Proposed property anti money laundering rules too weak

Loopholes in proposed legislation designed to prevent money laundering through the UK property market need to be addressed if it is to be fully effective, a joint select committee has warned

The government plan is to create a publicly accessible register of the foreign entities that own UK property, and of the individuals who actually control them, to improve transparency over ownership.

The joint committee on the draft Registration of Overseas Entities Bill has published its pre-legislative scrutiny report.  Between 2004 and 2015, £180m of UK property was subject to criminal investigation as suspected proceeds of corruption, and cautions this may be just the tip of the iceberg.

In 2017, 160 properties worth over £4bn were identified as being purchased by high corruption-risk individuals, and 86,000 properties in England and Wales have been identified as owned by companies incorporated in jurisdictions where secrecy was paramount. 

Witnesses told the committee that a lack of information about anonymous owners often stands in the way of criminal investigations, underlining the need for new regulation. 

The report raises a number of concerns about the draft legislation, particularly criticising the omission of trusts from the proposed rules.

The Bill does not cover trusts, and since trusts are not technically ‘entities’, there are concerns that they will be used to circumvent this law. It recommends that the government’s plan to ensure that trusts are transparent, to be reinforced under the upcoming fifth EU Anti-Money Laundering Directive, must therefore be introduced at the same time as this draft Bill. 

Secondly, the Bill allows the government to exempt certain entities from publishing their information, and in some cases from disclosing it at all. The committee wants the government to make clear in the legislation exactly which entities can be exempted, and also asks for an annual statement to parliament the number of times these exemptions are used. 

Another concern is keeping information on the register up to date. The committee says vendors of property should update their ownership information once a year, but also update information about proposed transactions before they take place, thus capturing information at the point where most money laundering occurs. 

The proposals also do not allow for verification checks to deter individuals, including criminals, who want to submit false information. Without such checks the draft Bill risks failing to achieve its primary aim of increasing transparency about who really owns land.  

Finally, the committee warns that enforcing this new law may be difficult. The report suggests that civil penalties will be easier than criminal sanctions to enforce abroad, and against land or other assets in the UK. 

The government plans to introduce the Bill to parliament later in 2019, and to launch the register in 2021.

This will work alongside other anti-money laundering measures, including the people with significant control (PSC) register, unexplained wealth orders, and suspicious activity reports.

The committee recommends that the percentage of ownership thresholds that the draft bill uses to define beneficial ownership, as well as the definition of what it means to have ‘significant influence or control’ over an entity, must reflect those used in the PSC framework. Such an approach should avoid unnecessary administrative burdens on users, and promote the coherence and efficacy of the two registers.

Lord Edward Faulks QC, chair of the joint committee, said: ‘We welcome this much-needed legislation as one of the vital tools required to create a hostile environment for money launderers who want to use the UK property market to hide unlawful funds.

‘The legislation is well drafted, but there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation. 

‘In the current political climate, anti-money laundering may not seem an immediate priority. But the evidence shows there’s a huge problem, and it’s not going away. Time is of the essence: the government must get on with improving this bill and making it law.’

Tom Beak, associate in the real estate team at Kingsley Napley LLP, said: ‘The Bill is undoubtedly a positive step towards increasing the transparency of ownership in the UK property market. Whilst the recommendations strengthen the Bill and provide greater insight into how it would work in practice, the Bill is unlikely to make it impossible to launder money, just much harder.

‘Reliance on the implementation of the EU directive and concerns regarding the enforcement of sanctions suggest that the Bill is not perfect. But whilst the window of opportunity remains open to launderers, allowing them to restructure or dispose of properties in the meantime, it may be time to put this legislation to the test.’

Joint committee on the draft Registration of Overseas Entities Bill report, issued 17 May 2019

Pat Sweet

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