Those looking for bargains in London real estate may want to follow developments in National Crime Agency v Mrs A  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.