Property becomes ‘welcome mat’ for foreign money launderers

The UK’s Home Affairs Select Committee says poor supervision and enforcement in the London property investment market are making a safe haven for laundering the proceeds of crime.

In a new report released on Friday, the committee calls for much stronger supervision of agents, buyers and sellers. It also says that the key tool for detecting suspicious financial activity across the financial services sector and connected industries, such as real estate, is overloaded to the point of being "completely ineffective".

The committee has called for the creation of a specialist 'confiscation court' to combat the current lack of interest and expertise in confiscation orders among prosecutors and judges.

"At least a hundred billion pounds, equivalent to the GDP of Ukraine, is being laundered through the UK every year,” British Labour MP Keith Vaz said.

“The Proceeds of Crime legislation has failed to achieve its purpose. London is a centre for money laundering, and its standing as a global financial centre is dependent on proactively and effectively tackling money laundering,” he said.

“Investment in London properties is a major route which tarnishes the image of the capital. Supervision of the property market is totally inadequate, and poor enforcement has laid out a welcome mat for launderers and organised criminals.”

The report quoted Henry Pryor, one of the UK’s most prominent property commentators and buyer’s agents, who said he was “suspicious” about the sources of finance of some overseas investors. 

In his opinion it was “without question” that the property market was a destination for laundered money.

Last year, there were 1.2 million property transactions in the UK. According to the National Crime Agency (NCA) those 2.4 million buyers and sellers generated just 355 Suspicious Activity Reports.

Mr Pryor suggested that the “regulations and the rules and the penalties for breaking those rules are quite sufficient but it is woefully inadequately policed”.

“I would say that if, for example, the buyer of a property was the second son of a world leader in a country in the middle of South America—how does he have £8 million to buy a flat in Mayfair—personally I would be suspicious. But it does not seem that my professional colleagues are as sceptical as I am, which is unfortunate.”

In Australia, allegations of mortgage fraud at some of the country’s biggest banks sparked a crackdown on home lending to foreigners.

However, tighter lending to non-residents is being driven not by any issue in servicing the debt — which most banks agree is not a problem — but rather the source of the funds to do so.

"If Chinese borrowers, for example, can only take $50,000 out of the country each year, and clearly some of the deposits are at much higher levels, the way that the whole banking sector is being challenged now to know their customers and know their source of wealth clearly is not being looked at in that example," said Steve Weston, former CEO of mortgages at Barclays.

Speaking at an FBAA event in Sydney last month, Mr Weston said: “We are seeing it happen all too often — money laundering and tax evasion are all being driven by banks not knowing where the money is coming from.

"What could potentially happen there is if you see Chinese regulators tighten money flows, if something should happen in the future, a question rightly could be asked of Australian banks: what research did you do to find out where that money was coming from? It won’t lead to credit losses, but it could be embarrassing for our industry."

With a handful of banks no longer accepting overseas income for home lending to foreigners, mortgage brokers targeting Asian buyers have taken imaginative steps to bring in business.

ASIC recently reigned in four Sydney brokerages over misleading Chinese-speaking buyers with advertisements claiming ‘no proof of income’.

ASIC said the range of concerns contained in the advertisements targeting Chinese-speaking home buyers may be false and misleading statements, or indicate a breach of the responsible lending obligations.

NAB became the latest major lender to further tighten its policy for non-resident lending. In addition to capping LVRs at 60 per cent, NAB has confirmed that foreigners will now need to provide evidence of existing Australian income in order to be eligible for home lending application purposes.

NAB will also no longer accept foreign-sourced self-employed income, and has tightened income verification requirements.

ANZ, CBA and Westpac have all curbed lending to foreign buyers over the last few months. Many smaller banks such as Bendigo and Adelaide and AMP have also tightened lending to foreigners after fears over fraudulent supporting documents.

Back in May, Mortgage House CEO Ken Sayer told Mortgage Business that he expects every lender to eventually turn the tap off to non-residents.

“Every mortgage insurer, every bank BDM, every broker, every relationship manager and every bank has known about this for 20 years,” he said.

Mr Sayer said the recent foreign borrower policy changes made by the banks have had no negative impact on Mortgage House, as the group made a decision from the beginning not to target the non-resident market.

“We were approached by some Chinese brokers for Chinese investors two years ago, but because we’re so anal, we actually wanted to contact the third parties in China to confirm that the borrowers were actually self-employed,” he said.

“The brokers withdrew the deals from our desk and we haven’t seen them since.”

[Related: Blind eye to foreign money could end badly for banks]