Corruption and Property Laundering
Nelson Yap at the Australian Property Journal writes:
SECRET companies are allowing illicit and corrupt money to flood into Sydney and Australia’s real estate market.
Transparency International’s new report Doors Wide Open: Corruption and Real Estate in Key Markets has identified Australia, Canada, the United Kingdom and United States as the top four hot spots targeted by corrupt officials or criminals.
Transparency International found whilst all four countries are vulnerable to enabling the corrupt and other criminals to launder money in the real estate sector, Australia was the worst, failing to address 10 out of 10 loopholes.
The US also lacked the legal framework with the report identifying nine out of 10 loopholes; in Canada (4/10) and the UK (1/10).
The report said all those countries had one thing in common and that is high-end real estate properties in key markets are purchased by shell companies or trusts without undergoing adequate due diligence or scrutiny by the professionals involved in the deal.
A separate Global Financial Integrity report found between 2004 and 2013, China led the world with US$1.39 trillion in illicit outflows, followed by Russia, Mexico, India and Malaysia. In 2013 alone, China had the largest illicit outflows of any country globally, amounting to US$258.64 billion.
According to the Financial Action Task Force (FATF), real estate accounted for up to 30% of criminal assets confiscated worldwide between 2011 and 2013.
“Governments must close the loopholes that allow corrupt politicians, civil servants and business executives to be able to hide stolen wealth through the purchase of expensive houses in London, New York, Sydney and Vancouver,” Transparency International chair José Ugaz said.
“Not only do expensive apartments in New York, London or Sydney raise the social status of their owners and allow them to live in luxury, they are also an easy and convenient place to hide hundreds of millions of dollars from criminal investigators, tax authorities or others tracking criminal behaviour and the proceeds of crime,” he added.
The anti-corruption group found that despite anti-corruption promises by the four governments, they have failed to detect and prevent money laundering in the real estate sector.
In Australia, 70% of Chinese buyers pay in cash and they represent the largest proportion of foreign purchases in the country.
Strikingly, Australia, Canada and the US rely almost exclusively on banks to stop money laundering, even though a slew of middlemen including real estate agents, accountants, tax planners, lawyers and others participate in deal-making. This makes all-cash deals, which do not require the involvement of a bank and which represent a significant proportion of high-end sales made to overseas investors, especially difficult to track.
The report highlighted one of Asia’s most notorious scandals, where between 2008 and 2009, Jho Low, a 27-year old Malaysian who allegedly became friends with the stepson of the Malaysian prime minister during his studies at an elite school in the UK, helped to set up what soon became 1MDB – an investment fund owned by the Malaysian Ministry of Finance, with the Malaysian prime minister chairing the advisory board. 1MDB borrowed money from private investors for joint ventures with companies from Abu Dhabi and Saudi Arabia.
According to a civil lawsuit filed by the US Department of Justice in July 2016, Jho Low and others allegedly diverted more than US$3.5 billion to buy luxury US real estate.
According to the court documents Jho Low and his allies allegedly redirected several transfers of up to US$700million each, initially meant for investments of 1MDB, to their own bank accounts. They reportedly hid their beneficial ownership by using companies in the Seychelles and the British Virgin Islands combined with accounts at small Swiss banks, including one that was owned by their Abu Dhabi business partner. It is reported that they then allegedly transferred hundreds of millions from their accounts to a pooled account of a top tier US law firm, and that they used money from the law firm’s pooled account to buy luxury real estate, including a mansion in Beverly Hills that was bought by a Nevada registered company using an attorney from the law firm as a signatory. The Nevada company is thought to be owned by another company registered in the Seychelles owned by Low and later transferred to the stepson of the Malaysian prime minister with the help of another US law firm.
In the UK, research by Transparency International UK shows that in London alone more than 39,000 properties have offshore owners. Analysis found that over £4.2 billion worth of property owned in London has been bought by individuals and companies representing a high money laundering risk.
Cases have been harder to identify in Australia because there aren’t any frameworks in place to detect and identify illicit money.
Transparency International found Australia has severe deficiencies with 10 loopholes identified:
- Real estate agents, lawyers, accountants, developers and others involved in the buying and selling of real estate are not subject to the provisions of the Anti-Money Laundering and Counter Terrorism Financing Act 2006. This means that properties can be bought and sold without any due diligence on the parties.
- There are no requirements for any professional involved in real estate deals to identify individuals or beneficial owners behind foreign companies purchasing property.
- Approval by the Foreign Investment Review Board is required for foreign individuals and companies wishing to purchase property, but information disclosed in the application is not systematically used to mitigate the risks of money laundering.
- Customer due diligence on real estate related transactions is only performed by financial institutions; there are no checks on cash transactions.
- Professionals involved in real estate deals are not required to submit suspicious transaction reports (STRs), even if they suspect illegal activity is taking place, and there are no requirements or rules for verifying whether customers are corrupt politically exposed persons PEPs or their close associates.
- Real estate agents and developers, lawyers, accountants and others involved in real estate transactions are not required to verify whether customers are PEPs or close associates or conduct enhanced due diligence.
- The entry standards differ across the various professionals, but there is no requirement for those involved in real estate transactions to register with the supervisory body for anti-money laundering supervision or to undertake “fit and proper” tests.
- No money laundering risk assessment has been conducted in recent years.
- Professionals involved in real estate transactions are not subject to anti-money laundering obligations, and therefore are not monitored by authorities such as AUSTRAC or self-regulated bodies.
- Professionals involved in real estate transactions are not subject to antimony laundering obligations, and therefore there are no sanctions for non-compliance with reporting requirements. The involvement of professionals in money laundering schemes is punishable, but criminal prosecution against real estate agents, developers, accountants and lawyers seems limited.
Transparency International makes the following recommendations:
- Governments should require all middlemen to identify and keep records of the real, beneficial owners of legal entities, trusts and other legal arrangements in real estate sales.
- Governments should require that both domestic and foreign politically-exposed-persons, their family members and close associates purchasing property be automatically identified as high-risk clients. Additional preventive measures such as enhanced due diligence should be implemented.
- Governments should require foreign companies that wish to purchase property to provide beneficial ownership information. This information should be kept in a central beneficial ownership registry and made available to competent authorities and the public in open data format.
- Governments should require real estate agents to register with a designated public authority for anti-money laundering supervision in order to operate in the real estate sector, and be tested to show they know the rules. Anti-money laundering training should be made compulsory upon registration.
- Governments and professional associations should introduce rules requiring lawyers, accountants and other professionals who are not registered with the relevant anti-money laundering supervisor to be prohibited from engaging in real estate deals.
Australian Property Journal