Raising a housing deposit is becoming harder for first time
buyers and many will turn to family to help. Increasingly, property
lawyers are seeing deposits coming from wider savings clubs or
committees. Yet this particular process of fund raising has its
challenges from an anti-money laundering (AML) perspective.
How do the savings clubs work?
From the queries received through the Practice Advice Service,
it seems that family members and friends agree to make deposits
each month into the savings club from their wages. Monthly deposits
we have heard of vary in amounts from 100 to 500. The
club members will then each take turns to have access to the funds
within the club for larger purchases or emergencies. Their
entitlement to access the funds may be on the basis of a rota, on
the basis of drawing lots or after application to the committee for
a set release of funds.
So what then are the AML challenges?
Unlicensed investment scheme
Effectively such a savings club amounts to an unlicensed
investment scheme. Where such a scheme is carried on by way of
business, it will be in breach of the Financial Securities and
Markets Act 2000 (FSMA), which may result in the creation of the
proceeds of crime.
Where such an agreement is merely between family members, it may
not be by way of business, meaning that it does not need to
regulated and no offence has been committed. However, once the pool
of contributors widens, such breaches may become an issue. You can
contact the Financial Services Authority on 0845 606 1234 to
discuss further whether the savings club you are considering is
covered by FSMA.
Illegal lottery
If the access to funds is governed by the drawing of lots or any
other basis determined wholly by chance, you may have an illegal
lottery. The Gambling Commission issued guidance on their website
on the boundary between prize competitions, free draws and
lotteries in November 2007.
A scheme will be a simple lottery if the following criteria are
met:
- a person is required to pay to participate
- one or more prizes are allocated
- the allocation of the prize relies wholly on chance.
Under the Gambling Act 2005 lotteries remain the preserve of
good causes and therefore cannot be operated for commercial or
private gain. Lotteries must be licensed by the Gambling
Commission, unless they qualify in one of the exempt categories.
Unregistered lotteries are illegal and any funds received from them
will be considered the proceeds of crime.
For further information on lotteries, refer to the
Gambling Commission website.
Its legal - so how do I verify the funds
If the running of the savings club is lawful, having taken into
account the two proceeding issues, you still need to consider the
source of funds under regulation 8 of the Money Laundering
Regulations and consider whether you have a suspicion of money
laundering under the Proceeds of Crime Act.
Firstly, consider what you know about the client in terms of
their occupation and source of income and whether the amounts to be
deposited in the savings club on a monthly basis. In the present
economic climate wages have in many occupations been frozen for
some time, inflation is increasing the costs of living and
disposable incomes are being shrunk. Yet criminals continue to be
paid for illicit goods in cash and are continually looking for new
ways to make funds look more legitimate.
Is it reasonable to expect that your client, given their
specific circumstances, has for example 500 to deposit into
a savings committee every month, particularly if they are not able
to get access to that money for a number of months or even years
depending on the club's rules?
Ask for documentary evidence to support their explanation. Are
the funds held in a bank account? Can you see bank statements
showing their income being deposited into their account and their
contributions to the savings club being transferred; and can you
also see bank statements for the savings club showing their
deposits being received. If such bank statements are not available
- why not?
If it is because the money is simply held as cash, the situation
becomes even more challenging.
Is there a legitimate and lawful basis for holding large amounts
of cash outside of the financial system without proper records?
Is this a way of accumulating 'tax free' savings or
an inventive cover story for the possession and transfer of the
proceeds of crime?
The test for a reportable suspicion under POCA is quite low: a
possibility that is more than fanciful that the funds are the
proceeds of crime.
In any situation where the source of funds is not sufficiently
explained you will need to consider whether to proceed with the
transaction, and if so, whether you need consent to do so. This is
even more crucial if the funds have been held as cash.