Those looking for bargains in London real estate may want to follow developments in National Crime Agency v Mrs A [2018] EWHC 2534 closely. The case is the first to rule on Unexplained Wealth Orders, Britain’s new tool for halting the purchase of British properties with money derived from corruption, human trafficking, and other wrongdoing perpetrated on a massive scale. In its October 3 decision, the court held that Zamira Hajiyeva, owner of a tony Knightsbridge townhome, must tell authorities how she could afford the place when her only means of support is a husband now serving 15 years for defrauding the Azerbaijan state-owned bank he ran. If she cannot show the house was bought with money from legitimate sources, the U.K. National Crime Agency will seize the property, now worth an estimated £15 million.
The Hajiyeva case could prompt a run on London real estate. Owners of other properties with a questionable provenance may decide to dump them on the market at fire sale prices rather than wait for the NCA to confiscate them. If so, there could indeed be many bargains on offer. Transparency International U.K. estimates £4.2billion (US$5.4 billion) worth of U.K. properties are held by those at risk of receiving an UWO.
But both bargain hunters and dodgy real estate owners might best hold off ringing an estate agent until considering another recent directive aimed at curbing criminal money flows into real estate markets. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 is likely to crimp quick sale plans. It is also very likely to ensure that any quick sale effort produces instead even quicker service of an UWO.
The Proceeds of Crime Act makes it illegal for a person who acquired real estate with criminal money to sell or attempt to sell it. To bolster enforcement, the 2017 regulations require estate agents to monitor all transactions in which they are involved for any sign of money laundering. If, as the official guidance provides, an agent “consider[s] that there is knowledge, suspicion or reasonable grounds for knowledge or suspicion” that the buyer or seller may be trying to launder money, the agent must immediately alert the authorities by filing a suspicious transaction report (STR). Sufficient “suspicion” or “reasonable grounds” for filing an STR includes considerations such as whether:
- the property is held through a corporation outside the United Kingdom,
- the buyer or the seller is a citizen of a country where corruption is widespread, or
- the owner is or was recently a senior government official or an officer of a “for profit enterprise where the state has ownership of greater than 50% or where information reasonably available points to the state having control over the activities of such enterprise.”
None of these factors — or the several others that agents must consider in determining whether to alert authorities – are dispositive. They require only that the agent make further inquiry. If the customer can explain away each, an STR need not be filed.
To see how these rules could bollix the sale of criminally-acquired real estate, consider Mrs. Hajiyeva’s case. Suppose she had decided to sell her Knightsbridge property before receiving the UWO. The court found that:
- the property was in the name of a BVI corporation;
- she and her husband are citizens of Azerbaijan;
- Azerbaijan scores poorly on measures of integrity;
- her husband had been a life-long public servant; and
- he had been convicted of defrauding a state-owned bank he chaired.
On these facts, any estate agent she asked to handle the property’s sale would have had to ask several probing questions before taking her on as a customer. They would have included: Why was the home titled through a BVI corporation? Given her husband was a career government employee, where did the money to buy it come from? What about her husband’s conviction for bank fraud?
Had Hajiyeva provided satisfactory answers to such questions, ones the estate agent could independently verify, the agent could have put the property on the market. Her tooth and nail fight to avoid providing the NCA with answers to these same questions, however, suggests she wouldn’t have been able to supply her agent with innocent explanations. If so, the agent would have been obliged to alert the authorities. That in turn would almost certainly have led to the NCA to bring an action to seize the property, the same fate that awaits Hajiyeva if she cannot provide innocent answers to the UWO.
The real estate money laundering regulations nicely box in those fearing service of an UWO. An attempt to sell will lead to questions they cannot honestly answer and the falsehoods they provide instead will likely trigger the kind of scrutiny they cannot withstand. Indeed, an attempt to dump a property quickly at a bargain basement price will produce even more scrutiny than in the Hajiyeva hypothetical. For in deciding if they must alert the authorities to possible money laundering, the rules say estate agents must consider if the owner “is keen to . . . sell quickly at an unusually low . . . price for no legitimate reason.”
Criminals who thought London real estate was a great place to park their money are now stuck with their pricey flats. They can either wait for the UWO server to knock on their door or hope they can slip through the net thrown over real estate transactions, knowing that if they fail they will lose the property sooner rather than later. If one could ignore the enormous harm their crimes have done to so many, one might sympathize with them. Given their crimes, it is right to feel the opposite. Nor should any guilt be felt for experiencing schadenfreude.
This post was ostensibly written to warn those looking to pick up London real estate on the cheap that UWOs aren’t likely to drive property prices down. It was in fact written to answer a question posed in response to last week’s post on UWOs. Won’t the threat of UWOs simply drive the money now in London real estate to countries more willing to ignore its origin? Assuming reasonable compliance by estate agents, quite likely given the heightened scrutiny they are now under, the answer as this post shows is no. Those who bought London property with the proceeds of their crimes are now condemned to wait for a UWO followed almost surely by the seizure and sale of their fancy places.
Hard to imagine a better ending to the mad rush over the past decade by crooked public servants, drug barons, members of the Russian mafia, and other assorted criminals to buy high-end London real estate — a sorry spectacle of wrongdoing now coming to a just end.
GAB | The Global Anticorruption Blog 
Rick, thank you for this helpful update on UK’s Unexplained Wealth Orders. With regard to the factors considered to raise “reasonable grounds” for filing an STR, I wonder how UK officials will be able to track down companies incorporated outside the UK if no transparency exists about whom they belong to. As had been pointed out on this blog by Helen Jiang before, when ownership of expensive properties is obscured—through anonymous companies, which own over 75% of real estate in Britain—it is difficult to confirm what properties belong to which kleptocrats or criminals. On a related note, I wonder what your thoughts are on the diplomatic effects of UK officials acting on STRs or suspicions that involve government officials from countries with which the UK is cooperating on matters important to domestic interests, even if those countries are those “where corruption is widespread.” I can see potential for acting on an STR to take a back seat to UK’s diplomatic strategy in some cases.
Thanks for a fascinating post! It’s interesting to see how the Proceeds of Crime Act enlists real estate agents in the state’s fight against corruption. Is this kind of mandatory reporting requirement for realtors normal in the UK and in other countries?
I’d also be curious to learn more about realtors are supposed to determine whether a buyer comes from a country where corruption is widespread. Does the UK government disseminate a list of corrupt countries? Does the realtor need to provide an explanation of why she thinks the country is corrupt? I also wonder whether this criterion is worth it. I imagine it will cut down on the work of realtors, but that it might also lead to the “escape” of some corrupt buyers from relatively non-corrupt countries. Why not just have a rule where all purchases made by government officials via an overseas corporation are subject to greater scrutiny?
Very timely and relevant post! The 5th and 6th EU Anti-money Laundering directives introduce some measures that are supposed to help with such efforts by establishing registries of politically exposed persons and and even registers of ultimate beneficial owners (the “UBO-register”) for companies and other legal entities operating within the EU. This also in part answers the questions raised by Vicky and Kevin here above.
However, with Brexit pending, I wonder if UK decides to also introduce these changes as they will no longer be obliged to do that… If they opt to not follow the new legal standards and not have any separate agreements with the EU, the UK realtors (and in fact other institutions obliged by AML regulations) will have a harder time enforcing the laws. On the same note, I wonder how UK is preparing for Brexit in the field of AML in general, but that is an entirely different topic.
Such a fascinating post, Mr. Messick. Thank you for sharing it with us.
While the 2017 regulations may indeed seem complementary to UWOs, I wonder whether the regulations would not in fact lead to passivity on the side of the authorities, who would rely too heavily on compliance of estate agents with the regulations and on estate agents’ ability to recognize suspicious transactions. Even assuming that estate agents would wish to fully comply with the regulations, can we really be confident that they are equipped to recognize the right red flags or the answers which would be enough for deciding not to file an STR? Besides the considerations that estate agents are instructed to take into account when determining whether or not to file an STR, do they receive any other professional guidance?
Furthermore, there is a concern that the regulations put too much pressure on the shoulders of estate agents. Depending on the potential sanctions that non-complying estate agents are facing, I am not sure whether it is fair to set such a low standard for filing an STR as “reasonable grounds for… suspicion”, and expect that the estate agents would be able to make an objectively satisfactory determination that the seller could explain each one of the questions addressed to him.
Thanks for your great post. I wanted to reply to Keller’s question above regarding mandatory disclosure requirements, as I published a piece on UK STR requirements last year as debate kicked off around the US Title Act, which would have imposed STR requirements on US lawyers. [Unfortunately, in my view, it never left the floor].
In short, many European countries have had STR-reporting requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports. The UK, in particular, implemented the 2001 EC Directive by passing the Proceeds of Organized Crimes Act (POCA) in 2002. POCA created criminal penalties for certain regulated sectors, most importantly lawyers, who failed to act upon their knowledge or suspicion that their client is engaged in money laundering. It required lawyers who have those suspicions to file a SAR with the National Crime Agency [see section 330] and to avoid tipping off their client that such a filing has been made [see section 333].
Thanks for your great post.
Whether in the United Kingdom, the United States, or most other countries, real estate sales tend to be a cover for corrupt funds. The goal through such sales is to ‘convert’ illegitimate funds into legitimate ones. There is this idea that by owning real property and title to it, this will stop the chain of those funds and ‘clean’ the money with the purchase. This turning of illegitimate to ‘legitimate’ funds takes when that purchaser then sells that newly acquired property to a new buyer.
By having governments seize or freeze assets (especially real property) in this context, it will voice that governments will not tolerate the purchase of their lands with illicit funds or by foreign criminals. Governments would show that they are taking a stance against money laundering and corrupt funds by seizing such assets. They also would have the ability to search into the buyer’s financial records and determine how the buyer could afford such a purchase. We have seen this in the Hajiyeva case. However, this poses another problem too.
By governments having this ability to search the buyer’s financials, past purchases, and income, critics will argue that it poses a privacy concern for the buyer and opens the debate as to whether a government should be able to dive into every real estate purchase. However, governments should have the ability to know who is purchasing property in their country and how those purchases are being funded. By having a lack of transparency with real estate purchases (as currently exists in many countries), it would only further encourage corrupt purchases by illegitimate means.
As stated in the post, the U.K. Proceeds of Crime Act makes it illegal for individuals who acquire real estate with criminal funds to sell it. Other countries should enact similar legislation with the same goals in mind that also define what constitutes “reasonable grounds” or “suspicion” in regard to what constitutes a suspicious transaction report. By defining these, it will create an objective standard for governments to follow when choosing to evaluate transactions.
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