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Enforcers take the fight to money launderers in UK luxury property: but is it enough?
AML RightSource : January 25, 2021
The fight against money laundering through luxury UK property is intensifying. But real estate players have much more to do in bolstering compliance processes.
Law enforcers won a major battle in October, when suspected money launderer Manni Hussain surrendered properties to the National Crime Agency (NCA).
Flamboyant businessman Hussain was forced to hand over properties worth £10 million, after the NCA made them the subject of an unexplained wealth order (UWO).
Investigators suspected him of being a major money launderer – but could not obtain enough evidence for charges. The relatively new power of a UWO reverses the burden of proof and requires suspects to prove their wealth has come from legitimate sources.
The NCA been expanding its use of UWOs for two years – including freezing several multimillion-pound homes in London. But it is thought to be a small amount compared to the billions of laundered funds still in UK property.
Property risk increases
In December, the UK government’s Money Laundering Risk Assessment 2020 rerated the risk of money laundering in UK property from medium to high. This is due to the large amounts criminals can invest or move through it, and the low transparency levels.
The report said UK property remains attractive to foreign and domestic criminals seeking to conceal large amounts of illicit funds.
In London, thousands of properties have likely been bought with illicit funds thanks to the lifestyle it offers, and ability to move large amounts in one transaction. High-end, also known as super prime, properties are particularly high-risk.
Understanding of these abuses has grown and supervision of conveyancing has improved – but the risk among UK legal players such as conveyancers remains high, said the report.
The government also raised the risk status of estate agents from low to medium. Though they do not handle the monetary side of property transactions, they are closely involved.
Corporate structures or trusts based in secrecy jurisdictions pose the greatest risk, due to the difficulties in determining ultimate beneficial owners (UBOs), said the report. Criminals also layer their funds by aborting transactions, manipulating values, and buying and selling quickly.
Estate agent money laundering challenges
One significant barrier to detection and enforcement is that 50% of estate agents advertising properties at £5 million or more had failed to register with HMRC for AML supervision or failed to pay their annual fees. Action against those businesses is ongoing.
Even those who registered often have insufficient staff training, rely too much on others for customer due diligence (CDD) and have failed to share information.
The effect is that estate agents filed only a paltry 861 suspicious activity reports (SARs) in 2019-20 compared to 470,000 filed by credit institutions such as banks.
December saw another report – from Transparency International – on money laundering in luxury property in Australia, Canada, the US and the UK.
It said investigations show property data can be a powerful tool for detecting laundering. Access to property-related data – such as legal and beneficial ownership, historical ownership data, value and purchase dates – can go far in exposing red flags.
The government plans to start addressing this by introducing a register of beneficial ownership for property in 2021.
TI said beneficial ownership registers will be a crucial tool and should include data such as historical ownership, property value and purchase date.
Unexplained wealth order challenges
Transparency International has identified 513 properties in the UK bought with suspicious wealth, with a combined value of over £5 billion, though this is likely only a small proportion of the actual total. Many of these properties could be subject to UWOs, it said.
Jonah Anderson, partner at law firm White & Case, said: “When they were introduced, it was expected that UWOs would be used more than they have been. Wealthy individuals subject to these orders have the resources to challenge it so law enforcement risks having to deal with costly and complex civil litigation. As a result, there have been fewer than expected. UWOs were always going to be a niche, though potentially useful, tool.”
Dev Odedra, director, Minerva Strategem Consulting, said: “Some UWOs have been more successful than others. But they have put people on notice that the UK will go after those thinking of parking illicit funds in UK property.
“Continued efforts include the UK Financial Intelligence Unit (FIU) working with the Law Society to educate on areas such as improving SARs, and events aimed at the law and accountancy sectors. These can improve awareness and highlight the importance of efforts to tackle financial crime.”
Jerry Walters, MD of FCS Compliance, said the scale of the challenge is huge and law enforcement is still just scratching the surface.
“UWOs, most often, seek cooperation from an overseas jurisdiction with high levels of corruption,” he said. “This makes getting any assistance difficult. The UK has some of the most comprehensive AML legislation in the world, but it needs to be applied more strongly. The fines and regulatory action do not reflect the level of breaches.”
Walters said estate agents, solicitors and banks can all do much more to prevent illicit funds flowing into the UK.
“These organisations have a moral and legal obligation to ensure the UK housing market is not used or seen as a soft touch for laundered funds,” he said.
“Technology can and does play a part, but the government’s 2020 risk assessment report highlighted that some have over-relied on it. It should be just part of the overall due diligence process. AML is a complex issue and requires a range of solutions.”
Luxury property players must act
Financial institutions and other players in the luxury property market will face increased scrutiny as enforcers ramp up their efforts against money laundering.
If they do not comply with AML regulation – for example, around identifying UBOs and politically exposed persons (PEPs) – or if their screening mechanisms are ineffective, these companies could suffer serious sanctions and reputational damage.
The pressure is therefore increasing on firms to have the strongest AML systems and processes possible. As part of a more comprehensive process, technology will be critical in helping them track the high volumes of data involved, cover the due diligence requirements and monitor complex international transactions.
Data analytics and artificial intelligence will also be increasingly important for banks and other players to keep on top of their AML responsibilities.