Trying to Follow London's Corrupt Money Trail

Even before London’s property boom the city as well as other areas of Britain have been considered safe investments for overseas buyers and developers.....

Even before London’s property boom the city as well as other areas of Britain have been considered safe investments for overseas buyers and developers. But a new report by London-based Transparency International UK (TI) states that while Britain has a stable business environment, robust financial sector and a better quality of life it has also become a destination of choice for the investment of corrupt money from around the world. One reason cited for this is that UK property can be ‘acquired anonymously through companies registered in secrecy jurisdictions and anti-money laundering checks can be bypassed with relative ease.’ To reduce the risk of corrupt money finding its way into the country TI recommends increased transparency to identify who owns the companies that have invested in UK property. 

Criminal Examinations Uncover Just 1% of Corrupt Money

Using Metropolitan Police and Land Registry data as to the quantity and value of the property involved in criminal examinations for corruption in England and Wales, revealed that since 2004 over £180million in property has been investigated. This number is believed to represent only a small fragment of the problem with the UN estimating that law enforcement agencies only know about 1% of all money being laundered from around the world.

What makes this enterprise successful is that 75% take advantage of offshore corporate secrecy regarding the identities of the owners which makes tracking those in the money laundering scheme difficult.

 TI states: ‘All foreign companies and trusts that hold titles for UK property under criminal investigation for grand corruption are registered in offshore secrecy jurisdictions rather than major economies.’ There are currently 40,725 property titles, or 2.25 square miles, being held by foreign companies with 4.89% that are owned by companies in secrecy jurisdictions outside the UK. One third of the companies with London property are registered entities in the British Virgin Islands which equates to 13,831 London properties. Next is Jersey with 14% or 5,960 properties, the Isle of Man with 8.5% with 3,472 properties and Guernsey with 8% and 3,280 London properties.

 A breakdown by area TI states that ‘Almost one in ten properties in the City of Westminster (9.3 per cent), 7.3 per cent of properties in Kensington & Chelsea and 4.5 per cent in the City of London are owned by a company registered in an offshore secrecy jurisdiction.’

Tighter Controls Recommended

 TI recommends: ‘To address wider money laundering risks associated with anonymous companies in the UK, the Government has recently set out legislation to require a public register of the true owners of UK-registered companies.’ and further ‘In this paper we recommend that any foreign company intending to hold a property title in the UK should be held to the same standards of transparency required of UK registered companies.’

 The UK is described in the report as being one a small number of global financial centres that has collected substantial amounts of laundered money. This is due to London’s global banking and financial services sector which also been able to attract overseas investment for the London property expansion. The UK is home to 1,400 financial firms with the majority foreign owned and another 250 from foreign banks, more than any other country globally. In a 2013 Financial Services Authority investigation concluded that each year £23billion to £57billion was laundered through the UK with an impact of 1.4% to 3.6% of national GDP.

With approximately 37% of London residents being born abroad these are a good number of properties therefore that are purchased by foreign citizens. Most of these purchase ‘mainstream’ property where the risk of corrupt money is quite low with the risk rising dramatically as the property gets quite a bit more expensive.

In a previous Guardian investigation it was reported that ‘an estimated £350m worth of vacant properties on a single prestigious London street in Hampstead. The empty buildings include a row of 10 mansions worth £73m, which have stood largely unused since they were bought between 1989 and 1993. Most of the properties are registered to companies in the British Virgin Islands, Curaçao, the Bahamas, Panama and the Channel Islands, allowing international owners to remain anonymous.’

In 2012 over £7billion of prime London real estate was purchased up from £6billion the year before with Savills reporting that in a 2013 report that 90% of the new-build luxury properties sold were purchased by overseas buyers. The largest foreign buyers were from Eastern Europe and Russia with the rest from Near East, North Africa and China. In its 2014 Corruption Perceptions Index TI concluded that with these nations:  ‘It is reasonable to infer 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 challenges.’

Red Flags Throughout London's Property Market

The TI report added:

‘Large cash payments are typically regarded as a money laundering red flag risk. However, cash payments are not uncommon in the property market. Research by Hampton’s International found that 350,000 purchasers of UK property in 2013 were cash buyers, and of these cash purchasers, 70 per cent – as many as many as 245,000 property buyers – were not funding their deal through the sale of another property. The term cash buyer may refer to both those buyers who are not funding the purchase through a mortgage and those who are purchasing with cash. In either scenario, the AML (Anti Money Laundering) checks provided for by the UK financial sector may be bypassed.’

This allows very large amounts of money to be invested in expensive properties with little or no risk of loss in capital value. By having the property be for letting the use of fraudulent lease contracts with fake tenants allows money to be laundered even more.

The Impact of Corrupt Money

The consequences of corrupt money, particularly large foreign money investment in the luxury housing market in London leads to price increases, the reduction of housing options for locals, the high end buyers influence that is used by developers to justify construction of luxury residences instead of affordable homes.

Given the vulnerability of the high-end property sector to money laundering of the proceeds of corruption, it is likely that corrupt capital contributes to these effects, albeit to an unknown extent.

Key Recommendations for Improved Transparency

One of the best methods to start in identifying the sources of offshore corrupt money is with establishment of transparency of companies that either own or have plans of investing in Britain.

T.I recommends ‘that any foreign company intending to hold a property title in the UK should be held to the same standards of transparency required of UK-registered companies. Before completing a purchase on a property, overseas companies should be required to submit to Land Registry the same details that UK registered companies must submit to Companies House.’

Others include requiring estate agents due diligence to collect information on the purchaser as well as the seller certifying the beneficial owners of the purchasing company.

Estate agents’ anti-money laundering responsibility should be extended to include due diligence checks on the purchaser, not just the seller. These checks should include ensuring that the purchasing company has declared their beneficial owners and that appropriate checks have been carried out on those individuals. Additionally have HM Treasury convene a property group foe anti-money laundering authorities to review transactions.

One other recommendation includes having HM Treasury introduce a cap on cash payments for property purchases to stop illegal money laundering transactions from evading the financial services sector.

- Monday 27 April 2015

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