Real estate and money laundering: partners in crime?

The UK property industry is largely supportive of the draft bill, not least because companies that are both registered and own property in the UK are already required to log details of beneficial owners on the Persons of Significant Control Register.

“We’ve always been quite supportive of the government’s moves to tackle money laundering by introducing greater transparency,” says Rachel Kelly, senior policy officer at the British Property Federation. “We also think it’s right that the government levels the playing field between UK companies that own UK property and overseas ones.”

Marc Schneiderman, director at London high-end agent Arlington Residential, adds that the bill should also help damp down inflation at the top of the market in the UK capital. “Anything that encourages transparency and avoids over-inflation of values in the market is a good thing,” he says. “I think it will change the top end.”

The bill may also help agents to do their jobs more efficiently. Regulation 18 of the Money Laundering Regulations 2017 requires that estate agents have to conduct know your customer (KYC) checks on people they are doing business with, and file a suspicious activities report (SAR) to the NCA if they have any concerns. “If there is any doubt about who they might be or where the money has come from, we will take the appropriate action,” says Schneiderman. “And if that means walking away from a transaction, we will walk away.”

He adds that equipping oneself to conduct KYC checks may be time-consuming, but it is neither difficult nor expensive – and he has very little sympathy for the argument that smaller agents don’t have the resources to comply with the regulations. “If you’re not equipped to do the checks, you need to be doing something else,” he says. “If we can’t identify who we’re doing business with and they won’t be forthcoming, then we don’t want to do business with them.”

The register, Schneiderman adds, would avoid the need to interrogate an entity’s origins and its beneficial owners, as the information would be freely available. He also points out that recent tax changes make the use of company structures to buy property far less attractive, and therefore such practices are more likely to do with maintaining anonymity.

Concerns about legislation

However, for all this positivity, there are some concerns about the bill as it stands. Kelly is worried about investors getting caught out – not because they have done something wrong but out of sheer ignorance. Given that sanctions include criminal prosecution, she believes this could damage the UK’s reputation as a fair and transparent place to invest. “The UK is incredibly good at attracting overseas investment,” she says. “In terms of commercial property, we have about £140bn invested from overseas, which is roughly a third of all investment. We want to make sure that investment keeps coming in, and that any new rules are as fair and transparent as possible, and don’t accidentally penalise people.”

Rose-Anna Higgins, senior associate at international law firm Burges Salmon, says the danger is particularly acute given that owners will have only 18 months to register themselves. “The first some of those people are going to hear about the rules is when they come to sell the property,” she says. “It’s a question of how they get contacted. There will be contact details on the Land Registry, but if a property hasn’t transacted for years, those details could be well out of date.”

Finally, there is an issue around the fact that the proposed register is to be held by Companies House, which has little ability as a registrar to interrogate the information it receives. “Enforcement against people who file misleading information is an issue,” says Ben Cowdock, senior research officer at Transparency International. “Currently, this is not being done at any scale by Companies House for UK-registered companies.”

How money laundering works

In October 2018, the UK’s Serious Fraud Office joined US and Dutch law enforcement agencies in investigating Gulnara Karimova, eldest daughter of the former president of Uzbekistan. Court cases revealed Karimova had received £606m in shares and payments in exchange for business access in the former Soviet state.

According to Transparency International, most of these payments were sent from firms in the British Virgin Islands and received by a company in Gibraltar, which acted as the gateway to a complex network of shell companies. This allowed Karimova and her associates to purchase high-end property around the world without the source of their funds being apparent to legitimate vendors.

The limitations of Companies House are the subject of a separate government review, and it may well see its powers beefed up – but that is unlikely to happen in parallel with the Registration of Overseas Entities bill’s progression through parliament. In the meantime, Cowdock says that other work is being carried out to ensure the registrar does have the statutory powers to carry out checks. “This could possibly be done by [combining] data sets they have on owners and officers with existing datasets with PEPs (politically exposed persons) databases,” he ventures.

Assuming that such issues are overcome and the bill is enacted, the UK would probably have the toughest AML regime in the world when it comes to property. International standards are overseen by intergovernmental body the Financial Action Task Force (FATF), which is related to the OECD (Organisation for Economic Co-operation and Development). Thijs Stoffer, founder of Stoffer Consulting in Switzerland, has represented the property industry on the FATF for a number of years and says that it is working well. “What the FATF has been doing is putting out guidance for [real estate] agents and making recommendations to governments,” he explains. “Governments are supposed to agree these recommendations and put them in place, before talking to the private sector to explain how things will change.”

In reality, however, responses to the FATF’s recommendations vary from country to country. “In EU countries, there are EU directives, and they are gold-plated on top of the FATF recommendations,” says Stoffer. “Other countries aren’t so highly regulated. In central and eastern Europe, and in some African and South American countries, they are not so strong in this field. However, one could say that most ‘Western’ jurisdictions have adopted some sort of regulation.”

Theory vs practice

What is clear is that the establishment of a register of overseas owners of property is still far from being the norm, even in long-established property markets. For instance, a 2017 Transparency International report, Doors Wide Open: Corruption and Real Estate in Four Key Markets, looked at the steps being taken in Australia, Canada, the US and the UK. The report acknowledged that the UK is in the midst of establishing a register, but it was otherwise damning about the international situation: “There are few requirements and checks on foreign companies and individuals wishing to purchase property,” it said. “In all four countries, foreign companies do not need to provide information on their real owners to any sort of company registry in order to purchase property or to the land registry upon registration. Australia is the only country that has any checks on foreign investment, but these are not designed to prevent money laundering.”