The UK property sector has been a hotbed for financial crime in recent years, with many criminals seeing it as an attractive target to launder money through.
Indeed, Transparency International has warned that London’s prime residential market is at clear risk of being used for illicit activities such as money laundering and tax evasion, and the same is true for other UK cities. But does the new world of cryptocurrencies play a part in this criminal activity?
The draw of using cryptocurrencies for financial crime is their relative opacity – it is possible for an individual, or group of individuals, to launder huge sums of money around the cryptocurrency ecosystem, crossing jurisdictional borders and potentially avoiding international sanctions at the same time.
However, those who utilise bitcoins are now running into difficulty when interacting with the financial services sector. We’ve seen a number of banks globally banning bitcoin trading and exchanges as a result of the lack of regulation and associated high levels of risk with this currency.
The same is also true within the property market. As cryptocurrencies offer high levels of anonymity with a limited audit trail, individuals intending to purchase a property using funds derived from cryptocurrency transactions, either in full or as the deposit, are finding themselves denied as they are unable to prove the funds have come from a legitimate source.
This should perhaps come as no surprise, as concerns around the volume of criminal funds that exist in cryptocurrencies were highlighted in a recent interview with Europol, which states that as much as £4 billion could be being laundered via cryptocurrencies throughout the EU.
The reality is that for estate agents, any bids on property either in a cryptocurrency or in funds derived from trading in them, should be considered an immediate red flag. As part of standard due diligence, it is vital that agents ascertain where the funds have come from and consider the possibility that would-be buyers have used this technology to launder illicit monies.
The risk should be considered even more heightened when transactions come from high net worth individuals from high-risk countries which are subject to international sanctions – such as Russia, Iran, Sudan and parts of South America.
The high degree of anonymity offered by these currencies allows individuals to avoid detection by international authorities, which they would not be able to do via traditional bank transactions.
It has also recently come to light that such transactions are also being facilitated by so-called ‘luxury asset brokers’. These parties are brokering deals within the UK property market where overseas buyers from sanctioned countries are purchasing high value homes in bitcoin, without necessarily going through the appropriate due diligence checks. Any transactions involving luxury asset brokers should again be treated with extra caution.
To combat this criminal activity, estate agents will need to adopt a more proactive approach to preventing money laundering. All regulated firms, including estate agents and their intermediary networks, are obliged to fill out Suspicious Activity Reports (SARs) where they suspect money laundering, or some other form of financial crime has taken place.
However, in many cases, agents aren’t always aware of how to comply with anti-money laundering regulation, and as such the number of reports coming from the real estate sector isn’t necessarily reflective of the true level of financial crime occurring.
Estate agents must take steps to understand their compliance obligations when it comes to money laundering, and familiarise themselves with any new updates to regulation that may come in. While the cryptocurrency sector is taking steps to regulate itself, it is likely that the 5th Anti-Money Laundering Directive will include dealing with cryptocurrencies, which will be a crucial part of financial crime compliance in the property sector.
Before this comes into force, it is even more critical that agents ensure they recognise the nature of the risk at hand, and take due diligence to the appropriate level. Through a better understanding of the typologies of money laundering in real estate, and consideration of the spirit of the law around anti-money laundering regulation and how to apply it to property purchases funded by these new currencies, agents will be better positioned to protect the economy and their sector from criminals.
*Michael Harris is Director of Financial Crime Compliance at LexisNexis® Risk Solutions