financial crime in the real estate sector - countering illicit money flows

FINANCIAL CRIME IN THE REAL ESTATE SECTOR

April 2016

COUNTERING ILLICIT MONEY FLOWS

ILLICIT MONEY IN REAL ESTATE: Facts and Figures

2 FINANCIAL CRIME IN THE REAL ESTATE SECTOR – COUNTERING ILLICIT MONEY FLOWS

• London has recently been dubbed the ‘world capital of money laundering’ in the press.

• Billions of pounds of corrupt funds have been laundered by criminals and foreign officials buying upmarket London properties through anonymous offshore companies.

• 75% of properties owned by subjects of corruption investigations were held through offshore shell companies, according to the Metropolitan Police.

• In 2013, the Financial Services Authority estimated that between GBP 23-57 billion was laundered through the UK, corresponding to 1.4-3.6% of the national GDP that year.

In 2014, the regulator fined three UK estate agents for deficiencies in their anti-money laundering programmes:

Jackson Gurundy:GBP 170,000Hastings International: GBP 48,000Jeffrey Ross:GBP 29,000

ILLICIT MONEY IN REAL ESTATE: Facts and Figures (cont.)


• Transparency International - a highly respected NGO focused on anti-corruption - notes that the sources of foreign investment for the highest value properties in the UK tend to be from regions of the world with substantial domestic public sector corruption problems, namely: Eastern Europe, Central Asia and MENA. This correlates with a 2013 study by Savills, which found that 90% of new build luxury properties were purchased by overseas buyers, primarily from Eastern Europe, Russia, MENA and China.

• Out of the 144 properties involved in Proceeds of Crime Unit investigations in 2015, only 31 were registered to individuals, though primarily to close associates of the corruption suspect.

FINANCIAL CRIME IN THE REAL ESTATE SECTOR – COUNTERING ILLICIT MONEY FLOWS

MONEY LAUNDERING THROUGH REAL ESTATE: How and Why?

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• Money laundering is the process by which criminals conceal the illegal origin of the resulting property or income.

• To distance themselves from their crimes when purchasing property, corrupt individuals use complex and opaque corporate structures and legal arrangements, often spanning multiple jurisdictions and “secrecy havens”.

• These structures deliberately obscure the identity of those who own the companies.

• Exploiting the often credible reputation of intermediaries - such as estate agents and property lawyers, criminals can more easily pass initial eligibility checks.

Two notable cases of London properties purchased with corrupt funds were those of Saadi Gadaffi from Libya, and James Ibori of Nigeria.


MONEY LAUNDERING THROUGH REAL ESTATE: How and Why? (cont.)

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• Intermediaries allow criminals to gain access to legitimate institutions and carry out transactions, while ‘keeping sufficient distance’ from the true source of funds.

• Luxury UK properties provide a safe investment for criminals with very low risk of capital loss; as well as a source of legitimate earnings, through equity or rental income.

• Criminals may be drawn to the property market as a channel to launder illicit funds due to the:

o Ability to buy real estate using cash and disguise ultimate beneficial ownership.

o Ability to launder significant amount of funds in a single transaction.

o Ability to generate legitimate funds through equity or rental income.

o Stable market and relatively low risk of capital loss.

o Air of respectability it affords.


IN THE PRESS: Recent Negative Publicity

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Date Publication Content

March 2016 The Guardian: “Kleptocracy Tours Expose State Failures to Stop Dirty Money Buying Up London”

The article by Roman Borisovich (former Vice President of Russia’s largest insurance company turned anti-corruption activist) is part of his effort to bring public awareness to alleged corrupt Russian, Ukrainian and Kazakh officials and oligarchs’ multi-million pound property purchases.

October 2015 Transparency International: “Corruption on Your Doorstep: How Corrupt Capital is Used to Buy Property in the UK”.

Transparency International’s in-depth analysis concludes that significant regulatory changes need to be made to ensure that estate agents and other intermediaries assist in preventing corrupt officials from exploiting the UK property market to launder their ill-gotten funds.

July 2015 BBC 4: “From Russia with Cash” The documentary centres on undercover reporters posing as corrupt Russian government officials attempting to purchase a property in London with dirty money. The reporters targeted five London estate agents in upscale neighbourhoods and concluded that the estate agents were indifferent to the source of funds, despite repeatedly being informed of its illicit origins.

March 2015 Oliver Harvey and Robin Winkler, Deutsche Bank foreign exchange specialists: “Dark Matter: The Hidden Capital Flows that Drive G10 Exchange Rates”

Deutsche Bank’s special report concluded that the UK has seen GBP1 billion a month in unrecorded capital inflows, primarily from Russia, with much of it channelled to the London property market. The analysts assert that a substantial amount of this money is illicit, and has had a direct correlation on the property price chain in the city.

February 2015 – January 2016

New York Times: “Towers of Secrecy” Over a year, the NYT investigated and unpacked shell companies which own some of New York’s and Los Angeles’ most expensive properties. The exposé revealed ownership of at least 16 properties with ties to suspect funds, including from Russian, Chinese and Malaysian politically-exposed individuals whose official salaries were not commensurate with the price of the properties purchased. Some of these individuals have been accused - officially and/or in the press - of corruption and other crimes.

The real estate industry’s connection to corrupt funds has frequently featured in the press over the past year, primarily exposing weaknesses which have enabled corrupt officials to purchase luxury properties in London and New York. Here are a few examples:


Corruption is a major contributor to global poverty. Money expropriated by corrupt government officials considerably reduces government resources meant to provide social services, investments in infrastructure and economic development ,which would ultimately help their citizens lift themselves out of extreme poverty, and assist in their countries’ prosperity.

One of the most important controls over the prevention and detection of money laundering is to have staff alert and trained to identify potentially suspicious activities. Competent staff can safeguard a firm from enforcement actions, costly fines and remediation.

Fines and enforcement actions are inevitably accompanied by a media frenzy of negative press concerning the target firm, which erodes customer confidence in their brand - and can reasonably impact its bottom line.

BROADER IMPLICATIONS: Negative Effects

REGULATIONS: Future Landscape


• In its publication “Corruption on Your Doorstep”, Transparency International (TI) notes strategic recommendations to prevent the UK property market from being exploited by criminals. Specifically, TI suggests:

o Mandating that ultimate beneficial ownership information, including natural persons behind legal structures as well as property valuation, be registered with the Land Registry. This information should in turn be publicly available.

o Requiring estate agents to perform due diligence on purchasers in addition to sellers.

o Introducing a limit on cash payments when purchasing a property, and requiring that remaining funds come from a bank account.

o For HMRC to consistently enforce estate agents’ regulatory compliance through the use of monetary penalties and incarcerations.

o Requiring more relevant anti-money laundering training for estate agents.

UK anti-money laundering efforts have, over time, become more aligned with those in the US. As a result, FinCEN’s temporary measure, stronger transparency requirements included in the EU’s 4th Anti-Money Laundering Directive, and the UK’s upcoming Global Anti-corruption Summit could signify an impending change in UK estate agents’ AML standards. Moreover, a consultation paper on “Beneficial Ownership Transparency” by the Department for Business Innovation & Skills echoes some of TI’s recommendations.

REGULATIONS: Future Landscape (cont.)


• On the back of the New York Times’ series “Towers of Secrecy”, the Financial Crimes Enforcement Network (FinCEN, a division of the US Treasury) announced a temporary measure to identify and deter money laundering through real estate. From 1 March 2016 until 31 August 2016, title insurance companies are required to report the identities of cash purchasers of certain luxury properties in Manhattan and Miami.

• The US real estate industry has repeatedly been granted exemption from AML requirements prescribed in the USA Patriot Act. FinCEN’s temporary measure could signal a more permanent regulatory change in the future.

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financial crime in the real estate sector - countering illicit money flows

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