As pressure from regulators and law enforcement intensifies, and property professionals develop their risk assessments, the need for greater publicly available information about money laundering techniques and practices remains unmet, writes Jonathan Fisher.
Sometimes, the factors that trigger suspicions will be obvious. Where, for example, a purchaser or seller seeks anonymity or funds supporting a purchase are received through an unnecessarily circuitous offshore route, red lights will start to flash.
The UK government’s National risk assessment of money laundering and terrorist financing 2017 (published in October) revealed that in an analysis of suspicious activity reports linked to property, 27% highlighted the presence of companies and trusts, 36% highlighted use of professional intermediaries and 17% reported high cash payments. However, in other cases, the money launderers’ techniques may be more subtle and sophisticated, making it difficult for the property professional to spot.
This article relates the circumstances of six suspected money laundering cases that do not fit the traditional mould. As I have been professionally instructed in each of these cases, the facts have been anonymised for obvious reasons.
Exchange controls and false declarations
The first case involved a string of out-of-London residential property purchases. Today, when the link between the property sector and money laundering is made, invariably attention focuses on prime and super-prime property in London. A recent investigation by Transparency International points to investment in the London property market of the illegal fruits of grand corruption emanating from a basket of leading figures in Eastern Europe and Africa. This perception was reinforced in the National risk assessment 2015 when it reported that 75% of investigations involving real estate had been handled by the Metropolitan Police Corruption Unit. In fact, the risks of money laundering are much wider.
In the case in point, a cohort of Chinese investors had decided to purchase multiple residential properties outside London of relatively low value. Customer identification presented certain difficulties, but the challenge for the property professionals was to risk asses the investors’ source of funds. The monies were coming from China, and although a breach of exchange controls does not always enliven the money laundering offences, if funds are transferred out of China on the back of a false declaration made to the Chinese authorities, a money laundering issue would arise. Typically, the false declaration would indicate that the purpose of the transfer was to pay for educational fees when, in fact, the true purpose was property investment.
Sidestepping the conveyancing solicitor
The second case was entirely different. A single property transaction was involved, but again, the residential property was located outside London. The purchaser was seeking to acquire the leasehold interest of a medium-sized flat in a seaside town which he intended to occupy as a second home. So far, so good. However, matters became complicated when the purchaser informed the estate agent that if he instructed a solicitor to look after the conveyancing aspects, the purchase monies would be transferred directly into the vendor’s bank account.
Although there was no suggestion the purchaser was intending to use cash to settle any part of the purchase price, the case raised certain issues. Normally, purchase funds would be paid by the purchaser to his solicitor, and subsequently transferred to the vendor’s solicitor’s account on exchange and then completion. The fact the purchaser wished to circumvent his solicitor raised a concern about the provenance of the monies, but it did not mean that the monies were necessarily tainted as criminal property.
A question arose as to whether the vendor’s estate agent should make enquiries of the purchaser to see whether the concern about the provenance of the monies could be assuaged. It would certainly be helpful if a purchaser could put forward an explanation that was credible, coherent and consistent, however unlikely this might seem at first blush.
Today, following the introduction of the Money Laundering Regulations 2017, the legal exposure for the vendor’s estate agent is much sharper than it was at the time this case arose. This is because regulation 4(3) imposes a new obligation on an estate agent to regard himself as entering a business relationship with the purchaser as well as the seller, thereby triggering an obligation to undertake customer due diligence on the purchaser as well as the vendor. Hitherto, it was only the vendor who fell to be treated by the estate agent as his customer for the purposes of entering a business relationship. As an aside, it should be noted that regulation 4(3) raises an issue as to exactly when in terms of timing an estate agent is required to undertake due diligence on a purchaser, in addition to the pre-existing question – which has never been properly addressed – of when a business relationship is established by an estate agent in relation to the vendor who is unquestionably his client.
Swiss bank accounts
The next four cases involve central London properties, and three of the purchases involved “politically exposed persons” (PEP) from Eastern European and African states. Suspicions about money laundering screamed out from the facts of the first London case, which did not involve a PEP. The purchaser offered to acquire a super-prime residential property but he had an arrangement in mind. The buyer said he would proceed with the transaction if the vendor agreed to raise the purchase price by £2m, and then arrange for £2m to be placed in a Swiss bank account established to the vendor’s order. No more needs to be said.
Politically exposed persons
The three cases involving PEPs were more sophisticated. In the first of these cases, the purchaser exchanged contracts on an incredibly high-value super-prime residential flat in central London. Shortly thereafter he informed his counterparties that he was not proceeding with the purchase because the developer had decided to buy out the purchase contract by purchasing back the freehold immediately following completion, giving the purchaser a tidy six-figure sum as part of the process. The concern was that the purchaser and vendor were acting in concert, using the purchase and buy-back agreements to launder illegally obtained monies through the London property market. If asked about the source of his monies at a later stage, the PEP purchaser could confidently and truthfully assert that he had derived the funds from the sale of a high-value residence in central London, where “top-end” estate agents and firms of solicitors had been involved.
The second PEP case also involved the purchase of a prime residential flat in central London. In a classic sign of potential money laundering, shortly before exchange of contracts, the purchaser informed his property professionals that a third party should be named as the purchaser. It is true that the third party, who was also a PEP, had been named as an individual and it was not a company that was being substituted, but the explanation for the change was unconventional. The purchaser explained that he was buying the flat as a present for the third party, in return for a similar present located in a foreign country that the third party had given the purchaser at an earlier time.
It is impossible to know in this type of situation the true position. Sometimes, independent evidence can be obtained to corroborate unusual or unexpected explanations, but the property professionals are left in a dilemma. The low-threshold meaning of suspicion in the money laundering legislation is especially challenging. In terms, a suspicious activity report will need to be filed in circumstances where there are reasonable grounds for recognising that the monies have been derived from criminal conduct. The nature of the criminal conduct does not need to be identified.
The third PEP case can be differentiated from the first two PEP cases, since in this case the PEP was a person who was clearly identifiable as a person who was holding office in an African state. Often, an individual is classified as a PEP because they are a family member or close associate of a person holding office. In this regard, property professionals will always need to have systems in place to enable them to identify whether a party to a transaction is a PEP. Failure to identify a PEP constitutes a breach of the money laundering regulations and may lead to the property professional undertaking customer due diligence at the wrong level.
Although the African office-holder had been open about his identity, his suspected money laundering modus operandi was clever. Instead of acquiring a single high-value property, the purchaser divided his resources and purchased five smaller residential properties, using different estate agents and solicitors for each purpose. The property professionals did not know of each other’s existence, although if customer due diligence had been undertaken properly, it would have become obvious that his income as an office-holder in the African state could not have sustained one of these purchases, let alone five. The property professionals were vulnerable to criminal prosecution in this case.
Keep your eyes peeled
Unquestionably, property professionals remain in the sights of regulators and law enforcers. The National Crime Agency considers the number of suspicious activity reports made by estate agents to be “relatively low” (National risk assessment 2017, paragraph 8.16), and as widely reported, HM Revenue & Customs has been imposing substantial fines on estate agents for failing to comply with anti-money laundering legislation. The most serious contravention will involve a failure to spot suspicious circumstances, and the message is clear. Property professionals must keep their eyes peeled not only for obvious signs of money laundering but also for more subtle indications.
Jonathan Fisher QC is lead counsel at Bright Line Law, which specialises in money laundering and other financial crime cases
A second article on money laundering lessons from property-related cases will be published at the end of May
