Developments: Money laundering risks
Property developers should be regulated for anti-money laundering (AML) purposes and conveyancers should have to report annually on membership of their panels, Transparency International (TI) has argued.
The campaign group also called for a requirement that conveyancers report annually on whether they had been handling conveyancing transactions for “higher-risk clients from overseas”.
Since 2016, it has identified over 2,000 properties worth over £12bn bought with “suspicious wealth”, more than a third of which were new-build or development properties worth a total of £2.2bn.
“Roughly speaking, UK companies acquired lower-value apartments whereas offshore companies purchased those at the higher end of the market.”
In the report Concerning Developments: Money laundering risks in new-build property, TI said analysis of this data identified three weak points in the UK’s money laundering defences that needed addressing.
Developers did not have to be regulated if they were selling their own properties directly via a development company rather than in an estate agency capacity.
As well as the risks to clients, there were also “money laundering threats posed by some developers themselves”, with 78 property titles worth £647m “being developed by landowners with suspicious wealth or developers with corruption and money laundering allegations against them”.
TI recommended that the government use its forthcoming consultation on broadening the scope of the AML regulations to regulate developers for money laundering purposes.
Developers’ use of panels of solicitors could have some benefits, it said, such as the firms’ familiarity with the site and lower costs for customers, but the practice ha also attracted criticism.
“While panel solicitors should be carrying out ‘know your customer’ checks on buyers, the commercial incentives involved can mean these are often not as rigorous as they should be.”
The report said that “in some instances, hundreds of purchases are signed off by just one or two law firms that have a strong incentive to rubber-stamp questionable transactions”.
This was because the developer would often offer to pay the buyers’ legal fees, a “key source of income” for the panel conveyancing firm, and because firms “do not want to be seen as obstructive and risk not being chosen on development panels for other projects”.
It added: “These are strong structural imperatives to push sales through, even when tough questions should be asked about a buyer’s source of wealth.”
TI recommended that conveyancers report annually their membership of developer panels to their anti-money laundering supervisor, mainly the Solicitors Regulation Authority or Council for Licensed Conveyancers, but soon to be the Financial Conduct Authority.
The report said that while solicitors were required to conduct business-wide AML risk assessments, including whether they were doing conveyancing for overseas clients from a “tightly defined list” of high-risk jurisdictions, this information was not “readily available” to their AML supervisors.
“Considering the inherently high money laundering risks in conveyancing, and the compound risks posed by overseas buyers from higher-risk jurisdictions, firms should be required to report more information about this activity annually, and AML supervisors should be using it to help target their auditing work.”
TI recommended that solicitors report annually on whether they had been handling conveyancing for higher-risk clients from overseas.
It added: “While recent large-scale asset seizures are welcome, the challenge at hand is not one we can address through enforcement alone.
“Stopping the money upstream is crucial if we want to end the UK’s reputation as a haven for ill-gotten gains, and prevent illicit wealth from distorting our housing market.
“With better data and more eyes on the issue, we can make more targeted interventions to make sure businesses are not rolling out the red carpet for kleptocrats and organised crime.”
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