The beginning of 2022 has seen momentous and far-reaching regulatory changes affecting the real estate sector, which was already under pressure to improve its Anti Money Laundering (AML) practices. These new legislative changes present increased challenges to the industry as not only are criminals stepping up their effort to launder their dirty money through property but there are also greater compliance obligations.
In the UK and Ireland, criminals, both nationally and internationally are using real estate to conceal their money laundering activities. The lack of transparency surrounding ownership structures combined with a global pressure to combat illicit financial deals has placed a significant focus on AML in the sector.
Real Estate, lettings agents, and solicitors need to implement risk mitigation strategies to ensure they are compliant and to close gaps such as applying a risk-based approach to ascertain the true identity of customers by running customer due diligence (CDD) processes.
This spans from the simple identification and verification of the identity of clients (in the case of real estate transactions, the vendor, the purchaser, and any other parties involved).
Identifying the beneficial owner, who may be shielded either behind a third party acting as legal owner or behind a corporate vehicle, such as a company (a shell company for instance), a trust, or a similar vehicle.
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The Regulatory Landscape in UK & Ireland
As regulated entities, real estate companies play an important role in detecting and preventing money laundering.
In the UK there have been significant changes as a result of ongoing sanctions and accelerated money laundering legislative changes. Prior to the current sanctions, the real estate sector had been identified as one that exposes the financial system to money laundering risk by the HM Treasury and the Home Office in the National Risk Assessment of Money Laundering and Terrorist Financing 2020 publication.
Rachel Davies, Head of Advocacy, Transparency International UK noted that “London’s property market continues to be a safe haven for corrupt individuals, through anonymous ownership.”
“Londoners are right to be concerned that whilst the red carpet is rolled out for the corrupt elite, the capital is suffering from a housing crisis in which homes are becoming increasingly unaffordable. It’s clear that a transparent system, based on conclusive and publicly available data, is necessary to unmask the corrupt individuals using Britain to hide their criminality.”
Since 2016, the People with Significant Control (PSC) register has been in force in the UK. It is a publicly available database that records beneficial ownership information in respect of most UK-registered entities. In the same year, a similar register was promised that would record overseas ownership of UK land and property. The legislation to bring forward this register would take form in the Economic Crime (Transparency and Enforcement) Bill 2021-22.
This Bill had been deferred at the beginning of 2022, but following the invasion of Ukraine, it has been accelerated forward through Parliament. These measures are intended to directly impact the current crisis due to the alleged prevalence of Russian assets currently in the UK. There is currently £170 billion worth of foreign-owned property in the UK which this register aims to address by increasing transparency surrounding who ultimately owns and benefits from land owned in the UK and acts as a deterrent to those who “would seek to hide and launder the proceeds of bribery, corruption and organised crime”.
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It is also interesting to note that estate agents are only filing 0.1% of suspicious activity reports (SARs) out of 621,000 SARs each year in the United Kingdom. Closing the gap will require the obliged entities in the UK property sector to commit time and investment to their AML processes and systems.
In Ireland, the 2021 Regulations require trustees of relevant trusts to maintain a beneficial ownership register and to register the information on the Central Register of Beneficial Ownership of Trusts (or CRBOT portal). Relevant trusts established up to 23 April 2021 must have submitted information to CRBOT by 22 October 2021. Trusts created after this date have six months from the date of creation to submit information to the CRBOT portal Revenue has set up.
The Property Services Regulatory Authority (PSRA) is critical to control and supervise the Property Services Providers i.e., Auctioneers, Estate Agents, Letting Agents, and Management Agents. The PSRA is tasked with monitoring property services providers and taking measures that are reasonably necessary for the purpose of securing complianceReal Estate Combat Money Laundering & Mitigate Risk by property service providers with the requirements of The Criminal Justice Amendment (Money Laundering and Terrorist Financing) Act 2010 – March 2021. The amendment enforced the EU’s Fifth Anti-Money Laundering Directive meaning Property Services Providers holding license categories A, B, C, and D are all subject to the provisions of the AML Act. Additionally, recent changes have been made to a Property Services Provider’s obligations in the treatment of clients/customers from high-risk third countries and verification of all beneficial owners of the company.
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How to Mitigate Risk and Effectively Detect Suspicious Activity
A risk-based approach and the use of technology to detect and report suspicious activity are key for property professionals to combat financial crime. This includes:
- Implementing analytics tools and proper procedures to mitigate risk.
- Timely reporting to the relevant agency of real estate suspicious transactions potentially used for money laundering.
- Identification of all parties like buyers, vendors, lessors, and lessees. This is key to reducing money laundering in the real estate sector.
- Verification of ultimate beneficial ownership (UBO) against reliable and accurate sources.
- Screening of Politically exposed persons (PEPs) against PEP and Sanctions registries, and also adverse media checks.
To facilitate compliance an increasing number of property professionals are using Regtech providers to alleviate their manual workload and enable them to meet their ongoing compliance obligations so staff can focus on value-added activities. The authorities in the UK and Ireland have already made clear their determination to take a more interventionist approach. Obliged entities involved in the property must now have processes that enable them to confirm the identity of all those involved in a residential or commercial property transaction.
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May 10, 2022 Published by UBO Service.
