The luxury residential property market has long been a prime target for money laundering and renewed efforts by authorities are continuing on a global scale to contain the problem. A just released report by Cara Tabachnik of Mansion Global gives a perspective on the issue stating:
“Over the past year, a laundry list of suspects ranging from Chinese gambling rings, a Venezuelan television executive, and a banking official from Azerbaijan have been accused of using their ill-gained financial proceeds to purchase properties at some of the most exclusive addresses in the world—a C$22 million (US$16.8 million) gabled mansion nestled in upscale Shaughnessy, Vancouver; a US$8.85 million four-bedroom penthouse on Riverside Boulevard on the west side of Manhattan, and a £11.5 million (US$14.7 million), five-bedroom property in the tony London neighborhood of Knightsbridge.”
Anti-corruption author Diane Francis reports in Canada’s Financial Post that as a result of money laundering in luxury prime real estate Vancouver has become unaffordable due to high prices.
Ms. Francis says:
“The culprit has been money laundering — by criminals, kleptocrats and tax evaders. Their favourite means of hiding money is real estate. In 2018, Ontario and B.C. imposed a 15 per cent tax on non-resident buyers, resulting in home sales falling around 40 per cent in Vancouver in January compared to the same period last year.”
“Legal loopholes give Canada a bad name when it comes to money laundering.”
The RCMP puts the estimate of laundered money into Canada at $15 billion a year.
For Toronto the average home sale for 2018 was $787,300 down from a previous average of $822,681 but the costs for the market are still considered excessive.
The problem arises from a lack of financial transparency by foreign-buyers when it comes to a disclosure rules.
An analysis by the anti-corruption organisation Transparency International finds that in 2015 for the luxury property market in Vancouver the most expensive 100 properties over 50% were purchased by foreign shell companies and trusts. The report also included in Montreal and Toronto with laundered money invested in vacant condominiums and it is not all in just real estate.
Carole James, minister of finance says in Mansion Global:
"Our overheated housing market is vulnerable to those looking to exploit loopholes and engage in illicit activity, while families are being priced out.”
Canadian real estate brokers are required to report all cash transactions over C$10,000 to The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Rules in effect since 2004 prohibits lawyers accepting cash for escrow accounts in real estate purchases.
Recommendations by the United Nation’s Financial Action Task Force (FATF) is for Canada to reign in on money laundering enablers in Canada including lawyers, real estate agents, notaries and developers.
The FATF report states:
“Requirements (in Canada) are inoperative toward legal counsels, legal firms and Quebec notaries.”
“In light of these professionals’ key gatekeeper role, in particular in high-risk sectors and activities such as real-estate transactions and the formation of corporations and trusts, this constitutes a serious impediment to Canada’s efforts to fight money laundering (or terrorist financing).”
Recommendations by the FATF for Canada include:
“— Create a public registry of beneficial owners, and penalties for non-disclosure;
— Lawyers, real estate agents and notaries must report suspicious owners and transactions, as is now required of banks;
— Speculation must be stopped by taxing residences that are unoccupied, which will also free up supply; and
— Where real estate prices have soared above affordable levels for locals, bans on foreign ownership should be imposed as has been done in New Zealand, China, Hong Kong, Switzerland, Greece, Hungary, Denmark, Poland and Malta, among others.”
Rest of the World
On a global risk analysis scale Accuity located in Illinois puts the total amount of per year of money laundering at $1.6 trillion US dollars.
Patrick Hinchin, Accuity’s vice president of commercial strategy in Mansion Global:
"It was becoming increasingly apparent in countries such as Australia, America, and the United Kingdom that a number of assets were being purchased, possibly linked to political or criminal activities where money laundering was about to occur.”
Not surprisingly the United States has been a big prize for international and domestic money laundering. The US Treasury Department’ s investigative bureau the Financial Crimes Enforcement Network (FinCen) last November 2018 made new rules by lowering the amount of of money needed by title companies for transactions to $300,000 and above to identify shell companies with cryptocurrency which in the past was not necessary.
This new directive by FinCen now applies to title companies in purchases of luxury real estate transactions in Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco and Seattle. As expected the ability to launder dirty money will still be attempted in locations outside these cities.
A spokesman for FinCen tells Mansion Global that since their directive went into effect in January 2016 that all cash purchases for luxury real estate dropped by 70%.
After the 9/11 terror attacks in New York the Bush administration and Congress legislated the Patriot Act that included anti-money laundering rules that were to be enforced by the U.S. Treasury Department. The NY Post has reported that a temporary exemption was given to real estate at the time that is still in effect.
Louise Shelley, author of “Dark Commerce: How a New Illicit Economy Is Threatening Our Future" tells the NY Post:
“It sends the message that crime does pay."
The biggest problem for stopping money laundering in property are LLC's, limited liability companies, which can be set up in the U.S. giving the ability to hide identities.
"The cloaked entities allow celebrities to purchase properties out of the public eye, criminals to buy real estate with stolen cash — and terrorists to fund their deadly operations right under our noses, they say."
US Rep. Carolyn Maloney (D-NY) said:
“Law enforcement has been asking for years for new laws so that they can follow the money and not be stymied in their investigation by anonymous shell companies.’’
“The US should not be a safe haven for money-laundering and criminals’ funds.”
One example in New York City are the towers at 650 Fifth Avenue that were built in 1978 by the Shah of Iran before he was overthrown by the revolutionary government. Federal authorities say the building was transferred to entities with ties to mid-east terror organisations. Critics argue that as result Iran has been able to raise millions in rental fees.
But justice in the end prevailed and the $800 million 36 storey tower was in 2017 awarded to the U.S. Government by a jury decision in Manhattan. Plans included selling the towers and giving the proceeds to the families and survivors who were victims of Iranian-backed terror groups.
The boom in luxury property sales in Britain has been a haven for money laundering especially in London. In 2018 Parliament introduced new legislation requiring foreign-buyers to be personally identified as yet however the new rules have not been passed in Parliament but by 2021 a registry for the public is to be released in 2021.
Regulations had previously gone into effect in 2017 for estate agents to perform due diligence on buyers before transactions are started.
Another new order put into place went into to effect 31 January 2018 giving agencies the ability to examine the backgrounds of individuals who may be connected to organise crime when property is purchased.
One example is Zamira Hajiyeva the spouse of the Azerbaijan bank chairman Jahangir Hajiyev who will be in a London court this June to explain her purchases of luxury property.
Transparency International of Berlin reported in 2017 that €30 billion was laundered into German real estate and called on the German government to overhaul their real estate laws to increase the ability to identify the person(s) or shell companies purchasing property.
Germany did introduce in 2017 a transparency registry requiring all shell companies having to identify the true owners of all property or face a fine of €1 million.
Brigitte Unger, a professor at the University of Utrecht in the Netherlands in Mansion Global:
"In Europe, we should know about who actually owns houses. There are ways to trace suspicious purchases or owners.”
Ms. Unger conducted research in the Netherlands that found 25 indicators that would expose property purchased by money laundering including
“...unusual financing structures, mortgages that don’t match the income of purchasers, housing prices widely fluctuating and foreigners buying properties. Governments can be lax when checking on the backgrounds of foreigners buying property, and since there are few checks on who these buyers are, or where their fund are coming from, it attracts criminal money.”
New measures were enacted in November by the Singapore Parliament to reinforce their Anti-Money Laundering and Terrorism Financing Act for stopping money laundering.
Real Capital Analytics of New York City reports that Singapore-based investors spent S$37.2 billion (US$27.6 million) in overseas real estate making the small nation number the fifth largest source of global capital. Foreign real estate transactions into Singapore are expected to increase to US$2.3 billion. Estate agents and developers are required by law to exercise due diligence and report possible suspicious money laundering activity. Non-compliance can lead to fines up to S$100,000.
Transparency International recently listed the Arab emirate of Dubai as being weak on regulations and for 'lax' enforcement when it comes to money laundering in a report by Forbes. The report stated :
“Dubai has become a money laundering paradise, where the corrupt and other criminals can go to buy luxurious property with no restrictions.”
The report also starts that as for corruption Dubai is the 'least corrupt' when compared with its neighbours in the Middle East and Northern Africa.
A 2018 Bloomberg report said of Dubai:
'War profiteers, terror financiers and drug traffickers sanctioned by the U.S. in recent years have used Dubai's real-estate market as a haven for their assets.'
Washington-based Center for Advanced Defense Studies (C4ADS) found $100 million worth of apartments and villas across the U.A.E. were made by foreign buyers deemed suspicious with these transactions. The report found:
"...high-end luxury real estate market and lax regulatory environment prizing secrecy and anonymity above all else."
"The permissive nature of this environment has global security implications far beyond the sands of the UAE."
"In an interconnected global economy with low barriers impeding the movement of funds, a single point of weakness in the regulatory system can empower and enable a range of global illicit actors."
In 2002 the decision was made in Dubai to allow foreign ownership of "freehold" properties which brought forward a property construction and sales bonanza by investors and others from all over the world.
The Bloomberg report also mentioned:
That the Federation of American Scientists said 2002 that "money-laundering activity in the UAE may total $1 billion annually."
One route reported for transporting cash is from the Afghanistan capital of Kabul with a Wikileaks intercept of a U.S. diplomatic cable reporting that for three months in 2009 over $190 million in cash went to Dubai aboard commercial flights. For 2008 almost $600 million euros and 80 million British pounds were transported as well.
Pakistan authorities also reported in 2017 that over a four year period its citizens invested $8 billion in Dubai's property market mostly to evade taxes.
The United States State Department has stated:
"The UAE has demonstrated both a willingness and capability to take action against illicit financial actors if those actors pose a direct national security threat or present a reputational risk to the UAE's role as the leading regional financial hub."
"However, the UAE needs to continue increasing the resources devoted to investigating, prosecuting and disrupting money laundering."
Previous writings on global money laundering by Kevin Murphy:
(2015 ) https://www.kevinmurphy.london/single-post/2015/07/01/Britain-and-the-G7-Response