Feature: The property sector has an AML problem – Here’s how we address it!

By Joy Ighade, Founder and CEO of Alexander Jon Compliance Consultancy

The UK is a global financial centre through which trillions of pounds worth of

transactions pass worldwide every year. It, therefore, goes without saying that the financial service and professional service industries heavily dependent on it, will no doubt be susceptible to exploitation by those actively engaged in laundering criminal funds.

Real estate is a popular choice for investment, but it also attracts criminals who use real estate in their illicit activities or to launder their criminal profits. It allows criminal networks to thrive and grow using the profits of their illegal activities, which impacts society and undermines the rule of law. In some countries, these practices also contribute to driving up the prices of real estate, making housing inaccessible to many as well as further incentivizing the criminal activity.

Corrupt foreign elites are attracted to UK real estate, especially in London, to disguise their corruption proceeds, particularly when you consider that property can be bought through complex systems of shell companies registered overseas in secrecy jurisdictions to obscure ownership, rendering the true purpose and origin of money transactions unclear. For example, research by Transparency International has found that 75% of properties linked to corruption are owned by companies registered in secrecy jurisdictions.

All too often, properties are bought and sold as a method to layer criminal funds. Layering is a stage in the money laundering process and can take many forms. Criminals may abort transactions, manipulate values, and turn-around purchase and resale in short timeframes.

While the speed of money movement involved in property purchases is slow compared with other methods, the large volumes that can be moved, and the accessibility of the sector are still likely to make property an attractive laundering method.

As such, the property sector faces high risk from money laundering, which is further fuelled by low levels of transparency.

Since 2017, law enforcement agencies have observed increased overseas buyers and overseas cash flows into the UK property market. The recent invasion of Ukraine by Russia has undoubtedly brought to the fore the issue of money laundered in the UK and resurrected the UK’s unofficial name tag of “the money laundering capital of the world”.

Money laundering cases involving the ownership of property by overseas individuals and companies are inherently complex and their greater occurrence has increased investigative resource constraints. This, coupled with a greater understanding of abuse in the sector, has led to an increased risk score detailed in the UK’s National Risk Assessment.

So, what makes Real Estate attractive to potential Money Launderers?

As mentioned previously, UK property purchases remain an attractive method to launder illicit funds due to the large amounts that can be moved and the low levels of transparency of ownership or source of funds.

Purchases made by corporate structures or trusts based in secrecy jurisdictions pose the greatest level of risk, due to the difficulties in determining the ultimate beneficial owners.

Properties can be purchased via several facilitators. Estate agents, auction houses and ‘off-market’ agents are required by law to be registered for AML supervision. However, there are others responsible for the sale of properties that are not subject to the UK Money Laundering Regulations or the Estate Agents Act such as house builders, who can sell properties directly to the client.

While some construction companies may be subject to regulations, not all are captured by the MLRs. This provides opportunities for property purchases without any checks on the buyer or their source of funds.

Real estate transactions frequently involve the transfer of large volumes of money, potentially across jurisdictional borders, where individuals instructing these transactions often have access to considerable private or public funds.

Property transactions are likely to involve other parties such as Lawyers, Notaries and Accountants who may abuse their professional status to mask illicit activity.

The Way Forward

The full scale of laundering through the UK property sector is unknown. Money laundering may only make up a small part of overall property transactions, but the amounts moved are still significant.

Transparency International have identified 513 properties in the UK that have been bought with suspicious wealth, three of those properties with a combined value of more than £5bn. This is likely only a small proportion of the total proceeds of crime invested in UK property.

To tackle these situations, Estate Agents are now subject to the UK Money Laundering Regulations [“MLRs”], and Lettings Agents were more recently brought into scope in January 2020. Professional services providers [including Lawyers and Accountants] also fall within the regulatory perimeter.

Undertaking appropriate client due diligence is now a requirement for Property Developers. This effectively means that they must:

§ Conduct due diligence on buyers

§ Train staff on how to spot suspicious transactions; and

§ Appoint a Nominated Officer and / or a Money Laundering Reporting Officer.

Other professionals that operate in the industry are under pressure to enhance their AML processes in real estate transactions.

The Fallout

Non-compliance with the UK MLRs is costly, both from a financial and reputational standpoint as well as personal liability and the potential to lose personal freedoms.

It is therefore crucial that professionals working in the property sector are fully aware of their responsibilities and undergo appropriate training to ensure they can identify and report any suspicious transactions.

FATF assessments show that the real estate sector often has poor understanding of these risks and regularly fails to mitigate them. The revised Risk-Based Approach Guidance for the Real Estate Sector highlights the importance for the sector to increase its understanding of the money laundering and terrorist financing risks it faces.

Specifically, the guidance refers to vulnerabilities which include exploitation by politically exposed persons, the purchase of luxury real estate, the use of virtual assets, the use of anonymous companies and gatekeepers as instruments to launder the proceeds of crime.

FATF has identified that the sector must take appropriate measures to adequately mitigate these risks. This includes effective customer due diligence measures, such as access to information about the true, beneficial owner(s) of the real estate transaction.

In YEAR, the FATF has updated its guidance for a risk-based approach for the real estate sector with input from the private sector. As a result, it is encouraging all stakeholders to work together to prevent criminals from abusing the real estate sector and market, including cross-border cooperation and action.

Ultimately, instances of money laundering have grown significantly in the UK property sector, but if all professional parties work together and adhere to the correct AML requirements and due diligence, then not only will money laundering instances decrease, but utilising property as a criminal vehicle will become far riskier, and, therefore, less attractive.