https://www.mortgagefinancegazette.com/uncategorised/blog-pandora-papers-highlight-money-laundering-risk-property-14-10-2021/

In light of the Pandora Papers the issue of laundered money in property is back on the front pages. The leak of nearly 12 million documents revealed the scale of tax avoidance, concealed wealth and money laundering amongst the world’s wealthiest and most powerful individuals. 

The papers identified secret UK property transactions worth £4bn, highlighting the issue of foreign investment in UK property by secretive offshore vehicles. Indeed, the Guardian reported that nearly £7.5m of proceeds from ‘the world’s biggest bribe scandal’ (Unaoil) were invested into UK property. 

In light of these developments, tackling the issue of money laundering in property is more important than ever and, unsurprisingly, there have been calls for tougher legislation, particularly around the use of offshore vehicles. Despite legislation already being in place, the need for ‘more teeth and better coordination between the regulatory bodies are common gripes within the sector. 

Though much of the focus has been commercial investments, residential property is a key part of the puzzle when it comes to tackling money laundering. Estate agents, alongside property lawyers, are the gatekeepers to the property market and have a crucial role to play. 

Last year, a joint report from HM Treasury and the Home Office assessed the risk of money laundering in the property market as high (up from medium) in large part due to the increase in ‘overseas buyers and cash flows into the UK property market’. Estate agency risk was also increased (from low to medium) with the report highlighting weaknesses in “anti-money laundering and counter-terrorist financing (AML/CTF) controls, limiting the mitigations against the risk of money laundering in the sector.” Common failings included a “lack of bespoke policies, controls and procedures aligned with an appropriate risk assessment of each firm’s clients” in addition to failure to conduct sufficient ID checks.  

In other words, the failure of some property professionals to properly verify buyers’ identities, and comply with the relevant AML policies, means they risk supporting the laundering of dirty money. HMRC is responsible for monitoring agents’ compliance with the UK regulatory regime and there are serious implications for firms that fall foul of their obligations, including reputational damage, fines and even outright bans. A growing number of high value (£200k plus) and high-profile fines in recent years indicate that this is an increasing area of focus for HMRC.

New AI, Open Banking and facial recognition technology can automate ID and AML checks and help reduce the risk of such fraud. For example, Open Banking – part of a wider trend of giving citizens and customers more control over data – can make it much easier for firms to gather the financial information they need (often in the form of extensive bank statements) while still providing a positive, professional client experience. All providers must be regulated by the FCA, and Open Banking ultimately places the user in control, allowing them to easily rescind access to financial information if they wish. Agents using Open Banking can clearly sign-post where appropriate due diligence and Source of Wealth checks were carried out within a transaction. 

Facial biometric technology goes further than what a manual ID check is capable of, and what’s more, does it almost instantly. Biometric technology analyses unique aspects of the human body, such as fingerprints, voice patterns, facial traits and retina scans, using these as personal identifiers. The best systems cross reference and verify biometric features with those previously captured and registered to a trusted identity, such as a passport.

In short, whilst manual checks leave agents vulnerable to human error, utilising AI-driven tech alongside real-time PEPs and sanctions monitoring, provides a more reliable check in less time. 

This week, HM Treasury’s  call for evidence on the supervisory regime around AML draws to a close and we would urge the government to go further in its recommendations around the use of digital ID and AML checks. In its guidance for money laundering supervision, HMRC notes the role that such technology can play in supporting AML compliance, particularly when enhanced checks are required. Yet, this arguably falls short compared with how other government agencies are approaching e-ID. Take HM Land Registry, for example, which announced back in March that it was launching its Digital ID Standard, a new set of requirements to encourage digital identity checks in the conveyancing process.

The move benefits consumers and conveyancers alike, driving the industry towards a clear set of standards in digital ID whilst, crucially, conveyancing firms meeting the new requirements are now offered a Safe Harbour by HM Land Registry i.e. they won’t be pursued in any recourse claims resulting from the registration of a fraudulent transaction on the grounds that identity checks will have been adequate. A similar approach from HMRC would arguably benefit both agents and the wider economy by reducing the risk of money laundering in property.