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Why property is front and centre of the AML battle
AML RightSource : March 16, 2021
he real estate sector is under pressure to improve its AML practices, as criminals step up their efforts to launder their dirty money through property.
The UK’s property market has become a prime target for international money laundering, with high-end luxury properties in London proving particularly attractive to criminals looking to legitimise their wealth. The warning, made in the UK Government’s latest National Risk Assessment of money laundering and terrorist financing, is stark. “The property sector faces a high risk from money laundering,” it says, an upgrade from the medium risk rating awarded to the sector in the last NRA three years ago.
The Covid-19 pandemic is one factor in this upgrade. The crisis has undermined demand in some areas of the UK’s property market – prime and super prime included. That has caught the eye of international buyers, including those hoping to launder dirty money. It is also possible sellers and their agents have paid less attention to due diligence in their eagerness to complete deals. Commercial real estate sellers, in particular, have faced pressure to transact quickly, as the impacts of Covid-19 have rocked the economy.
The Government is increasingly concerned. It points to Transparency International research suggesting that more than 500 properties in the UK – collectively worth more than £5bn – have been acquired with suspicious wealth. Many of these transactions track back to corporate structures or trusts based in jurisdictions where it is difficult to identify the ultimate beneficial owner (UBO).
Property’s enduring appeal
Even before the pandemic, of course, real estate was a favourite asset class for perpetrators of financial crime. It is not just the lack of transparency that certain ownership structures provide, but also the fact that the tangibility of property offers a veneer of respectability – and the potential to generate legitimate income and profit on an ongoing basis.
It is not just the UK that has a problem. The European Parliament has published research on money laundering in real estate across the European Union, and a number of individual countries have had particular issues. Portugal’s Golden Visa programme, for example, has been accused of facilitating money laundering linked to real estate, which much of the cash raised by the initiative generated by property investment. Cyprus has also been a focus of concern, with the Council of Europe highlighting the problem last year.
Against this backdrop of growing concern about real estate, the regulatory response is set to become ever more robust in the months and years ahead. That will not only increase the compliance burden for participants in the property market – including estate agents, solicitors and financial services businesses – but also heighten the risk of damaging regulatory sanction in the event of a failure or breach.
The stakes have already been raised. The EU’s 5th Anti-Money Laundering Directive (5AMLD) broadened the scope of AML legislation so that a range of property professionals now have new compliance responsibilities. Real estate brokers, estate agents and rental intermediaries are all adjusting to the new regime, which requires increased customer due diligence of buyers, training for staff on how to spot suspicious transactions and the appointment of a nominated money laundering officer. Lawyers, too, are under pressure to step up AML processes in real estate transactions, with the Law Society issuing guidance.
Coping with compliance
For many in the property industry, these new AML responsibilities may represent something of a shock to the system. The National Crime Agency says the property sector in the UK accounted for less than 1% of suspicious activity reports during the 2018-19 financial year, the most recent period for which it has published figures.
That percentage may now begin to climb higher. The bottom line is that property professionals must now have processes that enable them to confirm the identity of all those involved in a residential or commercial property transaction, including buyers, sellers, leaseholders, lessors and people with significant control. It will also be crucial to identify “politically exposed people” for whom special attention may be required.
The authorities in the UK have already made clear their determination to take a more interventionist approach. In one recent case, the National Crime Agency seized a £50m property overlooking Hyde Park in London, as part of a broader seizure of assets that investigators believed could have been the proceeds of crime.
However, doubts remain about the property sector’s ability to engage. For example, the Government’s recent NRA warned that among estate agents advertising properties for sale at £5m or more, half had failed to register with HM Revenue & Customs for anti-money-laundering supervision in 2019, or had failed to pay their annual fees for this service.
Closing the gap will require the property sector to commit time and investment to their AML processes and systems. Technology can help firms rise to the challenge, offering a means to automate compliance and to manage data more effectively. Analytics tools, in particular, may be vital in helping the sector to understand its exposures and to identify problematic cases. These capabilities will prove increasingly vital if property professionals are to play their part in combatting financial crime.