On 21 November 2016, a Special Report from the Government was published in response to the Home Affairs Committee report on the Proceeds of Crime, flagging serious concerns regarding the use of the UK property market to launder the proceeds of international crime.
The Home Affairs Select Committee report, which was published on 15 July 2016, criticised the Government for failing to take effective measures to tackle the vast sum of money which it is estimated is laundered through the UK every year. The report quoted Robert Barrington, the Executive Director of Transparency International UK, as saying that “it seems likely that in terms of money laundering going through the UK system every year, it is at least £100 billion”. This figure is more than the GDP of many countries in the world.
The Home Affairs Select Committee focused in particular on the property market as a vehicle for money laundering and received evidence that the property market was "without question" a destination for laundered money. The value of property in the UK subject to criminal investigation for being proceeds of international corruption in 2004–2015 was £180 million. Another statistic the Committee focused upon was that last year there were 1.2 million property transactions in the UK, whereas – according to the NCA – those 2.4 million buyers and sellers generated just 355 Suspicious Activity Reports. The Committee commented that only 335 Suspicious Activity Reports was "astonishing" and concluded that supervision of the property market is totally inadequate, and that poor enforcement has "laid out a welcome mat for money launderers." It recommended enhanced supervision of the property market.
Whilst rejecting a number of the Home Affairs Select Committee's recommendations, there are some features of the Government's response which give an insight into future developments which could impact significantly upon the property business.
Suspicious Activity Reports
The Government has recognised that the ELMER system for reporting Suspicious Activity Reports (SARs) is heavily overloaded and therefore rendered completely ineffective. The ELMER system, despite being designed to manage only 20,000 SARs, currently processes 381,882 of which only 15,000 are looked at in detail, some 4%.
The Government has committed to replacing the SARs IT system, and considers that those who will benefit from the new IT system should share the costs for developing it.
It is unclear whether "those who benefit" from the new IT system includes those businesses who actually use the system, and if so how the Government proposes to allocate any charges. Businesses which regularly use the SAR system may see this as a further example of the Government outsourcing the policing of public law enforcement to private companies – now it is the cost which is being outsourced too. The risk is that applying charges will act as a disincentive for the making of SAR's – precisely the problem that has been highlighted.
Estate agents should be acutely aware of the need to report suspicious activity in accordance with the applicable money laundering and terrorist financing offences. The Government will consult later this year on the transposition of the Fourth Money Laundering Directive, including the Directive’s provisions regarding estate agents.
Money Laundering in Property Transactions
The Government in its response to the Committee's report has acknowledged the concerns that estate agents may not carry out anti money laundering or counter terrorism finance checks on a contracting party to a transaction who is not a client.
HMRC, which supervises estate agents for anti money laundering purposes, faced criticism earlier this year from the Public Accounts Committee for failing to tackle properly tax evasion and they are being told that their supervision of estate agents is totally inadequate. There is little doubt that as a result of this repeated criticism they will shine a spotlight on the property sector.
All estate agency businesses must put in place policies and procedures that reflect the degree of risk associated with a property transaction. The Government clearly has concerns that this is not being done and may well see the response to the Select Committee's report as a mandate for HMRC, increasing the level of compliance checks and unannounced visits. Where HMRC find that a business has not met its obligations, they will use a range of sanctions such as civil penalties or referring the most serious cases for criminal prosecution.
Property businesses are also going to face a series of challenges arising out of other governmental initiatives to tackle financial crime. As a business sector it is one which will be exposed to the proposed offence of failure to prevent the facilitation of tax evasion (both onshore and off-shore) if, for example, its clients are purchasing properties in the UK to avoid overseas tax. There is also a proposed offence of failure to prevent financial crime which, on 18 November 2016, was very quietly introduced as an amendment to the Criminal Finances Bill.
Estate agents will need to ensure that they have reasonable procedures in place to prevent financial crime – whether it be tax offences or possibly more general economic crime – or face potential criminal prosecution if they are connected to others committing those offences.
The Government will expect businesses operating in the property sector to help detect criminal activity and, where there are concerns, report these via a new and improved SAR system. If there is one message those working in the property sector should take away from the Government's response to the Select Committee's report, it is that these businesses are now expected to police the UK property market or they may find the police turning up at their properties without an appointment for a viewing.