Partners in Crime?
Adam Branson asks whether the UK government's anti-money laundering (AML) regime for property transactions measures up to other leading international jurisdictions.
In July 2015, the UK government set out its stance on foreign criminals using the country’s property as a way to launder their ill-gotten gains. The prime minister at the time, David Cameron, committed to exposing the use of “anonymous shell companies” to buy property in the UK, adding that: “London is not a place to stash your dodgy cash.”
The following year, the same government announced that measures to combat money laundering would include a mandatory register of overseas ownership, and in July 2018 the draft Registration of Overseas Entities bill was duly published. Under the terms of the bill, offshore entities that own UK property will be required to identify their true owners on a publicly available register, or face unlimited fines and prison sentences of up to two years for “any member of the entity”.
So, just how robust are the plans as they stand? And, assuming the bill is enacted, where do they place the UK in terms of the anti-money laundering (AML) regimes to be found in other property hotspots?
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Certainly, there can be little doubt that something needs to be done. Four years ago, the National Crime Agency (NCA), often dubbed the British FBI, stated that overseas criminal gangs were using British property transactions to launder “billions of pounds in corrupt funds”.
More recently, in December last year, the NGO Transparency International published a report in which it analysed 237 corruption and money-laundering cases. It identified 1,201 companies from six of the UK’s 14 overseas territories that had featured in cases of grand corruption and associated high-end money laundering.
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.”
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.”
Cowdock responds: “The establishment of the register would place the UK at the top in terms of corporate transparency around the world. So far, there are only a few countries that have registers, and in most places, they aren’t publicly available. But, although the UK will be a leader, any country remains vulnerable to illicit flows if its regulations aren’t implemented or adhered to properly.”
Speaking off the record, one international expert agrees that the rules on paper can differ wildly from the impact on the ground. “I recently asked people in one part of the world who they reported to if they had suspicions about someone or something,” the expert says. “They looked at me blankly, because there doesn’t appear to be anyone they can report to.”
It also has to be asked why registers of overseas ownership are not being taken up more widely around the world. According to Stoffer, one of the main reasons is that policing the information is incredibly difficult. Governments, he says, are wary of placing requirements on professionals that may prove impossible to fulfil, and which would therefore add regulatory burdens without actually stemming the flow of illicit cash. “Say there is a company buying a nice property in Kensington, and that company has four shareholders” says Stoffer. “One is in Saudi Arabia, one is in Nigeria, one is in the UK and the other is in the US. When the professionals acting on the transaction do their due diligence and call these four countries to figure out who the owners of the company actually are, they find out that each shareholder is another company, which in turn is owned by three more companies, and so on and so on.”
Peter Bolton King FRICS, global director of professionalism and ethics at RICS, agrees that tracking down genuine beneficial owners can be fiendishly difficult. “This caused a real problem in Canada,” he says. “Real estate agents found themselves in an impossible situation trying to work out the beneficial ownership based on all sorts of weird offshore companies.”
What’s more, some territories have valid reasons for not wanting to make registers of overseas ownership public, says Nimesh Shah, partner at London-based accountant Blick Rothenberg. “You are putting people on the radar who own valuable real estate,” he says. “I have clients in countries where you have to be careful about how much wealth you are seen to have, because there are kidnapping threats all the time.”
So, while the UK’s plans look set to make it a world leader in transparency, it seems doubtful whether many other countries will follow its example. Rightly or wrongly, for the most part, offshore will continue to mean a long way out of sight.
This article originally appeared in the Good Issue of Modus (April 2019), titled Cleaning Up.