshires