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Dirty cash: tackling money laundering in real estate

Property is a prime target for the proceeds of crime or corruption, but surveyors can be the first line of defence if they know what to look out for

Author:

  • Alex Frew McMillan

19 April 2022

Dollar bills hidden by tower blocks

Pope Francis personally signed off on the indictment that brought Cardinal Angelo Becciu, previously the deputy secretary of state for the Vatican City, to trial in July 2021. Becciu became the top-ranking official among 10 people to face the court in the Vatican, charged with money laundering, embezzlement, fraud, extortion and abuse of office.

At the heart of the charges, which Becciu denies, is an investment in 2014 that saw the Vatican Secretariat of State, the administrative ‘heart’ of the Catholic Church, allocate more than €200m to a property deal in London. The mandate to a broker’s external fund secured a 45% share of 60 Sloane Avenue, a commercial and residential building in South Kensington.

The allegations claim that when the deal went bad, the secretariat chased the losses. It fell out with two swindling brokers, diverted money and contracts to companies run by Becciu’s brothers in their native Sardinia, and suffered what a former Vatican treasurer calls “enormous losses,” in “an absolute fiasco.” 

Pope Francis has worked diligently to strip away mismanagement in the Catholic Church, just as he has pushed personnel reform from within. The trial is not yet concluded at the time of writing, but as it began, the Vatican published a first-ever public budget for the general-accounting office at the Holy See. The church’s most-detailed financial disclosures ever saw it declare ownership of 4,051 properties in Italy, and another 1,120 abroad, including upscale neighbourhoods in Geneva, Lausanne, Paris and London. The church says the entire episode marks a “turning point” in the credibility and transparency of the Vatican’s operations.

Money laundering can taint institutions even with the holiest of intentions. While in this case, the capital may have been raised legitimately through donations, its use and distribution is open to abuse which illustrates the importance of using a chartered surveyor and the technical and ethical standards they follow. The murkier the origins or the management of the money, the easier it is to mask where it flows. And the way the money was managed behind the scenes in the Catholic Church had been opaque in the extreme. Pope Francis has streamlined how those finances are run, and dramatically improved transparency about how the money is used.

Laundering money through real estate

Transparency is the watchword when it comes to identifying money laundering and preventing illicit funds from being turned into apparently above-board proceeds from property trades. Property will always be extremely popular as a washing machine.

“Real estate is a big-ticket item, so you’re able to wash a lot of money with one transaction,” says Clement Lau FRICS, RICS President. The advent of anonymous cryptocurrencies may heighten risks that already exist.  “I don’t think we should take it lightly,” he adds.

The RICS was concerned enough to issue a 2019 professional statement entitled Countering bribery and corruption, money laundering and terrorist financing as a professional statement and guidance note on the topic. RICS was also part of the HMRC’s ‘Flag it up’ campaign at the time, which aimed to stop properties being bought with dirty money. Among the points of action are the need to create a written policy concerning money laundering, to put a senior executive in charge of anti-money laundering compliance, and to state when “enhanced due diligence” into clients would be appropriate.

When dirty money enters the property system, it’s almost always masked. Creating a structure of legal trusts, funds, offshore companies, and corporate groups can hide both the proceeds and the perpetrator. The aim is to take illegally obtained money, funnel it through a network that is as anonymous and complex as possible, then buy property legally. The real estate can then be used by the criminals, rented out, or sold, and converted into clean-and-above-board cash.

If money is successfully invested through an anonymous offshore company and into a property, the property can be held to generate suitable rents for the short-term and capital gains over the long run. When it comes time to sell the property, the proceeds can be paid into virtually any bank as legitimate funds, since it’s now clear where the money came from.

“The banks are unlikely to look much beyond the last transaction,” says Scott Lane, founder of The Red Flag Group, a compliance consultancy. In general, financial institutions haven’t asked too many tough questions. “If you tick the right boxes on the forms, you can escape most review, and a lowly-paid compliance officer in a shared service centre for the bank is unlikely to scrutinise it too much.”

It should be a red flag to a property professional if the source of the money in a transaction is offshore, if the buyer is an offshore company, or if the buyer always wants to operate through their local law firm. A pliant legal counsel may be doing “little if any” in the way of know-your-customer checks on their clients, according to Lane.

Pay more attention to offshore entities

Property professionals should exercise greater caution and require in-depth, know-your-customer detail if they operate in a market into which money is easily moved. The same applies if they’re dealing with offshore entities of any kind and if money is coming from banks in “odd” locations or jurisdictions with scant banking legislation, says Lane. Watch out, of course, if physical cash is being used in large amounts, Lane adds, or if cryptocurrencies are involved.

A property broker, agency or buyer must know the entity they are representing or with which they’re transacting. Chase the paperwork, Lane suggests. Corroborate owners and directors of a corporation. Run background and media checks. Ideally, limit your dealings to local companies, with local directors, with local bank accounts, and a law firm that is known for its integrity.

With a greater awareness of the issue, Lau believes money laundering is preventable, but requires cooperation between the different parties in a deal. “We need to stay alert and agile in every step that we’re handling in a transaction,” he says. “Don’t take things for granted.”

Lau is also the head of development and valuations for commercial property at the developer and landlord Hongkong Land, which has a sizable portfolio in Central District, at the heart of Hong Kong’s financial sector. He believes it is much harder to launder money in a jurisdiction such as Hong Kong or Singapore, where title records are publicly available and each trade of a property can be clearly traced.

While the phrase ‘money laundering’ may instantly conjure up mental images of plotlines from Breaking Bad or Ozark, the malfeasance isn’t always so obvious as the masking of proceeds from the drug trade. Participants may be acting unwittingly, or being forced or pressured to cooperate by friends, relatives or corporate connections. A brokerage could get involved in corruption without knowing it, or while failing to make the appropriate checks or reporting, and still be liable as an accessory. Terrorist or extremist financing adds a whole other layer of complexity.

“There are a lot of reasons how or why this might happen – that means there are a lot of reasons why we need to be careful,” Lau says. “It’s not always just greed. There are other considerations.”

“Real estate is a big-ticket item, so you’re able to wash a lot of money with one transaction” Clement Lau FRICS, RICS President

Credit Suisse defends itself

The issue is at least becoming better-known. In February, Credit Suisse was defending itself in Swiss court against allegations that one of its wealth managers allowed a drug-trafficking ring to deposit 140m Swiss francs ($153m) that was then used to buy real estate, particularly in Bulgaria and Switzerland. At one point, a former wrestler smuggled 4m Swiss francs in small-denomination notes hidden in his car from Barcelona to Switzerland, prosecutors say, then deposited it in a Credit Suisse account.

Credit Suisse denies the charges as “meritless,” and asserts that its banker, not identified in the proceedings, is innocent. Prosecutors say the banker oversaw business relations with the gang, and deliberately masked the true origins of the money.

Later in February, the bank was again protesting its innocence after the publication of the ‘Suisse Secrets,’ a massive leak of data from the bank covering 18,000 clients from the 1940s through to the 2010s. A whistleblower provided the data to the Süddeutsche Zeitung, which then shared it with the Organized Crime and Corruption Reporting Project and 46 other news organisations.

‘Vast Leak Exposes How Credit Suisse Served Strongmen and Spies’ is how The New York Times described the findings. Global news organisations including The Guardian and Le Monde ran multiple stories outlining how the Swiss bank allowed dictators, spy chiefs, executives subject to sanctions and officials charged with corruption to open and hold accounts, often with multimillion-dollar deposits. Despite its public claims that it was cleaning up its act, Credit Suisse continued doing business with customers that it had flagged for suspicious activity involving their finances, the records indicate. The bank served “people whose problematic backgrounds would have been obvious to anyone who ran their names through a search engine,” The New York Times reported.

The whistle-blower, who remains anonymous, said in a statement that the motivation for the leak lay in frustration at the secrecy of the Swiss banking system, with laws that are “immoral.”

“The pretext of protecting financial privacy is merely a fig leaf covering the shameful role of Swiss banks as collaborators of tax evaders,” the whistle-blower said in the statement.

How the property sector can play its part

While this pressure is directed at banks in general, and the famously secretive Swiss system in particular, such unwanted limelight could find its way to shining on the property sector. Lane says it is not clear how the real-estate industry cooperates or interacts with law enforcement or financial regulators, but he suspects the answer is “not very well.” This necessity to flag suspect activity can start at the local level and continue up the corporate structure.

It is incumbent on the property industry to prevent itself becoming a destination for questionable funds. Credit Suisse and the Catholic Church may be hitting the headlines now, but any property company that participates in the money-laundering process risks being dragged into the court dock, or the court of public opinion.

All estate agents and letting agents in the UK who let any single properties with monthly rent over €10,000 must be registered with HM Revenue & Customs, the money laundering supervisor.

RICS does not have a supervisory role for anti-money laundering regulations, but it does require all RICS-regulated firms to comply with its Countering Bribery and Corruption, Money Laundering and Terrorist Financing Professional Statement, as well as providing support and education to RICS members.

Chartered surveyors are the first line of defence. They will need to work in tandem with other service providers, though, if they’re to be effective. “The more people involved, the less likely you can conceal any misconduct,” Lau says. “We need to work together with lawyers and all these stakeholders. If they [money launderers] appoint someone who is a front man who looks perfectly legitimate, it becomes very difficult.”

Experienced property professionals probably have a well-developed extra sense when it comes to sniffing out potential wrongdoing, Lau believes. They should act if they have even an inkling that something is amiss, both as a professional duty and to avoid any liability on their own part.

“If you have any doubts, do a deep dive and get more information from the client, and do your due diligence,” Lau says. “At the end of the day, you could become a cohort if there’s anything that’s not standard.”

“The banks are unlikely to look much beyond the last transaction” Scott Lane, founder of The Red Flag Group

Anti-money laundering policies and sanctions compliance

RICS is deeply concerned about the events in Ukraine and supports the measures taken by governments across the world to impose sanctions on individuals and institutions. That includes the intention of the UK government to urgently strengthen protection against money-laundering by introducing a register of foreign owners of UK property.

Given the crisis, firms should review their anti-money laundering policies in light of the increased risks. In particular, we would strongly suggest that firms and members adopt an extremely careful approach to due diligence checks.

Read the full RICS statement on the crisis in Ukraine and the importance of sanctions compliance.

 

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