The bank of Mum and Dad is a significant source of funds for home buyers. But how risky is it, and do estate agents and property lawyers need to apply more thorough anti-money laundering (AML) verification and Source of Funds (SoF) checks when a transaction involves such funds?
Each year £17bn is gifted or loaned informally, with almost all of this money going from parents to their adult children, according to the think tank the Institute for Fiscal Studies (IFS).
Around half the value of gifts received is used to help purchase a property or carry out a home improvement. On average, beneficiaries received more than £20,000 each.
Given the sums involved, estate agents and property lawyers must not assume that the bank of Mum and Dad is low risk and that, just because the money is in a UK bank account, it is legitimate.
It is imperative to go beyond mere proof of funds and delve deeper into the source of these funds.
Property professionals should not rely on self-declaration from their clients or the donor. Instead, those gifting the money must be subject to the same checks and verification we would expect of those buying the property.
Understanding where the money comes from is crucial to getting comfortable that the money is legitimate. The first question must be how have the parents accumulated the funds to be able to gift them.
Whether the funds come from savings, an inheritance, an asset sale, gambling winnings, or crypto gains, each requires evidence and verification. If the money is from savings, professionals need to see the savings account statement. This should be accompanied by an understanding of the activity that generated those funds.
If the money is from a lump sum from an asset sale or inheritance, professionals should seek documentary evidence such as a copy of solicitors’ letters.
If the funds come from another jurisdiction, there is more reason for property professionals to conduct a thorough source of funds check. Agents and lawyers need to be sure there is a good reason for the gift to have come from overseas.
If necessary, they should look at the jurisdiction itself and the AML profile risk of that country. Tools such as KnowYourCountry.com and Transparency International Corruption Perceptions Index are useful for gauging the level of risk.
While it is sometimes challenging for property professionals to know whether they have investigated enough, if they are uncertain, the chances are they have not.
Ultimately, despite perceptions that some sources of funds – like a gift from the bank of Mum and Dad are low risk – they are not.
To remain compliant and protect against money laundering, agents and lawyers must carry out due diligence and get comfortable about where a client’s or their donor’s funds have come from.
Property professionals must undertake a comprehensive analysis of the donor’s personal and professional background, financial statements and tax returns, and public records and reputation.
Clients may not like it, but it helps protect people and society against fraud and money laundering. It should not be overlooked.
Harriet Holmes is AML services manager at risk management platform Thirdfort
