HM Government has resolved to draft up a law to create a ‘UK Public Register of Overseas Entity Beneficial Ownerships’ on which it will force the foreign owners of British real estate to identify the people who ultimately own their properties.

The new policy is part of the Government's response to a consultative exercise regarding the billions of pounds of property owned by overseas shell companies on behalf of HNWs and others. According to business minister Andrew Griffiths, this is proof that the UK is taking a leading role in the global fight against corruption. Non-compliance could result in two years' imprisonment and unlimited fines.

He added: "The Government intends to legislate to establish a public register of beneficial owners of non-UK entities that own or buy UK property, or which participate in UK Government procurement. It will [be] consistent across the UK, where currently the Land Registries for England and Wales, for Scotland and for Northern Ireland have taken different approaches to land registration and [the] registration of overseas entities.

A growing problem

"The Government intends to introduce the Bill to Parliament early in the second session. Following Royal Assent and the making of secondary legislation...the register will be operational in 2021."

Money laundering through real estate is a growing, worldwide problem, and is thought to have reached $1.6 trillion (£1.13 trillion) per annum. The UK has seen more than its share, although the exact scale of illegal activity in the sector is hard to guess. Individuals or companies with a high money laundering risk are thought to own more than £4.2 billion of property in London alone. The London Independent has conjectured that Russian figures connected to Vladimir Putin might own British properties to the value of £1.1 billion, but nobody knows the true figure.

Concern about money launderers’ growing interest in real estate, and in particular the number of properties in major cities in the UK that are owned through offshore shell companies, has prompted the Government to take action.

The Department for Business, Energy & Industrial Strategy said recently that more than £180 millions' worth of property in the UK had been the subject of criminal investigation as the suspected proceeds of corruption since 2004, and that more than 75% of properties currently under investigation used offshore "corporate secrecy." The new legislation will create a public register on which foreign property owners will have to declare the identities of the people who ultimately own their properties. Non-compliance could result in two years in jail and unlimited fines.

Recent legislation

This is not the first move by the government to try to tackle this issue. In June 2017, regulations came into effect that bound real-estate agents to anti-money-laundering 'due diligence' requirements that are broadly equivalent to the ones followed by banks and casinos.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 require estate agents to check the backgrounds of their customers (and the beneficial owners of their corporate customers) before striking up 'business relationships' with them. The regulations say that the word ‘customer’ means both the buyer and seller of a property. The phrase ‘entering into a business relationship’ is taken to mean the point at which the seller accepts the purchaser’s offer. Agents are required to monitor the subsequent progress of the business relationship between parties to the transaction and to make sure that the transactions that take place are consistent with what they know about the buyer and seller. They must keep records of the checks they make and tell all their employees to report any suspicious activity.

A sector in transition

The Government piloted this regulation through Parliament so quickly that the sector had little time to prepare. HMRC published 'interim guidance' but is consulting interested parties with the aim of developing it further. In the meantime, real-estate practitioners are confused about the rules. As Estates Gazette reported in July last year: "Property auction houses have interpreted new money laundering regulations in different ways, leading to a variety of requirements for bidders. Some auction firms now require all bidders to register and verify their identity before the auction, whereas others are continuing to ask for proof of ID only once a bid has been accepted. There is also a divergence in views on when checks on the source of funds should be done, with some auctioneers saying it is necessary to do this before giving someone a paddle to bid, and others equally insistent that it only has to be done once."

HM Revenue & Customs is already undertaking both announced and unannounced inspections to make sure that real-estate businesses are complying with AML rules. A recent Accuity report explains how AML requirements are seeping into the real estate sector in every major region across the globe. The UK is leading the charge; if the latest plans come to pass, it will be the first country in the world to introduce a public register of beneficial owners of companies that buy property on its soil.

* Accuity protects reputations with comprehensive data and software to help firms comply with regulations and control their risks. It is available at accuity.com