Real estate is one of the industries most exposed to money laundering and as such falls into the UK’s regulated sector. This means that real estate agents are subject to strict AML regulations and face harsh sanctions for non-compliance. One of the most important regulations governing the real estate sector is the need to confirm and record the ultimate beneficial owner (UBO) of properties.
Real estate is recognised as one of the oldest ways of laundering money and remains one of the most popular. This means that a large portion of the £88 billion laundered through the UK economy each year passes through the real estate industry.
In this article, we will look at why real estate is so attractive to money launderers, what UBO means, who might be a UBO and what you need to do to stay compliant.
Why is real estate used to launder money?
There is a reason that property has been used to store illicit wealth for such a long time. It has traditionally been very easy for criminals to conceal the true ownership of their properties by hiding behind complex corporate structures that add an air of credibility to their actions and allow them to operate through third parties and intermediaries without raising suspicion. Previous lax UK regulations around ownership of properties, especially by foreign corporations, also made our property market accommodating to this money laundering activity.
In addition to this, there is another reason property is such a popular method of storing illicit wealth, it’s a good investment.
Criminals that use real estate to hide their wealth are also able to generate additional income from the property itself. Common examples of how they do this are:
- Appreciation of the property over time
- Generate rental income – In recent years it has become increasingly common for money launderers to buy property near universities that can be rented to students. These offer a steady stream of short-term renters who are low-maintenance and relatively well funded
- To quickly flip the property – properties can be quickly renovated and sold for a profit, which not only generates additional income but adds another break to the audit trail should authorities ever investigate. It should be noted that to this end properties can be bought by one shell company and sold to another almost immediately, where both are owned by the same criminal
- Properties can be used as a base for further criminal activity – this can be as a base to manufacture and/or sell drugs, store illegal goods.
What is an Ultimate Beneficial Owner?
For example, a property can be owned by a company that is part of a larger corporate group, to find the UBO you would follow the group structure to the company at the top. The UBO/s are the individuals that own or benefit from this company.
It is also entirely possible that a criminal UBO’s name will not be attached anywhere in a money laundering corporate structure or scheme and will instead act through a proxy. Under UK law there are different definitions of a UBO for domestic and overseas entities.
The UK legal definition of an Ultimate Beneficial Owner of a domestic entity is as follows:
- Holds, directly or indirectly, more than 25% of the shares
- Holds, directly or indirectly, more than 25% of the voting rights
- Holds the right, directly or indirectly, to appoint or remove a majority of the board of directors
- Has the right to exercise, or actually exercises, significant control
- The trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other specified conditions in relation to the entity in question, or would do so if they were individuals, and, has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.
The UK legal definition of an Ultimate Beneficial Owner of an overseas entity is as follows:
- Holder, directly or indirectly, of more than 25% of shares
- Holder, directly or indirectly, of more than 25% voting rights
- Holder of right, directly or indirectly, to appoint or remove a majority of the board of directors
- Has the right to exercise, or actually exercises, significant control
- The trustees of a trust, or members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above in relation to the entity in question, and, has the right to exercise or actually exercise, significant influence or control over the activities of the trust or entity
Who might be an Ultimate Beneficial Owner?
It is important to note that owning property via a domestic or overseas company is not, in and of itself, illegal and many instances of this are completely legitimate and safe to do business with. However, it is a widely abused system and UBOs behind money laundering schemes can be:
- Domestic and international criminals; including drug dealers, people traffickers and fraudsters
- Those engaging in tax avoidance
- The global corrupt elite; including kleptocrats, dictators, politicians embezzling funds and sanctioned individuals
To give some context around the scale of the problem; in the wake of Russia’s invasion of Ukraine, the UK government felt that to combat the sheer amount of illegal ownership of properties by sanctioned Russians it was necessary to launch the Register of Overseas Entities. This requires all overseas entities that own property in the UK to register their UBO with Companies House and as such affects all criminals using foreign corporate ownership of property to launder money.
Of the 32,000 foreign companies that own UK property 18,000 are still to register their UBO data. This brings into question the legitimacy of the ownership of roughly 50,000 UK properties.
What do real estate agents need to do?
Whilst it is up to each individual company exactly what their AML procedures are there are certain requirements each must meet. One of these is to obtain who the UBO is for each transaction. This seems like an impossible task as money laundering corporate structures are deliberately confusing and the UBO’s name may not even be attached to it.
The first step is simply to ask your client, there is no reason that this information should not be freely given and if any undue secrecy is displayed this must be considered a red flag.
Once a name has been given it must then be verified. This traditionally is a time-consuming and difficult task that criminals rely on being prone to error. Due to this, false UBO information is often accepted, money laundered successfully and the real estate agent open themselves to the risk of future prosecution for failing to meet their regulatory requirements should authorities ever investigate the scheme.
At Red Flag Alert we understand the difficulties that obtaining and verifying UBO data presents, how it slows down your business and exposes you to risk. To solve these problems and protect your business we have designed our UBO data to be clear, easy to understand and allow for quick decision making. We clearly display and break down complex corporate structures and list all UBOs; saving you time and giving you transparency over potential client's corporate networks.
Simply obtaining and verifying UBO information does not fulfil all your AML requirements and Red Flag Alert is here to help with a fully compliant suite of AML and enhanced due diligence checks. Our fully digital system has been designed to not impede your business and be convenient for your client; each check takes 30 seconds of staff time to send out and is completed on your client's device, with no need for them to download an app.