The dirty money market

Feature image

Many of the services provided by the legal sector are attractive to criminals seeking to conceal the origin of funds.

 

According to the National Crime Agency (NCA), around £100 billion is laundered through the UK every year. If we choose to classify money laundering as a ‘market sector’ in its own right and compare it to other established sectors by total revenue, it’s ahead of construction at £90 billion in 4th place and education at £73 billion in 5th. It’s outperformed only by manufacturing, at £357 billion, and finance, at £161 billion.

Recent high profile international corruption cases have demonstrated that corrupt, politically exposed people have obtained property in the UK and overseas. Law enforcement cases show that the UK ‘money laundering market’ is not just export focussed; UK criminals also invest dirty cash in UK property, which represents the most valuable asset type held by those against whom a confiscation order is made.

According to a study by Transparency International, an anti-corruption organisation, 36,342 properties in London have been bought through hidden companies in offshore havens. They claim that almost one in 10 properties in the Royal Borough of Kensington and Chelsea is owned through a ‘secrecy jurisdiction’ such as the British Virgin Islands, Jersey or the Isle of Man.

The Solicitors Regulation Authority’s 2013 Conveyancing Thematic Study found that a quarter of the 100 firms surveyed had experienced a client attempting to use a conveyancing transaction to commit property-related fraud or money laundering.

So, what makes our property market so attractive for laundering proceeds of crime?

One reason is that UK property can be purchased anonymously or using a false identity. The anti-money laundering checks that property professionals are currently carrying out are potentially useful for spotting ‘red flags’ to identify where enhanced due diligence is required, such as politically exposed people, but they do not identify the real buyer’s identity. Add to this the sizeable returns on investment available from UK property (10.74 per cent average yield per year since 1952) and the market stands out as a beacon for criminals that want to wash their dirty money.

The dramatic increase in migration has led to an explosion in the exploitation of vulnerable people wanting to gain entry to countries with controlled borders through the growing bogus identity documentation black market. Fraudsters are using advanced manufacturing processes that produce passports and other identity documents which are frequently not detected by expert border controllers. Are these high quality fake documents being used to launder money through property transactions? The answer is yes and the problem is increasing at an alarming rate.

Since 2012, I have participated in many round table discussions with regulators, law enforcement agencies, government think tanks and representatives from the legal, banking, insurance and financial services sectors to look at how best to meet the Financial Action Task Force (FATF) objectives to reduce global money laundering and restrict terrorism funding. However, the reality is that without government-led institutional and regulatory changes, property professionals and, in particular, lawyers are left without the tools they need to expose and prevent money laundering more effectively.

To tackle these problems properly, next generation fraud prevention tools are needed. Development will require significant private sector investment, as data needs to be shared in real time with multiple stakeholders. There are no short cuts, as the criminals involved are well organised, highly intelligent and, as the headline figures to this article illustrate, very well resourced.

In June 2013, FATF, the global task force that requires member states to follow a common anti-money laundering strategy to prevent terrorism funding, produced the report Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals in which, as the title suggests, the legal sector is recognised as being especially vulnerable.

In September 2016, the UK Government published their Consultation on the Transposition of the Fourth Money Laundering Directive ahead of the go live date
in June 2017.

The 4th anti-money laundering regulation states:

When carrying out Customer Due Diligence (CDD), the measures involve:

  1. identifying and verifying the customer’s identity, through documents, data or information obtained from a reliable and independent source
  2. identifying the beneficial owner and taking reasonable measures to verify that person’s identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer

It will be interesting to see how property market stakeholders and their regulators interpret this and what changes will be integrated into their commercial frameworks – no small task!

So, what needs to be done?

  • Will lawyers know the identity of all their clients?
  • Will lawyers know that the documents they are relying on are genuine and being produced by the owner of the documents, rather than an imposter?
  • Ultimately, to prevent money laundering, the recipients of money transfers will have to know where the money has come from. Is it realistic to expect lawyers to know this and for them to police this part of the banking system? It’s a big ask.

I fear that some property lawyers may face further criticism in light of the scale of money laundering in the UK. In the real world, property lawyers are operating in a fragmented and competitive market in which profit margins have fallen by approximately 50 per cent since 2000, while risk has risen significantly. These businesses do not have access to all the next generation tools required to support robust fraud prevention strategies. Consequentially, regulators and businesses are left to devise best practice using a ‘patching’ approach based on being suspicious of your customers and using antiquated procedures such as paper-based and face-to-face verification. These could be seen as holding the profession back from innovating towards an advanced lifestyle focussed customer experience.

I empathise with compliance officers for legal practice and compliance officers for finance and administration, as the ultimate penalty for wrongdoing is imprisonment. The options available to them look pretty limited:

  • Training to raise awareness of suspicious activity through consistent application of ‘suspicion testing’ throughout the organisation.
  • Audits and process testing.
  • Looking to use next generation data solutions that provide a greater insight into a person’s financial activity and identity credentials that adapt to new criminal methodology – where available and affordable!
  • Developing and maintaining dynamic information security policies to manage the increasing threat of information theft.

Whilst these changes pose new challenges for legal businesses, I see corporate governance as the new ‘referral fee’ for driving sales in the next few years. Go back 20 years, when referral fees emerged in the conveyancing market; the early adopters used them to win business. Today, more than 50 per cent of conveyancing instructions originate via a referral. In the current climate of unprecedented risk, stakeholders face significant brand damage exposure and financial loss. Those firms at the forefront of corporate governance will reap the rewards, as customers still want to buy houses and banks still want to lend money.

 

 

About the author

Ed Powell

BE Consultancy 0771 484 6270 Email