Over the past 12 months, the average detached property in Knightsbridge was sold for £4.1 million while across the whole of London, one in ten homes are now worth over £1 million*. These huge sums are one of the key reasons why property transactions are so attractive to money launderers.
The other reason is the lack of transparency within the property market – particularly around ownership. In the UK, properties can be bought, owned, and sold by companies and organisations, and this has traditionally enabled known money launderers and other financial criminals to get away with hiding their true identities behind shell companies (‘businesses’ set up in foreign tax havens that have no active business operations or any significant assets) which they then use as a vehicle to purchase real estate.
To try to combat this threat, regulators have brought in much tighter rules around foreign businesses owning property and also around the due diligence requirements for estate agents, conveyancers and any other professionals involved in the buying and selling of properties. Regulated firms must now run ‘Ultimate Business Owner’ checks while any foreign business holding land assets in the UK must register with Companies House as an ‘overseas entity’ and disclose who controls them.
And while there is clearly still a way to go – according to Transparency International** nearly 52,000 properties in the UK are still owned anonymously – the new register is already starting to have a positive impact.
Transparency International’s report ‘Through the Keyhole’ states: ‘the register is starting to serve its intended purpose, revealing the names of many individuals of interest who control overseas companies holding UK property. This includes several Politically Exposed Persons (PEPs)11 and other people of interest who were not previously known to have substantial property assets on our shores, indicating that after just six months of operation the register has started to prove its worth.”
However, while the UBO checks and Companies House register aims to address the ‘anonymity’ issue around ownership, there is another loophole that is proving harder to close, and that is around Source of Funds.
What is ‘Source of Funds’?
Anyone buying a property will obviously need a relatively substantial amount of money to be able to do so. Normally, the money will come from savings, mortgages, gifts from relatives, inheritances etc, and in the vast majority of cases will be completely legitimate.
However as discussed earlier, due to the level of funding involved in house purchase, the process is highly susceptible to money laundering, and therefore, to limit the opportunities for criminals to use property to clean their dirty cash, under anti-money laundering regulations – solicitors must ascertain where the money to purchase the property is coming from and this is known as the Source of Funds.
If they do not run this ‘Source of Funds’ check they will not be able to say, for certain, if the purchase is legitimate – both in terms of who is making the purchase and where the money is coming from.
Are Source of Funds checks a legal requirement?
Source of Funds checks are a legal requirement, but they are still often slipping through, enabling criminals to take advantage of the property sector and there are three main reasons why this is happening.
The first is that, while fully aware of their obligations in terms of establishing Source of Funds, some property professionals just don’t do it, leaving the business at high risk of being enablers to money laundering.
The second is that they are running the checks, but the systems they have in place are out of date and are therefore failing to capture the true picture.
And the third is that some are simply not obliged to run the checks in the first place. This is because, in the UK, properties can be purchased via a number of different channels. The main ‘three’ - estate agents, auction houses and ‘off-market’ agents - are required by law to be registered for supervision, however, house builders, who can sell properties directly to the client, are not.
This opens up a huge loophole whereby properties can be purchased without any checks on the buyer or their Source of Funds –SmartSearch’s recent report, Electronic Verification Uncovered, surveyed 500 compliance decision makers and almost two thirds (62%) of property developers admitted that they do not check financial records - which opens these businesses up to huge risk, financially, legally and reputationally.
How can property firms run Source of Funds checks quickly and accurately?
The most efficient, accurate and secure way to run Source of Funds checks is via open banking technology.
Open banking technology is able to gather key financial evidence from a buyer or seller’s bank account to determine where the funds for the property purchase is coming from.
When this accurate Source of Funds information is combined with the very latest in identification and verification techniques, property professionals can be sure they know exactly who they are dealing with and exactly where their funds are coming from.
SmartSearch recently launched its most advanced platform yet and can now offer everything a property firm needs to ensure they are fully compliant - robust verification from one of the most advanced solutions on the market and Source of Funds checks, powered by open banking technology.
SmartSearch’s triple-bureau credit checks and real-time biometric technology enables estate agents, conveyancers and property developers to authenticate the ID presented to ensure the person is who they say they are. SmartSearch also has one of the most advanced business and UBO checks on the market, allowing firms to verify business clients and their beneficial owners so they know who is behind the property purchase in even the most complicated of corporate structures.
Once an individual has been verified, SmartSearch’s advanced technology will automatically screen them against Global Watchlists to identify any sanctions or PEPs.
Once all the due diligence has been completed, the information can be used to inform the Source of Funds checks service.
Martin Cheek, managing director of SmartSearch, said: “As we move into 2024, being able to swiftly and accurately run Source of Funds checks is going to prove instrumental in the fight against money laundering.
“At SmartSearch we are proud to provide our clients with a powerful tool that not only uncovers the true origin of funds but also disrupts the activities of criminals. With the launch of this Source of Funds feature – alongside the other enhancements we have launched, including triple bureau checks and fully automated and configurable workflows - SmartSearch continues to lead the way in delivering comprehensive digital compliance solutions."
Sources
*https://www.zoopla.co.uk/house-prices/london/ and https://www.standard.co.uk/homesandproperty/property-news/property-millionnaires-10-000-london-homes-valed-ps1m-savills-b1059196.html
** https://www.transparency.org.uk/uk-money-laundering-stats-russia-suspicious-wealth
*** https://www.smartsearch.com/resources/whitepapers/the-smartsearch-index-electronic-verification-uncovered-ii
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