When property gets too hot: investigating ownership for your CDD obligations

Regulators in the UK and beyond are clamping down hard on money laundering in the property sector.

While a Nottinghamshire estate agent won its appeal in March against a money laundering-related fine of £169,000, you can bet that it still upped its game in this regard.

And London in particular has found itself under ever-increasing real estate scrutiny. Last week alone we two stories in this area were in the newa: one in which the British parliament's Home Affairs Select Committee highlighted the general risks of "deep and widespread" laundering in the capital's property investment market; the other the specific case of a £32m Belgravia townhouse being seized as part of an international sting by the US Department of Justice.

By its very nature, it's hard to estimate laundered wealth as a percentage of London's total housing stock but it's safe to say that it's unsettlingly high. Clearly the figure must come down, and the sooner it does the better if we want to avoid a deeper crash than the downturn some surveyors are talking about.

At the heart of this crackdown are estate agents, particularly those operating at the premium end of the market, many of which are now structured like professional services firms in the LLP or partnership mould, often with their own "information services" departments.

Thorough ownership assessment and the off-shore problem

Toughened laws now dictate that agencies must demonstrate that they have adequately and faithfully assessed the true ownership of the properties for which they are acting as agents, and business cannot be conducted on any property too closely associated with anyone known to be a proscribed individual or entity.

This is where things can get very tricky, especially when companies – some of them shell companies, designed to obscure beneficial ownership – are part of the ownership picture, as we discussed in April in the wake of the Panama Papers revelations.

Off-shore ownership can sound alarm bells, and, according to the New Statesman earlier this year, "Such is the extent of the laundering that we don't know who owns nearly one in ten houses in Westminster [in London]. In the City of London we don't know who owns 4.5 per cent of properties."

In recent years – with a rise in foreign investment and in legislative changes – the ownership identification challenge for high-end agents has shifted from being an irrelevance to one for which we at Bureau van Dijk have noticed a sharp rise in incoming enquiries about our solutions to these problems.

Corporate ownership is complicated. Whether it's direct, indirect or circular, without cracking it, you can't establish who you're really working with, what they're up to and whether they're on any PEPs and Sanctions lists. (We discuss this in our white paper, Really getting to know your third parties.)

Solutions

As well as offering a general array of information on companies, such as their financials and financial strength indicators, our systems provide detailed and graphical information on ownership structures and sanctions lists, which can be used together in your customer due diligence (CDD).

"Being able to see where in the world this money is flowing in from is very interesting," says Ted Datta, director of governance, risk and compliance solutions in Bureau van Dijk's London office. "It's coming from places like China, Hong Kong, off-shore tax havens in the Caribbean. You name it. We can track this, and we're integrating it and indexing it into our systems."

As an aside, Datta notes that – perhaps unexpectedly – Bureau van Dijk's systems are as useful in examining high-end residential property ownership as they are commercial property, given the increased likelihood of top residential properties being part-owned by companies. "By some people London property is simply treated as a commodity," he adds, "and the weak pound has boosted this since the Brexit vote."

But how can customers do better CDD?

Pivotal to their work is our Compliance Catalyst. A streamlined risk assessment tool, it allows users to centralise and customise their workflows.

Consultation

This was the experience of one high-end estate agent who approached us last year after they'd been told in no uncertain terms that they needed to improve oversight in all of their processes.

Following our consultation, they established an entirely new CDD process. Centralised – to eliminate the conflict of interest from an agent in a branch office doing his or her own due diligence for commission-based sales – the process can be summarised by the diagram below.

Note the box for "SPVs" – or Special Purpose Vehicles. Often shells set up entirely for the purpose of buying property, these companies crop up with great frequency in the ownership structures of very expensive property, and estate agencies need to be able to identify and assess them – and the people behind them – before proceeding on a sale.

Get in touch

To chat to us about how we could help you in your customer due diligence, please email ma-marketing@moodys.com or call your local office.

Update!

Only a day after publishing this blog post, the Guardian newspaper has reported on its investigation into the case of a Brazilian businessman and politician's son who has admitted laundering millions of dollars in bribes in property in London and Leeds.

"The case potentially ties London property to one of the world's biggest fraud investigations, called Operation Carwash," says the paper.

Read the Guardian's full story.