ECSH51525 - Introduction to high value dealers
Definition
A high value dealer (HVD) is defined in The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), under regulation 14(1)(a) as a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when the trader makes or receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked.
Linked transactions
HMRC considers multiple cash payments against a single invoice, which together exceed the 10,000 euros threshold to be linked transactions, regardless of how long it takes to make this payment. For example, if a customer pays monthly instalments of £2,000 over a year in cash against the cost of a car.
When payments are artificially broken down into smaller amounts to try and avoid crossing the threshold to come within scope of MLR 2017. For example, a customer pays for four pallets of goods in cash each costing £5,000 making a total sale of £20,000. Normal business practice would be for all four pallets of goods to be on one invoice. To attempt to avoid their MLR 2017 obligations, the transaction is split into four invoices for £5,000 each, in order to appear below the HVD threshold although the total cash paid is still £20,000.
HVDs can trade in any goods, from retail sales of luxury items to wholesalers of meat, fish and poultry. EC-S breaks the HVD sector into 12 subsectors.
HVD services are occasionally provided in other supervised sectors.
Occasional transaction or a business relationship
Under MLR 2017, a purchase or sale for an HVD can either be by way of an occasional transaction, or by way of a business relationship.
A lot of sales and purchases in the HVD sector are likely to be occasional transactions, on the basis that there is no obligation or commitment on the customer to use the services or buy goods again or form an ongoing relationship with the HVD.
A “business relationship” means a business, professional or commercial relationship between a business and a customer, which—
Arises out of the business of the relevant person, and
Is expected by the business, at the time when contact is established, to have an element of duration.
This could be a contract to provide regular relevant payments, e.g. a customer asks an HVD to provide multiple goods over a period of time or sets up regular recurring invoices, all over the 10,000 euros threshold.
The HVD should then ensure that the customer making the payment of over 10,000 euros per transaction is registered with HMRC as an HVD before completing the transaction.
Linked transactions, where a customer makes a number of separate cash payments (for different items, or on different invoices) over a period of time may be considered a business relationship.
Exclusions
HVDs are excluded from financial activity carried out on a limited basis - please see Exclusions: Regulation 15.
Cash
Cash is defined in regulation 3 MLR 2017 as notes, coins and travellers’ cheques in any currency. Payments made using a credit or debit card or by bank transfer of 10,000 euros or more are not relevant HVD payments.
Under regulation 14(2)(a) and (b) MLR 2017 a payment does not cease to be a “payment in cash” if cash is paid by or on behalf of the person making the payment—
(a) to a person other than the other party to the transaction for the benefit of the other party,
or
(b) into a bank account for the benefit of the other party to the transaction.
In simple terms, this means an HVD can’t dismiss its responsibilities and avoid its obligations under MLR 2017 simply because cash was paid to another person (for example, a supplier) or into a bank account.
Where goods have been supplied, but the HVD did not handle the cash payment itself, for example, it instructed its customer to pay another person or deposit the cash over the counter into a bank account, the payment is still deemed to be a “payment in cash”. The firm or sole trader therefore falls within the definition of an HVD and must comply with MLR 2017, such as the obligation to apply anti-money laundering (AML) checks.
Informal Value Transfer System (IVTS)
Some customers choose to make payments by IVTS and in those instances the HVD may never actually meet the invoiced customer. The customer will say that the goods are being purchased by an agent and then shipped out to the end customer. The transactions are then carried out by agents in the UK, but they are not agents in the traditional sense, and may often be a family member, friend or business partner acting on behalf of the customer.
By way of business
An example of a ‘by way of business’ transaction would include an individual buying and selling cars with the intention of making a profit, but not a private individual selling a personal vehicle. For a more detailed explanation of ‘by way of business’ refer to ECSH 42525.
Goods
Goods are not defined in MLR 2017 so HMRC have adopted the dictionary definition of goods as ‘things that can be bought and sold, moved across borders and converted into cash’. e.g. someone selling a car where the customer pays cash equivalent to 10,000 euros or more is in scope of MLR 2017, whereas someone paying for the hire of a fleet of cars in cash over 10,000 euros is out of scope because hiring a car is a service. Services cannot be resold once the service has been used.
Goods are defined in the Sale of Goods Act 1979 s.61 which is more authoritative albeit not in the MLR 2017 context.
If there is a mixture of goods and services, you will need to work out what part of the value of the transaction is for goods only. This can normally be found on an invoice which breaks it down into different parts.
Goods do not include properties as they cannot be transported across borders. A business selling commercial or residential property, may be acting as an estate agency business and if so, it must register with HMRC.
The purchase of gift cards using cash is not relevant activity, as gift cards are not classed as goods.
Calculating the value of transactions
EC-S staff carrying out transaction testing may wish to use the monthly exchange rate published on gov.uk to establish whether a transaction crosses the 10,000-euro threshold, rather than establish the exchange rate on the day of each sale or purchase.
However, if there is a difference of opinion, (for example, if a transaction appears to be in scope but the business hasn’t carried out CDD, arguing that it was below the threshold), you will need to take into account how the business calculated the exchange rate on the day.
HVD pre-registration check
All HVD applications are put through an extended verification process called a pre-registration check which was introduced in 2014 due to the high levels of criminality in the alcohol sector, the increase in alcohol applications and there being no requirement for a fit and proper test for an HVD.
The purpose of this check is to ensure that the business is required to register, is aware of its legal responsibilities and that robust procedures are in place to assess and mitigate the risk of money laundering and terrorist financing before carrying out relevant business.
This includes checking whether the business has taken appropriate steps to identify and assess the risks of money laundering, terrorist and proliferation financing to which it is subject, has kept a written record of its risk assessment and can provide information on which it was based.
As a result of this, additional information may be requested, if necessary, in order to determine the application for registration.
Can a business remain on the register “just in case”?
Some HVDs may be registered with HMRC just in case they carry out transactions over the threshold. This would be more commonly seen with auction houses due to the cost of a goods being very subjective. The business may normally not sell goods over the threshold. They could however sell goods that were estimated to sell under the threshold, but bids make the sale go over the threshold.
If an HVD does remain registered it must be able to demonstrate that it can comply with MLR 2017, even if it doesn’t expect to carry out regulated activity. This means it must have an up-to-date risk assessment in writing, setting out the risks associated with handling payments over the threshold and ensure its policies, controls and procedures align with the AML guidance for HVDs. It must also ensure staff are regularly trained.
Important note
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)