Earlier this month Transparency International UK published a report entitled “Corruption on Your Doorstep: How Corrupt Capital Is Used to Buy Property in the UK.” The Britain-specific recommendations are part of TI’s broader “Unmask the Corrupt” campaign, a call by TI, and echoed by others, to establish public registries of beneficial ownership. A similar call to unveil the individuals behind the shell corporations used to buy luxury condos in Manhattan garnered a lot of attention stateside during last month’s New York Times “Towers of Secrecy” series on the city’s high-end property market (see here, here, here, here, here, and here). The anticorruption rationale for mandating disclosure of real property beneficial ownership seems straightforward: As both the TI-UK report and the NYT series argue, buying real property in New York and London is an appealing way to launder stolen funds, because high-end real estate purchases allow a corrupt actor to inject millions of dollars into the legitimate market without having to deal with pesky anti-money laundering regulations, completing the purchases through shell companies that disguise the true beneficial owner. Requiring public disclosure of the beneficial owners of real property would in theory have two related benefits: First, requiring purchasers to reveal beneficial ownership information up front would dissuade some from using real property as a means of laundering money, and second, if law enforcement authorities have ready access to this information, it will make it easier to instigate and conduct investigations, as well as to seize assets later on.
Indeed, transparency in real property beneficial ownership seems like the kind of thing all anticorruption advocates should support, which is why it may seem a little counterintuitive when I say TI and others are taking the wrong tack. Pushing for central public registries of beneficial ownership of real property will not likely achieve the two objectives, and may have serious drawbacks. Here’s why:
Regulating the whole for the few does not make good policy, and in this case is probably politically infeasible.
Both TI-UK and the NYT throw out a lot of statistics that are convincing from an anticorruption perspective, but they don’t do much in terms of putting that perspective into perspective. As TI points out, over 75% of UK properties which since 2004 have been investigated as the suspected proceeds of corruption used offshore shell companies to mask their owner’s identities. A 2013 investigation into London’s One Hyde Park, at that time the world’s most expensive residential building, revealed that nearly 80% of properties had been purchased through shell companies registered abroad. The NYT series focused in large part on the Time Warner Center (TWC), a luxury building overlooking Central Park in which over 60% of owners had purchased their condos under a cloak of anonymity, and at least 16 of whom had been at some point subject to government investigation. It’s clear that corrupt actors view high-end real estate in stable, metropolitan cities as a great way of laundering money. But when we look at the real estate market as a whole, and the frequency with which individuals choose to use shell corporations to purchase properties for perfectly legitimate reasons, the picture changes dramatically. It’s true that 16 foreign nationals who have at some point owned TWC property have been subject to government inquiries, but there are 192 condos in the TWC and they change hands frequently. In London, TI reports that 113 of the 144 London properties which have over the past 10 years been investigated as being suspected proceeds of corruption were registered to shell corporations rather than individuals, but this is out of the over 40,000 London properties held by foreign companies. In the words of the Director of Operations for the Metropolitan Police’s Proceeds of Corruption Unit, “the percentage of properties purchased via illicit money is tiny in comparison to the legitimate trade, but the values are huge.”
Even assuming we significantly underestimate the annual purchases of real property through corrupt funds—which is probably true—the shell company purchases of real property using illicit funds is still likely a very small segment of the overall shell company purchases of real property. The ratio is important for two reasons: 1) regulating the whole as a means of regulating a small segment is rarely the most effective means of addressing a problem; and 2) more importantly, the non-corrupt interests which benefit from shell company privacy, particularly in the US, make the establishment of a central registry disclosing real property ownership politically infeasible. People choose to use shell companies to purchase property for numerous reasons, including limiting exposure to lawsuits, avoiding double taxation, easing multiparty transactions, and inheritance and investment strategies. Foreign registration often affords exemption from capital gains taxes and in some jurisdictions companies can be created in as little as two days. The establishment of full transparency of beneficial ownership of real property amounts to a curtailing of benefits for all individuals who opt to use corporate vehicles to purchase property in order to target a very small segment using these vehicles for corrupt purposes.
This being said, some progress has been made on these issues over the past two years. The UK and EU should soon both have legislation requiring that domestic companies identify their beneficial owners. The US has noticeably been dragging its feet, though the U.S. Treasury has proposed plans to require financial firms to collecting beneficial ownership information from clients. However, it is not clear that these requirements, which focus on registration of foreign companies (UK and EU) and financial firms (US) will directly affect real property purchases, which are often cash transactions conducted by agents with no incentives to perform any due diligence other than making sure all the money adds up. If the anticorruption world wants to see more immediate change, they’d be well advised to design more targeted efforts. An example of such a recommendation was made just last week by the Stolen Asset Recovery Initiative, which called for the financial disclosure requirements for politically exposed persons (PEPs) to be amended such that any disclosure of assets must include properties owned through legal entities or for which the PEP is the beneficial owner. Though this reform would be limited to public officials required to submit financial disclosures, it also it is the kind of targeted regulation which could prove both more effective as well as more politically tenable as it targets a much smaller subset of real estate purchases, and a subset composed of people more likely to be engaged in corruption.
We should not ignore the real ramifications disclosure requirements may have on secrecy jurisdictions.
As a corollary to the legitimate domestic privacy interests which would militate against central public registries, the countries which specialize in setting up offshore corporations also have valid interests in maintaining attractive privacy rules. For example, more than 60% of 2011 government revenue in the British Virgin Islands was collected from company registration fees. The Premier of the Cayman Islands, another offshore hub, noted last December that, “[u]nless such registers become the new global standard and are being used by all major players – including the UK – [we do not] intend to go first and have our economies experimented with and potentially damaged. We see no need for a central registry that would increase cost to business and the country and also create a potential single data source, which motivated and skilled individuals could hack into for gain.” The majority of offshore corporations do not engage in money laundering, but do choose to register in secrecy jurisdictions. In restricting some of these countries’ comparative advantage, we should be aware of potential negative economic effects.
We may want to look closer to home.
The corporate beneficial ownership requirements in the UK draft legislation are based on corporate self-reporting. Applied to companies formed in order to purchase real property, the utility of this requirement decreases significantly. Companies purposefully formed to launder money through real estate will most likely simply misreport, or use corporate service providers (CSPs) known for more lax due diligence standards. Interestingly, according to a 2012 paper by researchers Michael Findley, Daniel Nielson, and Jason Sharman testing how likely CSPs were to follow international guidelines on collecting identity documents prior to setting up shell companies (summarized by Professor Sharman in his previous guest post), “against the conventional policy wisdom, those selling shell companies from tax havens were significantly more likely to comply with the rules than providers in OECD countries like the United States and Britain.” We may simply see a shifting of business from offshore havens which are more likely to follow regulations to major economies which are not. Either way, we may be no more likely to have companies set up to launder money actually submitting the names of beneficial owners.
A windfall of information may not lead to a windfall of change.
This may be rather obvious, but it’s worth noting all the same: Transparency in and of itself does not solve the problem; data still needs to be used to instigate and conduct investigations. In establishing a central registry for beneficial ownership of the entire real property market, as opposed to a more targeted approach, authorities will be faced with a windfall of information, most of which will be irrelevant to anticorruption efforts.
* * * * *
If increasing transparency is not going to be fixing anything anytime soon, what to do? Both the NYT and TI-UK touch upon the issue of industry agent regulation, but generally treat it as having a limited role to play. One of the key aspects of money laundering through real estate is that it requires the participation of various professionals, including lawyers, accountants, escrow and real estate agents, as well as condominium boards. Each of these groups may be regulated, which would allow anticorruption agents to focus their efforts on the most effective pressure points while expending less political capital than would be required in taking on diverse privacy interests. At a minimum, real estate agents should face the following regulations:
- Any property purchase above a relatively low threshold should either take place through a financial institution with AML checks, or the real estate agents should be required to ascertain the identity of all beneficial owners involved in the transaction. This standard should be more politically palatable than a central registry as the threshold limits the number of real estate agents involved. Furthermore, whereas under the TI recommendation the onus to reveal the beneficial owners is placed on the company, this alternative proposal places that burden on a party with less incentive to disguise the proceeds of corruption, and who is well-positioned to verify the identity of both sellers and purchasers. Doing so—or, more likely, hiring someone else to do so—would be an additional financial burden, but would also be more likely to generate valid information and could be further targeted to affect the market segments most vulnerable to corruption (i.e. new luxury developments which are not primary residences in specific cities). More thought should go into where exactly the threshold level should be set, but a suggestion would be any real property with a value higher than the average value of properties investigated as proceeds of corruption over the past five years.
- Real estate agents should be obligated to immediately report any suspicious behavior to anticorruption authorities. Suspicious behavior would include cash purchases, property sold at unusually low or high prices, or other indications that the purchaser may be a high-risk individual. The requirement to report is important as it allows authorities to be informed of a transaction before it takes place.
To be sure, there may be other benefits associated with increased transparency in property ownership, particularly in cities facing skyrocketing inequality and woefully inadequate access to housing. But as an anticorruption strategy, attempting to create public registries to identify the beneficial owners of all real property is both a political non-starter and unlikely to have a significant impact. A better approach would be to impose—and strictly enforce—more targeted obligations obligations on the middlemen in potentially problematic transactions, especially real estate agents and CSRs.
GAB | The Global Anticorruption Blog 
Melanie, this is a quite thorough post, but I wanted to raise some concerns.
First, I think that the TI-UK or NYT recommendations to which you’re responding have offered up a bit of a straw man. Your first criticism is essentially that it may not be desirable or feasible to regulate the “whole for the few”; in other words, it cuts too broadly to require disclosure of beneficial ownership in ALL real property. This appears to be the reason that you recommend a threshold limit for more targeted requirements (ones that you would prefer to put on third parties). The problem I see, though, is that a beneficial ownership disclosure requirement could also be restricted to SOME real property; there is no reason that disclosure could not similarly be restricted to transactions crossing a certain threshold. Importantly, such a limitation would certainly cut back on the privacy or political infeasibility arguments that you highlight. In my view, then, these arguments are not so much an argument against some form of a disclosure requirement as much as an argument for drawing the requirement narrowly.
Second, while I understand the idea that there may be political opposition to a beneficial ownership disclosure requirement, I don’t know that I fully understand the remainder of your criticisms. Alternatively, you seem to question such a requirement either because it infringes too heavily on privacy, that it interferes with the economic well being of “secrecy jurisdictions,” and/or that it is ineffective.
(A) As to the privacy concern, I already explained that the requirement could be circumscribed so as to reduce any resulting threat to privacy. Furthermore, it isn’t clear that the privacy concerns would be as serious if the list were available to the government and not the public writ large. Lastly, I’m not entirely convinced that one has a legitimate privacy interest vis-à-vis the government to secret ownership of property. I also question whether many of the reasons for wanting secret ownership – for example, to reduce civil or tax liability – are actually desirable ends worth protecting in the name of privacy.
(B) Next, I have trouble seeing how country A should be obligated to refrain from gathering information – deemed important to its AML efforts – about domestic property transactions merely because it might complicate another country’s efforts to permit secrecy in banking and corporate registration. Besides struggling to see the purpose behind any comity interest in that instance, I again question whether we’d ever want to protect secrecy in tax havens. Not wanting to interfere with those who wish to earn money by looking the other way doesn’t seem like much of a valid reason to avoid beneficial ownership disclosure requirements.
(C) Though I have been guilty of this in my own writing, I don’t think it’s worth placing too much emphasis on the concern that this would be ineffective in the sense that we would still have to do something more with the information. We can presumably narrowly restrict the data gathered so as to not overwhelm government regulators and the data certainly could be integrated into government enforcement efforts, much as Suspicious Activity Reports (SARs) have been. It is hard to argue that the information wouldn’t be helpful; the key will just be in how we use it.
Third, while I understand that putting the onus on third-party real estate agents may give them an incentive to investigate, it may not actually be that helpful. The parties engaging in the transaction may have the same (or even an increased) incentive to lie. The problem is that the information still resides in the buyer/seller, and the agent has no power to compel the information. Furthermore, should the government come knocking and questioning why bad information was provided regarding the beneficial ownership, both the agent and the party engaged in the transaction could point fingers at each other. So it’s not clear that the incentives to either avoid the transaction or tell the truth are any stronger when disclosure is required to a third party agent (with no enforcement power; just the power to decline to take part in the transaction) than to the government (which can prosecute). Lastly, I’m not sure that disclosure to the third-party is any less intrusive of privacy. As I noted above, disclosure rules could be circumscribed in the exact same manner under systems that require disclosure to government or to an agent; so if you could limit the frequency of disclosure or the amount of information that must be disclosed in the same way, regardless of whether it goes to an agent or the government, how are privacy interests more infringed by the latter type of scheme? Is there some legitimate difference in how one’s privacy is infringed when one must disclose to a private third-party rather than to the government?
Jordan, isn’t Melanie’s critique leveled against a public registry? It’s not so much the distinction between a private third party and the government that she is drawing, but rather the difference between a privacy-preserving solution and one that is needlessly public. For instance, the anti-money laundering SARs system that you invoke does indeed start with a private third-party — like a bank — gathering information, but then immediately handing it over to the government. This is a far cry from what the TI-UK and NYT seem to be calling for: a broadly-construed, publicly-searchable registry of everybody who owns a luxury apartment.
This is a great post, Melanie! I think something that is sort of underlying your concerns is that the line between money laundering and corruption is blurred in these transactions. A lot of the points you raise about transparency are true for combating money laundering, but they are even more true for combating corruption. Sure, beneficial ownership information can aid in AML investigations and compliance, but transnational money laundering is extremely difficult to prosecute and/or prove. There are vast information gaps, that in a legal context cannot be satisfied with methods used in investigative journalism, but rather through subpoenas, etc that may not be valid in a foreign jurisdiction. Then there is the question of proving the underlying crime, and then actually being able to prosecute or sue someone who is overseas. All this becomes even more tricky in an anticorruption context. Even if we assume that most of the information we’d get from a central registry or other heightened due diligence requirements will be irrelevant to anticorruption, what do we do with the information that IS relevant? Can we actually block those transactions unilaterally? Which agency would do that? There also may be information that is relevant to the AML setting, but has nothing to do with corruption. For instance, perhaps we have a “corrupt” official from India buying property in New York. Even if we know this, what can we do about it if the official is not violating any AML laws in the process. How do we know that the money he’s using to buy the condo is the dirty money from corrupt acts in India without cooperation from Indian authorities on the matter? Have the UK laws said anything about this issue?
Melanie, I think you’ve raised some important points about the privacy interests at stake with these kinds of proposals. However, I’ve surprisingly found myself going back and forth somewhat on how strongly exactly to weigh these interests. On the one hand, the right to not have your address posted for the public to see (for all intents and purposes) is obviously important. On the other hand, couldn’t you perhaps make an argument that purchasing these kinds of luxury apartments is, well, a luxury, and one that these individuals are opting into and that may come with a slightly increased loss of privacy? I’m not particularly convinced by the latter point but I do think that there could be some argument to be made that in this particular context individual’s privacy rights might be somewhat diminished. All that being said, however, I think that it could perhaps be possible to rehabilitate the public registry proposal if you were to tweak the information that is publicly available. Would it be possible, for example, for these registries to simply reveal the fact that an individual had purchased property via a company in a particular city rather than its exact location?
In a similar vein, while I agree with Jordan that it’s rarely the case that more information in these kinds of situation, is a bad thing, it’s somewhat unclear to me why, given the privacy interests at stake, TI hasn’t taken a more targeted approach. The notion that the G20 will “publish lists of the real owners of all companies” (http://www.transparency.org/unmask_the_corrupt/en/) seems both somewhat unreasonable and highly unlikely to occur at any point in the immediate future (though I’m happy to be proven wrong on either point). If this is the case, wouldn’t it make sense for TI to generate lists of corrupt actors (or use other indices to identify particular individuals/companies) that should be ‘unmasked’ by the government (and whose beneficial ownership should be made public) rather than casting such a broad net?
Melanie,
Thanks for this thoughtful post; I don’t necessarily agree with your take on the efficacy of new beneficial ownership requirements in the UK or the potential fallout of requiring more entity ownership disclosure from the real estate sector as whole, but you raise some complicated scenarios that are worth thinking through in more detail.
One point of your counterpoint stood out to me, however, that I wanted to pick up on. You write,
“One of the key aspects of money laundering through real estate is that it requires the participation of various professionals, including lawyers, accountants, escrow and real estate agents, as well as condominium boards. Each of these groups may be regulated, which would allow anticorruption agents to focus their efforts on the most effective pressure points while expending less political capital than would be required in taking on diverse privacy interests”.
This actually is an area that TI, Global Witness, GFI and other have been doing work on and are looking to do more work in the future on, so it’s good you brought it up. We believe there are some effective strategies to pursue greater oversight in this area. However, I don’ think anyone is under the assumption that attempting to promote stronger regulations – particularly in the US – would mean expending LESS political capital than pursuing more comprehensive beneficial ownership transparency overall, at least in the US.
To begin with, these professional groups have a tremendous amount of political clout in their own right and there are few levers for real accountability (at least in the US). Case in point: as you probably know in the US state bar associations largely set the standards for legal practices in in most states (with some state oversight, depending on the jurisdiction) but these are largely, or at least arguably, self-policing professions Second, these political players are virtually synonymous with the wealthy private interests you name earlier that arguably represent a broad array of political opponents. They are either ‘are’ them or work directly for them. Separating them out (say, just focusing on real estate agents) might help narrow opposition but since professionally there are range of different players involved in the real estate business you’re bound to bring in the rest.
I raise this because, in terms of political strategy (apart from the efficacy of policy), I don’t think this argument makes case for abandoning broad beneficial ownership transparency work or looking for greater disclosure of company ownership as it relate to property itself. At least with a broader platform you get more support on your side because you bring in a broader array of interest who support your views.
We’er still hoping to do both, but the provide different campaign advantages, and shouldn’t be set against each other as an either/or choice, in my opinion.
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