Save content
Have you found this content useful? Use the button above to save it to your profile.
Jackson Grundy Estate Agents
Jackson_Grundy
Jackson Grundy Estate Agents win AML costs appeal

Estate agent wins AML costs appeal

by
23rd May 2017
Save content
Have you found this content useful? Use the button above to save it to your profile.

An upper tier tax tribunal decision on anti-money laundering penalties throws new light on the grey areas in this area of professional regulation - and the grounds for overturning “unreasonable” fines.

Back when the Office of Fair Trading regulated estate agents for anti-money laundering compliance, estate agent Jackson Grundy was found to have breached AML regulations and fined £169,652.

When HMRC subsequently assumed regulatory oversight in 2014, Grundy sought a review, but the tax department decided the original penalty was justified.

On appeal the estate agent won a 95% reduction to £5,000 at the first tier tribunal on the basis that the original fine was disproportionate. In its internal review and appeal defence, HMRC stuck to the line that it couldn’t apply a different penalty retrospectively from the amount decided by the OFT. Jackson Grundy representatives countered that when HMRC took over regulatory responsibility, it had the opportunity to review the original fine and apply its own penalty policy, but chose not to.

The original tribunal judge took the same view, and imposed what he thought was a more proportionate amount.

Before the FTT hearing, HMRC ignored a “suggestion” from the estate agent’s representatives that the cost of a hearing could be avoided if it imposed a fine of £15,000-£20,000. After winning its appeal, Jackson Grundy went back with an application for costs amounting to £55,887.17, arguing that HMRC’s defence of the original appeal had been “improper”. The tribunal agreed.

HMRC accepted the tribunal decision on the penalty itself, but appealed against the costs decision.

Poor documentation

The UTT case of HMRC v Jackson Grundy [2017] UKUT 180 (TCC) featured some wrangling around the specific circumstances of the regulatory handover, but as a precedent-setting tribunal decision, it provides relevant points of argument for any accountant not regulated by one of the profession’s recognised bodies and subject to HMRC’s regime.

For purposes of comparison, it is worth reviewing the failures that attracted the original penalty. The estate agent’s troubles started with an OFT compliance visit that found “significant and widespread” failings in how Jackson Grundy observed the AML regulations. These included:

  • inadequate due diligence when taking on properties from new clients
  • failing to take a “risk-sensitive” approach to due diligience and demonstrating that it was undertaking checks appropriate to the circumstances
  • not monitoring that transactions were consistent with client background information the estate agent should have obtained
  • failing to keep the required client identity records
  • not maintaining appropriate risk-sensitive policies and procedures relating to due diligence measures
  • failing to train employees on money laundering and terrorist financing, particulary in how to recognise and deal with suspect transactions

In reviewing the lower tier decision, the upper tier judges Colin Bishopp and Timothy Herrington repeated the first tier judge’s conclusion that the estate agent’s faults were more technical than “substantive failings likely to enable fraudsters and terrorists to invest in real property in Northamptonshire villages”.

The managing director familiarised himself with the AML requirements and in practice the firm’s day-to-day practices would have been unlikely to allow a fraudster to proceed unchecked. While the company’s AML regime was inadequate, “There was never any allegation that these failures had led to any actual instances of JGL having facilitated  transactions related to criminal activity, money laundering or terrorist financing,” the judges concluded in their decision.

“We do not underestimate the importance of record-keeping, but a failure of record-keeping is plainly less serious than a failure to undertake checks at all.”

Open to negotiation

The upper tier also considered HMRC’s arguments that it couldn’t change or enter into negotiations on a penalty that had already been settled by a separate body, but disagreed. There was a penalty mechanism available under the VAT Act where even though an appeal notice had been lodged, it could be settled without going before a tribunal.

“The parties could have come to an agreement to vary the penalty under section 85 VATA and such an agreement would have the same effect as if the FTT had determined the appeal in accordance with the terms of the agreement between the parties,” the judges said.

Proportionality

The law around anti-money laundering penalties stipulates that they should be “effective, proportionate and dissuasive”. HMRC’s reviewer focused on the first and final elements of that formula, but overlooked proportionality. HMRC’s stance focused on the gravity of the failings in relation to money laundering and terrorist financing, but not on the impact on the estate agent.

“While a penalty must be proportionate to the offence, it must also be proportionate to the offender,” the judges commented. There was “conspicuously” no examination of the company’s ability to pay nearly £170,000 in penalties.

Jackson Grundy’s protest that its penalty was 17 times higher than any other imposed on an estate agent was “recorded but disregarded” during the review process.

Public bodies levying penalties have a duty to consider all the relevant circsumstances including whether a penalty matches those previously imposed. However, “There is no evidence that either the OFT or HMRC carried out such a comparative exercise,” the judges noted.

Confirming the award of costs to the estate agent the decision concluded: “It should have been apparent to HMRC, reviewing the matter dispassionately, and by reference to the information available to them when the notice of appeal was served on them, that the review decision was so flawed that it could not properly be defended. It follows that HMRC acted unreasonably in ‘defending or conducting the proceedings’.”

Some questions still remain around the elements of the £55,000 costs claim and these were referred to a superior court costs judge for detailed assessment.

HMRC’s apparent instransigence in this case appears to be a case of trying to draw a line under any AML penalties it inherited from other supervisory bodies in 2014, possibly for financial reasons but also to lessen the potential workload.

But on a more general level, anyone encountering HMRC intractability on AML penalties could remind the department of the Jackson Grundy decision that penalties can be open to negotiation and settlement outside the courtroom - and that judges will want to see proper consideration for proportionality and the professional’s ability to pay.

Replies (1)

Please login or register to join the discussion.

avatar
By Business_World
07th Mar 2020 16:19

Hi,
I'm new to the Real Estate business.
I have an accounting question!
Does estate agent collection of tenants' rents is classed as their Sales Turnover or Cost of Sales in the P@L Account?
From my perspective, estate agent work on the commission basis. Lets say, ABC Estate Ltd collected £95,000 during the ARD into their limited company business a/c on behalf of the client's tenants. After deducting 5% commission of £4750 the agent transferred the rest £90,250 into their client (landlord) bank account imminently.
What sales figure do ABC Estate Ltd will include in their final accounts, is it £95000 Sales and £90,250 cost of sales or is it £4750 ???

Thanks in advance.

Thanks (0)