Britain: Property and Money Laundering Review

August 20, 2019

 

The effects and the ability to stop corrupt money in Britains property market continues with new procedures being recommended earlier this year. A March 2019 report published by Forbes stated once again the need for the British authorities take a stronger stand against corrupt funds in the nations real estate market. 

 

 

 

Duncan Hames of Transparency International U.K. (TI) told to the Treasury Committee :

 

"There has been a failure to properly protect the U.K. from proceeds of corruption being stashed in our property sector...’

 

Adding:

 

TI had identified £4.4 billion ($5.7 billion) of investment in U.K. real estate from "politically exposed persons in high-corruption-risk jurisdictions”.

 

The Forbes report mentioned that The National Crime Agency (NCA) has estimated that about £100 billion ($131billion) of dirty money moves through or into Britain each year. 

 

That figure is debatable, however, as the Treasury Committee said it needed a "more

precise estimate of the scale of economic crime in the U.K."

 

As London has become one of the worlds top financial centres for foreign cash deposits rules are now in place by The Unexplained Wealth Order that allows local authorities to seize assets over £50,000 of any individual "who is reasonably suspected of involvement in, or of being connected to a person involved in, serious crime.”

 

Working with the Serious Fraud Office the NCA are working to improve their fight of money laundering, as the Guardian reports in May 2019:

 

‘All foreign-registered entities, including those in Ireland, will be affected. There has been concern over the definition of beneficial ownership for registration affecting only those who own 25% or more of a foreign company. The report suggested lowering that threshold.’

 

Lord Faulks QC: 

 

“It’s pretty outrageous that great chunks of our country are owned by people whose identity we are uncertain of and that the source of their funds remains a mystery.”

 

The Economic Crime Report states that more regulation and oversight by HM Revenue and Customs (HMRC) :

 

”There is a risk that some estate agents may be unsupervised.”

 

In its 2015 report Transparency International (T.I.) highlighted the grip corrupt money has made in Londons property market. The report found that over £180m worth of property was being investigated from as far back as 2004 suspected of being bought with corrupt money. Over 75% of these properties used offshore corporations and the secrecy it provides to hide the identities of the buyers thus making the origin of the funds difficult to trace. One statistic showed that in London Westminster district almost one in ten properties or 9.3% were owned by an offshore corporate entity able to take advantage the secrecy rules.

 

Background 1989 to Present

 

Action on the money laundering issue can be found as early as 1989 at the G7 summit in Paris. Money laundering was a growing cause for concern so the creation of The Financial Action Task Force on Money Laundering (FATF) was organised. The goal was to identify the techniques or ‘typologies’ used to hide corrupt money as well as bolstering laws to find and prosecute offenders globally. In the beginning only 16 countries were members but this has since grown to 36. Standards for corrupt money detection were increased to include financing of terrorist groups after the September 11 attacks in the U.S.

 

Also after the 11 September attacks the International Monetary began increasing its programs with the international community that it had originally established in 2000. This began investigations and creation of Offshore Financial Centers (OFC) Assessment Program in its anti-money laundering (AML) campaign. One of the main points recommended to protect financial institutions is to apply Customer Due Diligence (CDD) stating that this is:

 

‘Crucial to fight money laundering and the financing of terrorism effectively. CDD must be applied upon establishment of a business relationship or in preparation of a specific cash transactions in excess of a certain amount. CDD must also be applied whenever financial institutions suspect money laundering or terrorist financing activities.’

 

At the G7’s June 2015 gathering one of the main issues leaders discussed was the global problem of money laundering and the increased action needed to combat the problem. The U.S. G7/G20 Advocacy Alliance in its February 2015 policy paper issued a series of recommendations to detect corrupt money much of which helps finance terrorism. The Alliance is comprised of 40 non-government organisations and labour groups with the United States playing a lead role.

 

The main goals agreed upon include:

 

The G7 must take concrete, positive steps to ensure developing countries fully and effectively participate in ongoing global transparency initiatives.

 

G7 countries G7 countries should use the Sustainable Development Goals (SDG) and Financing for Development (FfD) processes to promote inclusive financial transparency and endorse a measurable, achievable target to reduce illicit financial flows.

 

Also recommended were increased plans for country-by-country reporting and having public records information more available. London Property because of its explosive property growth, rising valuations, a major financial centre and a stable political climate London had become a prime choice for those looking to invest illicit cash. 

 

In its report Transparency International found that Land Registry data had records of 40,725 property titles owned by foreign companies. This included both commercial and residential assets as the Land Registry does not differentiate between the two categories.

 

The locations of corporations as classified by the Metropolitan Police ‘Proceeds of Corruption Unit’ finds Jersey to be the most commonplace for incorporation with 49% of companies that hold property under investigation followed by the Isle of Man and the British Virgin Islands.

 

Also mentioned in the T.I. report is the current rule of due diligence for estate agents in the U.K.:

 

‘Currently, real estate agents in the UK are compelled to carry out due diligence on only one side of a property transaction. Money Laundering Regulations in the UK only legally require estate agents to undertake due diligence on sellers – the agent’s official clients – not purchasers of property. This clearly stymies the effectiveness of AML in the property sector.’

 

As a result T.I. reported that the impact of corrupt capital can have all matter of negative effects on the local marketplace:

 

1. Raising average prices, particularly in certain London boroughs, with a reportedly widespread ripple effect down the property price chain and beyond London

 

2. Removing the availability of housing stock for UK citizens

 

3. Due to the interest of foreign buyers in high-end property, a shift in developers’ priorities towards luxury flats and houses, and away from affordable homes

 

4. Ghost communities, in which the presence of unoccupied houses with foreign owners, leads to a decline in local taxes, affecting local businesses and community life

In 2013 the UK drafted legislation to make available a public registry of beneficial ownership. 

 

The UK published the Small Business, Enterprise and Employment Bill on 25 June 2014, with new rules requiring private companies to provide:

 

“Adequate, accurate and current” information on who owns and controls them and to implement a central registry of company beneficial ownership maintained by Companies House. 

 

The UK’s stated policy objective was to :

 

“Deter illicit activity and improve enforcement outcomes where misuse does take place; and promote good corporate behaviour.”

 

The most common recommendation is that of transparency not just for those representing the seller but for those providing the finances for the purchase of the property. As T.I. states in their recommendations:

 

‘Corporate transparency in offshore centres should be incentivised and lack of transparency should be dis-incentivised. TI-UK believes that relevant authorities should consider how companies that choose to operate in offshore centres that fail to meet corporate transparency standards should be held as a higher AML risk category, and how private sector due diligence, business refusal, and regulatory enforcement should reflect that higher risk.’

 

New Measures

 

Earlier this year the Home Office began a more stringent review of wealthy investors and the ability to receive a Tier 1 Investor Visa for wanting British residency.

 

The Home Office says the new changes:

 

“...will better protect the U.K. from illegally obtained funds.”

 

It was announced by Knight Frank shortly after the changes that London’s luxury market had seen a decline of 4.4% in the past year. Coutts reported that in its review of of London properties valued at £10 million and more sales had fallen by 12.1% in the 12 months to December 2018. 

 

Speaking to the Guardian in May 2019 Duncan Hames, the director of policy at Transparency International UK, said: 

 

“Every day that passes, criminals and the corrupt are able to hide behind the cloak of anonymity to launder their stolen wealth into our property market … if we are to stop the UK being a safe haven for dirty money, now is the time for action.”

 

 

Portions of this article by Kevin Murphy were previously published in Britain’s online publication ‘The Wealth Scene’.

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