But to what degree should estate agents also be worried about financial crime? And if the industry is a target what can it do to reduce the risk of it affecting business?
The soaring levels of financial crime such as money laundering are certainly not restricted to the financial services sector – the UK property market is an attractive target for bad actors looking to invest their ill-gotten gains, both to ‘legitimise’ funds and turn a profit.
As an asset class, UK real estate yields consistently high returns. Due to the large sums of money being transferred between parties, the property industry can be a conduit for a range of criminal activities, from phishing to money laundering to fraud.
London’s prime real estate market is particularly appealing to criminals but the problem affects the wider UK market, and should not be viewed as a problem confined to the capital.
Prime real estate transactions are an attractive vehicle for money launderers to wash dirty funds. The Panama Papers shone a spotlight on the method of creating offshore entities to conceal the identity of real buyers, further fuelling the risk of laundered money going through the UK property industry.
Left unchecked, this poses a serious threat – both reputational and financial – to the UK estate agency sector, one that should be countered through adequate due diligence to ensure that the identity of the ultimate beneficiary is established.
Beyond this, there are various other financial crime methods which plague the industry, two notable examples of which are mortgage fraud and the use of escrow accounts.
Mortgage fraud often occurs where there is a lack of verification and thorough checks on who is borrowing to facilitate the purchase of a property.
Escrow accounts used in property transactions are also an attractive honeypot for financial criminals. Due to the high volumes of funds and transactions that are processed through escrow accounts, they offer criminals a practical vehicle through which to funnel funds into the economy and make them appear legitimate.
However, it’s not just about sales. The lettings market is also a target, and equally vulnerable. Even more so than in the purchase of property, the level of background checks and due diligence currently being conducted on both potential landlords and prospective tenants, could be leaving the industry exposed. The sums involved in high-end lettings (particularly in London) bring them into the sights of financial criminals.
Financial criminals will aim to target both small and large firms of agents, and both are vulnerable to attacks. Larger firms are likely to have a financial services arm to their business, and that may also be a target for criminals. Indeed, these financial divisions of agents are unlikely to have the same level of defences, processes and resilience to protect themselves against financial crime as major banks and financial institutions will have in place. This leaves these divisions vulnerable to criminals seeking opportunities to commit fraud, launder money, access sensitive client details or breach cyber defences.
With this is mind it is critical that the property industry ensures it has robust procedures to combat financial crime, and protect itself from this growing threat. Some of the topics covered in Future Financial Crime Risks 2017 point to relevant areas where the estate agent industry can learn from the financial crime issues that banks are managing.
Effective information sharing, to improve the outcomes of counter financial crime initiatives, is a key concern within banks and an area of notable focus. Ultimately, they aim to catch the criminals whilst ensuring their organisation’s compliance with the law. Through sharing information, they are able to build a clearer picture of any criminal activity, which will ultimately improve the quality of the Suspicious Activity Reports (SARs) they return to law enforcement.
And the filing of SARs is one area where estate agents can drive improvements. The National Crime Agency’s annual Suspicious Activity Report for 2017 showed that estate agents only accounted for 0.12% of the total SARS reported between October 2015 – March 2017.
Sharing suspicions through SARs will help estates agents to better combat the wider prevalence of financial crime in the economy. Providing compliance staff with both structured training in order to help them feel confident about reporting, and access to the right technology and data in order to build a full picture of the suspicious activity, will help to boost reporting.
Following the enactment of the Criminal Finances Act, the accurate reporting of SARs can have a more pronounced effect in the fight against financial crime. Law enforcement now have the ability to act on SAR submissions more effectively due to the introduction of Unexplained Wealth Orders. When suspicious transactions are flagged to the National Crime Agency, they now have the ability to demand the source of wealth being used in a transaction. If the purchaser is unable to provide appropriate evidence, the authorities have the legal means to seize the assets.
Future Financial Crime Risks 2017 also highlighted that technology provides both opportunities and threats in the fight against financial crime. Within larger financial institutions, there can be an inertia in changing legacy systems which have often become complex and unwieldy through mergers and acquisitions. However evolving threats, a shortage of talent and the continued drive for profitability has seen banks making the shift towards digital, and in doing so, finding new ways to combat financial crime.
Likewise, technology can present a challenge for estate agents, who have previously not had the necessary systems in place to truly understand the level of risk a relationship presents.
Traditional hardcopy means of verifying and assessing risk associated with the buyer or seller, may not meet the risk-based approach outlined in the Money Laundering Regulations 2017, which requires more sophisticated and in-depth checks be conducted for high risk individuals. Technology has a significant role to play here. Efficiently drawing together and delivering the risk intelligence estate agents require in order to effectively identify and combat financial crime.
Hopefully, the experiences of financial institutions can help estate agents to employ new strategies to play their part in protecting themselves and their customers from financial crime risks, and make the UK economy a more hostile environment for the criminal fraternity.
*Michael Harris is director of financial crime compliance at LexisNexis® Risk Solutions