Unexplained Wealth Orders and London Property Bargain Hunters: Part II

Last week I dangled before readers hunting for a home in an upscale London neighborhood the possibility that prices might take a sudden nose dive. Britain’s recently enacted law on Unexplained Wealth Orders (UWO) authorizes law enforcement agencies to seize a property if the owner cannot show it was bought with monies honestly come by. Given estimates some 40,000 U.K. properties can’t pass this test, I suggested it was possible the London real estate market could soon be flooded with properties for sale at bargain basement prices as those fearing an UWO try to dump them before law enforcers confiscate them.

But to the great disappointment of GAB readers looking for bargains on London properties, I explained that another new law makes this scenario highly unlikely.  Those trying to offload a property purchased with criminally obtained money are, under U.K. law, committing the crime of laundering money, and thanks to the recent tightening of the U.K. money laundering rules, British real estate agents must alert authorities to any transaction where they suspect money laundering.  With enactment of the UWO law, selling a property of questionable provenance now at less than full market price would scream money laundering. So loudly that no real estate agent no matter how hard of hearing could ignore it.

While the post dampened the hopes of readers thinking the UWO law might shave a couple of million pounds off a place in Mayfair, Knightsbridge, or other neighborhood where many anticorruption activists now dwell (okay, or more likely wish they dwelled), it did serve my real purpose: to prompt reader reactions.    And so it did.

Victoriya Levina asked two questions.  The first was whether British authorities would be able to respond effectively if a real estate agent did report that a proposed property sale might involve money laundering.  Citing Helen Jiang’s earlier post, she noted that many London properties are owned by corporations organized in secrecy jurisdictions, nations whose laws make it difficult if not impossible to determine who owns the company.  Wouldn’t this frustrate an investigation she asked? Her second question was whether law enforcement might hesitate to serve UWOs on owners from a country where Britain has important diplomatic or economics interests.

On the first question, suppose a corporation in a secrecy jurisdiction approached a real estate agent about selling a London property it owned; the agent saw signs of money laundering and alerted authorities.  The same facts that led the real estate agent to suspicion money laundering would surely suffice for the authorities to invoke the UWO law: asking the sale be enjoined until the seller explained where the money to obtain the property originated. Indeed, the facts here nicely illustrate the value of an UWO.  Its purpose is to shift the burden of proving a property was legitimately acquired to the one best positioned to do so: here the corporate owner.

On Victoriya’s second question, whether law enforcement will pass up the chance to serve UWOs on owners from countries with which Britain has close ties or interests, I can only speculate.  The law authorizing UWOs grants five agencies the power to seek them: the National Crime Agency, Her Majesty’s Revenue and Customs, the Financial Conduct Authority, the Serious Fraud Office (SFO), and the Director of Public Prosecutions (DPP). How much influence the government of the day has over them, especially the kind of informal influence that can be exercised behind the scenes, is question better directed to close students of British politics.  On one side, the Crown Prosecution Service, which oversees the DPP, loudly proclaims its independence of government.  On the other hand, when the SFO was pursuing a corruption case involving BAE and senior officials of the Saudi government, the government stepped in to quash the prosecution.  Although the reason given was national security, Corner House, a well-regarded civil society organization, asserted the real reason was economic.

Kevin Keller asked a series of questions about money laundering and real estate.  Do British real estate agents have to report suspicious transactions?  Do other countries have similar requirements for real estate agents?  He also wanted to know if the British government publishes a list of corrupt countries. One factor a British real estate agent must consider in deciding whether to report a transaction is if one of the parties is from a country where corruption is widespread. Does the U.K. government publish a list that real estate agents can consult?

To start with the last question first.  The U.K. does not publish a list of countries it considers corrupt.  What the latest edition of the guidance furnished real estate agents does say is agents must conduct a particularly thorough inquiry (“enhanced due diligence in money laundering speak) if a party to the transaction is from a “high risk third country identified by the EU and FATF” (¶4.14).

I can understand the U.K. government’s reluctance to create its own list of corrupt countries given the diplomatic headaches that would likely ensue.  But I would think the guidance could go a bit further than it does and note that there are several lists compiled by reputable organizations.   An NGO like TI UK (hint, hint) could even send its own list around to agents.  The purpose in either case is to put all agents on notice of particularly dodgy countries and thus make it hard for them to claim later they didn’t realize they should take a very, very close look at a multi-million pound transaction involving a buyer or seller from, say, Venezuela or Tajikistan.

As to mandatory reporting by real estate agents, EU real estate agents have been required to report transactions they suspicion involve money laundering since Commission Directive 2006/70/EC issued August 1, 2006.  While that directive applied only to real estate sales, with the 2018 Fifth Antimoney Laundering Directive agents who facilitate the letting of property where the monthly rental is €10,000 or more must report suspicious transactions as well. American real estate agents have so far fought off mandatory reporting, but thanks to recent news reports highlighting the use of properties in Miami and New York to launder money, they are now subject to limited reporting requirements. Pressure is also mounting to make them comply with the same reporting requirements as banks and other financial institutions.  (Pressure that perhaps might even increase if, as some suspect, the Special Counsel finds that some of the sales by the current President’s real estate firm helped Russian criminals launder money.)

Finally, Kevin questioned whether it was worth the effort to force real estate agents to consider a buyer or seller’s nationality in deciding whether to report a transaction.  Wouldn’t it be more efficient to require real estate agents to carefully review any property purchased by a government official involving an offshore corporation?  In fact, the guidance to real estate agents specifically requires they have procedures in place for identifying whether a customer is a public official (a “politically exposed person” in money laundering speak) or the relative or “close associate” of a public official. Agents must take extra care when assessing transactions involving these individuals for possible signs of money laundering.

My thanks to Ruta Mrazauskaite for noting in her comment that the 5th and 6th EU Anti-money Laundering directives both introduce measures to help curb money laundering in real estate by establishing registries of politically exposed persons and registers of ultimate beneficial owners for companies and other legal entities operating within the EU. Ruta wonders how Brexit will affect these provisions. The Fifth Directive requires EU member states to bring their laws into compliance with it by January 20, 2020, before the expected date of Brexit.  I would hope GAB readers still looking to buy high-end London real estate (and/or combat corruption) would lobby the U.K. government to keep the real estate anti-money laundering (AML) controls in place post-Brexit.

Lastly, Guy Rubinstein worried that the combined effect of the real estate rules and UWOs might lead law enforcement to become too passive, leaving it to real estate agents to expose money laundering schemes.  And if so, “can we really be confident that they are equipped to recognize the right red flags or the answers which would be enough for deciding” to alert law enforcement? More broadly, he wonders about the efficacy of turning real estate agents into enforcers of the AML laws. Guy, those are all great questions that deserve careful thought.  Please stay tuned for a further post.

Thanks to the many readers commenting on the earlier UWO posts.

 

One thought on “Unexplained Wealth Orders and London Property Bargain Hunters: Part II

  1. Thank you Mr. Messick for taking the time to respond to the readers’ comments. I’m looking forward to reading your next post about this interesting issue.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.