How to Manage AML Compliance in the Property Sector

The sheer size of the property market in the UK and the high value of property assets means that extremely large amounts of criminal funds can be “cleaned” in a single transaction. Joy Ighade, Founder and CEO of Alexander Jon Compliance Consultancy, which specialises in financial regulation, general compliance, and financial crime, gives her thoughts on why money laundering is so prevalent in the UK property industry and what steps it can take to tackle it. 

What is the impact of money laundering on the property industry and the wider UK economy?

In reality, the full scale of money laundering throughout the UK property sector is unknown. However, Transparency International UK has been collating information on questionable funds being invested in UK property since 2016 and believes this figure currently stands at £6.7bn.

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

Information obtained and affirmed by Pandora Papers, which comprised circa 12 million documents exposed secret dealings and hidden assets of the world’s richest and most powerful, in particular the revelation of secret owners of more than 1,500 UK properties with an estimated value in excess of £4bn worth of property assets purchased via offshore companies.

This is just the tip of the iceberg.

Why is the property industry so attractive to money launderers?

Traditionally, property has always been viewed as a reliable form of long-term investment, and despite the current economic outlook, it remains a popular choice of investment – particularly for wealthy individuals with excess cash.

Aside from genuine wealthy individuals, UK property attracts sophisticated criminals who need to disguise their proceeds of crime. Buying property is an easy way and means of money laundering while enabling criminal networks to continue to thrive.

UK property can be bought by using offshore companies. Whilst Companies House now requires a certain amount of due diligence and information to be provided on the beneficial owner, this does not seem to be the case for companies registered overseas and especially in countries with well-known secrecy jurisdictions. The flip side to this is that the true purpose and origin of financial transactions remain unclear.

Proper and accurate due diligence on property buyers must be conducted to ensure firms and banks know who they are dealing with and know the true origin of the funds. It is clear also from the number of fines meted out by some of the UK Money Laundering Supervisors that institutions are still falling short in this area.

HMRC recently revealed that almost half of those falling foul of AML regulations are property firms. Why is the industry failing to meet their AML obligations?

In direct response to the HMRC October 2022 headline - it focused on Estate Agents who either failed to register with the HMRC for AML purposes or the firm had registered but had failed to put in place adequate risk assessments and other relevant policies and procedures to ensure the firm met its required AML obligations.

These offences attracted numerous fines and in one particular case a sentence of 120hrs unpaid community service.

Until August 2022, it was perfectly legal for offshore companies to purchase property in the UK without providing details of the beneficial owner, which effectively allowed the beneficial owner to remain anonymous.

However, the new Economic Crime (Transparency and Enforcement) Act 2022 requires overseas firms with property in the UK to register with Companies House by 31 January 2023.

Aside from the above, there is a blasé attitude from a number of property firms that they believe they will never be caught out and therefore prefer not to engage in the required resource to ensure they abide by the UK AML regulations.

Where such an attitude does not exist, it is usually a simple case of the firm not having the financial capability to employ the right individual to carry out the role or the firm believing they have adequate policies and procedures in place as well as the personnel - even if a little lacking.

Traditionally, property has always been viewed as a reliable form of long-term investment, and despite the current economic outlook, it remains a popular choice of investment – particularly for wealthy individuals with excess cash.

Is the government doing enough to support the property industry, and if not, what steps should it be taking?

Firstly, it is important to be clear on the facts – the UK has in place Money Laundering Regulations which, depending on the type and category of the firm, it expects all firms to act in accordance with these regulations. The Regulations are UK statutes and therefore penalties are issued for non-compliance. The onus remains on each firm to ensure it operates within the regulations.

These regulations alongside industry-wide guidance provide a framework within which firms are expected to conduct its business. The UK Government has recognised the need for further specific regulation where it is clear that the current regulation does not cater for certain scenarios or loopholes.

To this end, the government has introduced a plethora of legislation and reforms and property firms should avail themselves of this information by employing competent personnel to ensure they are operating within the regulations.

Many companies are investing in AML technology. Is it an effective solution for ensuring customer due diligence, record keeping and the reporting suspicious activity?

Technology is positively impacting the economic world globally, and in most industry sectors it speeds up operations and efficiencies without impacting accuracy.

Anti–Money Laundering technologies can play a valuable role in enabling property firms to tighten their policies and in flagging potential criminal activity, but such technology can only work effectively alongside experienced Compliance Professionals who have the capabilities to spot the warning signs and other potential red flags.

The client due diligence process has come a long way in terms of digitisation. This is only set to improve and ensure every aspect in the CDD process is fully electronic. However, it seems that the young, disruptive and innovative financial institutions and firms are more successful in ensuring the CDD process is almost 99% electronic.

In relation to record keeping, a lot of firms have automated their processes and have sought to go paperless where they are able. However, there are instances where it is still not fully developed and therefore firms should still make adequate arrangements for records that are not yet fully electronic.

Many firms have sought to improve their own internal suspicious activity reporting moving from a more manual process, however, the ability to do this has depended on the firm’s financial resources to implement such electronic systems.

In conclusion, there are many benefits in investing in AML technology, however, the scale to which this can be done will always depend on the scale and resources of the individual firm.

If a property company is concerned that they are not doing enough to meet their AML obligations, what would you advise them to do?

The first steps are recognising and acknowledging that there is an issue that needs to be rectified and that it is brought to the attention of the Board and Senior Management.

The Board and Senior Management must ensure that it hires a dedicated Compliance Professional with sufficient seniority and independence to carry out the role effectively.

The firm must ensure the Compliance Professional is competent. The firm should seek to hire a competent individual / s who will carry out a number of tasks including ensuring there is a robust Financial Crime Framework & Compliance Strategy developed and implemented.