David Cameron has vowed to fight “dirty money,” pledging during a summer visit to Singapore to expose corrupt individuals who try to launder their “dodgy cash” by investing in UK property.
His comments have compounded scrutiny of the industry at a time when the practices of certain individuals – namely estate agents who help foreign nationals with questionable sources of income to buy luxury London properties – have been heavily criticised, following Channel 4’s July undercover report on the industry, From Russia With Cash. (The industry gives its reaction on what can be done to stop this in next week’s EG Residential supplement)
But other parts of the sector are vulnerable too; experts are warning auction houses to up their game, to avoid being implicated in money laundering schemes.
Tom Bridge, head of residential conveyancing and probate at Stephensons Solicitors, says criminals wanting to dispose of properties may see auctions as a “viable alternative” to private treaty, due to the speed of sales and auctioneers’ typical lack of legal experience, making them particularly “susceptible” to fraud.
He says: “Money laundering is very much a prevalent issue at the moment. Property is an obvious target in terms of being able to get rid of assets quickly.
“If you were a criminal wanting to launder money, auction houses probably would be something of a target.”
Falling foul of rules designed to prevent corruption and fraud in property transactions could result in a prison sentence or, at the very least, a drawn-out and public investigation of the business.
Auction houses must protect themselves from money launderers, says Nicholas Redman, senior professional support lawyer at DLA Piper UK. “There’s no doubt that there is a risk of money laundering at auctions,” he says. “It should be taken very seriously. There are a lot of sophisticated people out there.”
One sign of trouble that auctioneers should look for is buyers who are prepared to overpay, want to buy properties outright in cash, or present cheques from banks that are not guaranteed by the Banking Conduct Regime. Some auction houses accept payments in cash up to a certain level, and this must be stated in their conditions, Redman advises. Another red flag would be raised if a party regularly changed his or her name, or repeatedly tried to provide new personal identification.
As directed in the 2007 Money Laundering Regulations, sellers must always provide identification. These days, many auction houses also require bidders to identify themselves. “My recommendation would be that they [auctioneers] do that even though there isn’t a requirement,” says Redman. It is likely to be a factor that would be considered by the authorities in any consideration of whether auction houses were taking proportionate steps to manage money laundering.
A money laundering reporting officer should also be nominated and told of anything suspicious; failing to report concerns could be classed as a crime. Under the rules, suspicions should not be shared with any other employees.
Auctioneer Clive Emson says the rules appear to have been tightened since April, when HMRC took over from the Office of Fair Trading responsibilities for overseeing auctions’ compliance with the regulations; the resulting increased “bureaucracy” can slow the post-sale contracts process, he complains.
For example, buyers whom auctioneers have known for up to 25 years, in some cases at a social level, are being told they must bring in passports to prove their identity.
This is going too far, and has business consequences, argues Emson. “We’ve increased staff now,” he says. “In some auction rooms – not ours – the queue goes on for half an hour,” due to the additional administrative processes, he adds. This has increased costs, though these have been absorbed by reassigning staff from other jobs to the contracts desk.
Those sharing Emson’s concerns may be interested in a government review, announced on 28 August, to improve the money laundering rules as part of a drive to cut red tape.
Emson also questions the fairness of putting so much onus on auctioneers to verify identify. “If someone’s laundering money, they should be taken to the cleaners,” he says. “But identity theft is happening all the time; it’s almost impossible to be certain the guy we’re dealing with is the person you think he is.”
Auctioneers who are anxious about being duped can be reassured that they will not face any consequences as long as they can show they have taken “reasonable steps” to check the person’s identity, according to Bridge. In practice, this means asking for a passport and taking a photocopy of it. “You’re not supposed to be experts on identifying documents,” he says.
However, he also recommends taking a “cursory look” at the Land Registry to check when the property in question was bought. Most criminals would know that if they have purchased land or buildings within the past six months, questions may be asked when they try to sell it again. But by waiting nine to 12 months, they may feel they have fallen off the authorities’ radar, says Bridge.
Other signs to check for include whether properties are being sold on behalf of someone else or under power of attorney, he adds. Bridge, while admitting this sounds self-serving, also recommends building relationships with conveyancers, who can refer clients and carry out detailed checks on them.
Despite the undeniable risks, auctioneers’ concerns can sometimes be misplaced, feels Redman. For example, he is aware of a fear that holding deposits could expose auction houses to money launderers, and that they can be protected by passing the money on to solicitors. But this is unnecessary if reasonable precautions are followed, he advises.
It is not just money laundering regulations that need to be considered; auction houses would be wise to also bear in mind their obligations under the Proceeds of Crime Act. This means reporting suspected criminal activity, at any level, during dealings with clients. For example, if a seller was trying to offload land that an auctioneer knew had been contaminated by that person’s activities, they would have to disclose this to the National Crime Agency.
No sources interviewed for this article had heard first-hand of an auction house being pursued as part of a money laundering investigation. But, while the dangers may seem remote, the risk of “significant reputational damage” to property businesses is considerable, warns Sarah Wallace, Irwin Mitchell partner. “A tick box approach to compliance on money laundering very rarely works and it would be vital for any businesses with concerns to ensure they seek advice on how to improve their processes and develop better practices if required,” she says.
Increased government attention to fraudulent transactions in the property industry makes this even more pressing. It may be a good time for auction houses to reflect thoroughly on their procedures, to avoid becoming embroiled in a protracted and costly investigation.
How to thwart criminals
Red flags
• Buyer is prepared to overpay
• Buyer tries to use a bank not guaranteed by the Banking Conduct Regime
• Party provides changing identification, or changes
their name a lot
• Buyer offers to pay in cash
Avoid being part of a money-laundering scam
• Ask buyers and sellers to produce their original passports
• Appoint a money laundering reporting officer
• Alert money laundering reporting officer with suspicions, but do not tell other employees
• Check Land Registry to see if property was sold recently
