Proposals for the first register of foreign-owned property aimed at preventing “McMafia-style” money laundering should be put in practice urgently and reinforced to plug potential loopholes, the government has been told.
Draft legislation contains insufficient verification checks to deter criminals from submitting false information and could allow those exploiting trusts to circumvent controls, MPs and peers have said.
More than £90bn is estimated to be laundered illegally through the UK each year, according to the all-party parliamentary committee scrutinising the registration of overseas entities bill.
Illicit funds help sustain Britain’s inflated property market through the purchase of homes that are frequently left unoccupied, emptying the wealthier parts of London of residents.
The issue was highlighted last year in the BBC drama McMafia, based on the book by Misha Glenny, which examined the penetration of western economies by organised Russian criminal gangs.
Quick guide Property and money laundering
What is the problem?
There have long been concerns that the UK property market is vulnerable to money laundering and corruption, with London real estate considered a particular problem. Buying an expensive mansion through a shell company enables a corrupt individual to ‘wash’ a large sum of suspicious money in a single transaction, while preventing law enforcement or journalists from finding out who truly owns it. Property generally increases in value, and thus also represents an excellent investment.
In 2015 the then prime minister, David Cameron, pledged in a speech in Singapore to clamp down on corrupt individuals using shell companies to launder dirty money. At the time one in 10 properties in the City of Westminster were believed to be owned through a tax haven. The Panama Papers subsequently identified more than 6,000 land and property titles worth at least £7bn owned through offshore companies.
What would the proposed entities bill do?
It would introduce a public register of overseas companies that own property in the UK, and the identities of the individuals that own or control them. It is currently possible to set up a shell company in an offshore tax haven and then use the company to acquire property, so the shell company hides the true identity of the buyer. The register, which aims to prevent this, would be launched in 2021.
How will the property register work?
Overseas entities that want to own or buy UK property will have to register with Companies House and identify their beneficial owners. Failure to register will prevent the company from obtaining full legal title, with sanctions for those who fail to comply.
What has already been done?
In 2016, the Cameron government introduced a public register of the true owners of British companies as part of a drive to promote transparency and anti-corruption measures. All corporate entities incorporated in the UK are now required to declare their beneficial, or true owners, as well as their shareholders. This prevents the true owner from hiding behind another company or a middleman.
The government also passed legislation introducing unexplained wealth orders (UWOs), which can be used to force those who own high-value property, but have limited income, to explain how they were able to acquire the property.
Last year a UWO was used against an £11m Knightsbridge property owned by Zamira Hajiyeva, the wife of an Azerbaijani banker who had been jailed for defrauding his bank.
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The proposed register could have a radical impact on house sales in the capital as well as other parts of the country, but its supporters fear it may be delayed by the political paralysis induced by the Brexit crisis.
Lord Faulks QC, the Conservative chair of the draft bill committee and a former justice minister, welcomed the “much-needed legislation”. He said it was “well drafted, but there are still some loopholes in the draft bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation.
“In the current political climate, anti-money-laundering may not seem an immediate priority. But the evidence we took shows there is a huge problem, and it’s not going away. Time is of the essence: the government must get on with improving this bill and making it law.”
His committee’s report says that in 2017, 160 properties worth over £4bn were purchased by “high-corruption-risk” individuals. As many as 86,000 properties in England and Wales have been identified as owned by companies incorporated in “secrecy jurisdictions” – commonly known as tax havens.
Between 2004 and 2015, £180m of UK property was subject to criminal investigation as suspected proceeds of corruption; many suspect that is the tip of the iceberg.
It is the security of UK’s stable, law-abiding environment, paradoxically, that attracts dirty money. Prof Jonathan Fisher QC, a barrister at Bright Line Law, told the committee: “If you asked the fraudsters … they would tell you … they are very comfortable with the political environment. London property has always been a good bet. We see evidence of organised criminals buying property outside London as well. It is broadly the stability element that attracts them.”
A few countries – New Zealand, Thailand, India and Switzerland – have restrictions on ownership of land by non-nationals. The UK is pioneering the development of a publicly accessible register of overseas commercial “entities” that will expose whoever is the beneficial owner behind a foreign company.
The committee is concerned, however, that the bill establishing the register does not cover trusts since they may not technically be “entities”. It is therefore calling on the government to ensure trusts are rendered transparent, through the Fifth EU Anti-Money-Laundering Directive, which needs to be introduced at the same time as the legislation.
The report also warns that plans for exemptions to the register – probably for foreign governments – need to be strictly limited and parliament informed when such exemptions are used. Information on the register should be updated every year and before property transactions take place.
The MPs and peers say tougher verification checks are required to ensure fraudsters do not submit false entries and suggest that experts from Companies House or regulated professionals could be made responsible for the accuracy of information.
Enforcement should be through civil penalties backed up by criminal sanctions for non-payment of fines, the report proposes. By preventing the completion of sales, the register in effect would have the power to freeze assets.
Working in conjunction with the Serious Fraud Office, National Crime Agency and law enforcement agencies using unexplained wealth orders, the register is intended to improve coordination in the fight against fraud and money laundering.
All foreign-registered entities, including those in Ireland, will be affected. There has been concern over the definition of beneficial ownership for registration affecting only those who own 25% or more of a foreign company. The report suggested lowering that threshold.
Faulks said: “It’s pretty outrageous that great chunks of our country are owned by people whose identity we are uncertain of and that the source of their funds remains a mystery.
“There wasn’t much disagreement between the parties. I don’t think there is any reason to delay this. There will no doubt be someone saying that this will deter foreign investment but I would reply that this is just the form of investment we want to deter if it’s [distorting] the property market.”
Ava Lee, a senior anti-corruption campaigner at Global Witness, said: “This bill has the potential to be groundbreaking. For the first time we could find out who really owns this country.”
Duncan Hames, the director of policy at Transparency International UK, said: “Every day that passes, criminals and the corrupt are able to hide behind the cloak of anonymity to launder their stolen wealth into our property market … if we are to stop the UK being a safe haven for dirty money, now is the time for action.”