Real estate is an easy target for money laundering and, until now, the industry’s response has failed to scrub up.
25 September 2017
On 15 July 2016, an influential cross-party group of British MPs issued a statement on money laundering in UK real estate. Its verdict was damning. The Home Affairs Select Committee warned that the London market had become a 'safe haven' for those seeking to hide dirty money, with the committee’s then-Chair, Labour MP Keith Vaz, adding: “Supervision of the property market is totally inadequate, and poor enforcement has laid out a welcome mat for launderers and organised criminals.”
Although the UK has emerged as a centre for money laundering, it is not just a British problem. The flow of corrupt funds from around the world makes tackling it a global issue. On 28 July 2015, then-UK Prime Minister David Cameron said at the Lee Kuan Yew School of Public Policy in Singapore: “We need to stop corrupt officials or organised criminals using anonymous shell companies to invest their ill-gotten gains in London property, without being tracked down.”
Since then, public authorities across the globe have ramped up efforts to disrupt the flow of corrupt funds. In April last year, the UK government published a money-laundering action plan, promising more robust law enforcement, reform of anti-money-laundering regulation and greater international cooperation to tackle the issue. A month later, the Monetary Authority of Singapore (MAS) announced that Swiss bank BSI would be stripped of its merchant-bank status and referred six of its managers to the public prosecutor. Minister of National Development Lawrence Wong said in July 2016 that MAS would “not hesitate to take action against financial institutions whose anti-money-laundering controls are found to be lacking”.
Attention is now turning to the role that the private sector, and in particular the real estate profession can play in helping tackle the problem. Many believe it could be doing much more. Steve Goodrich, Senior Research Officer at anti-corruption organisation Transparency International UK, says: “What we’ve seen, certainly over the last two years, is that the estate agency sector has a very low level of reporting, considering the scale of activity in which they engage.”
The UK National Crime Agency (NCA) has estimated that £100bn of dirty money filters through the country’s financial sector every year. Although real estate is far from being the only asset class affected, the high value of property assets in the UK makes it a prime target. In July 2015, campaign group Global Witness reported that “London’s high-end property market seems to be one of the go-to destinations to give questionable funds a veneer of respectability.” A report from Transparency International, published in November 2015, concluded a “radical overhaul of the UK’s anti-money-laundering system is needed to stem the flow of corrupt money and help prevent UK professionals from being corrupted by vast sums of money stolen from around the world.”
Identifying the true owners of companies investing in property is a key strand of anti-money-laundering efforts. The EU’s Fourth Anti-Money Laundering Directive, which came into force in June 2015, requires member states to maintain registers of the ultimate beneficial owners of businesses based in their jurisdiction. The UK’s own register was opened in April last year and the government has until 26 June 2017 to write the directive into law, but this could get tied up in Britain’s Brexit negotiations. And to add to this uncertainty, it is unclear whether the policy would be pursued by Cameron’s successor, Theresa May.
Robert Palmer, Anti-corruption Expert at Global Witness, believes such a register would be a major step: “It would certainly make it harder to hide and disguise the ownership. You’d have to find people who would be willing to have their name listed as the real owner when, in fact, they weren’t. That would be quite a substantial step forward.” But he also highlights the key role of the real estate industry in flagging up suspect deals. “We need to look at the sort of checks that are carried out by estate agents when people are buying property.”
High-profile cases of money laundering in property tend to involve super-prime real estate. However, Hugh Lumby, Head of Global Real Estate at Ashurst, says there is a need for greater awareness at all levels of the industry. “The smaller houses can equally be the level it takes place,” he says. “If you’re involved [in property transactions] in any way at all you need to be very alert to money laundering and to the rules. The way you get caught out isn’t through actually indulging these things, it’s just missing something obvious.”
Professionals working in the real estate industry have a responsibility to flag up suspicious activity under anti-money-laundering regulation. RICS guidance lists a range of potential red flags – including clients using agents or intermediaries without good reason, clients who express an unusual interest in the standards for identification and suspicious activity, and connections between two parties involved in a transaction without apparent business reasons.
In November 2015, RICS published mandatory guidance on real estate agency and brokerage, which said professionals must take “every reasonable effort to confirm the identity of your client” and have “procedures in place to prevent and identify money laundering within your company”.
Geraldine Mash is UK Compliance Director at CBRE, which requires all employees to take mandatory training on money laundering. She says awareness of the problem has become much more prevalent, but finding the resources to deal with it can sometimes be an issue. “There is no doubt that larger real estate companies have had to invest substantially in tools and training to drive greater transparency, deepen knowledge and raise levels of expertise,” she says. “Smaller companies do not always have the resources to employ anti-money-laundering experts or pay for these systems.”
Faced with increasing pressure to do more about money laundering, property companies have taken steps to present a united front. In the UK, 11 real estate firms including CBRE, JLL, Cushman & Wakefield and Savills are signatories to a joint statement, “Combating money laundering to safeguard investment in UK property”, which informs clients of the due diligence that all property companies are required to carry out. The statement concludes: “We appreciate your support in ensuring the UK property market has robust controls to combat the threat of money laundering.”
Real estate companies in France have taken a similar step. Jacques Bagge is Director of Investment Development at JLL in Paris. “We decided to create a document and a letter we send to our clients which is signed by all the heads of these companies to show our clients that they can’t avoid this process,” he says. “If they think that JLL demands too much paperwork, they will know from this document that other brokers will have the same process.”
Despite these steps, statistics from the NCA suggest there is still more to be done. In 2014-15, estate agents submitted 355 suspicious activity reports to the agency – from a total of 1.2 million transactions. The figure represented close to a 100% increase on the number of reports filed the year before, but still only 0.05% of the total across all industries. With governments demanding greater assistance from the private sector to tackle money laundering, real estate professionals may have to more than redouble their efforts.
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