Identifying money laundering risk in the property market

On this page:

• lack of conveyancing experience
• lack of international conveyancing experience
• lack of geographic connection
• use of agents
• rushed transaction
• funds paid into client account before transaction
• inflated property value
• offer over asking price
• third-party funds
• complex funding or corporate structure
• politically exposed person
• vendor fraud

Lack of conveyancing experience

Criminals have been known to target firms with limited conveyancing experience to launder the proceeds of crime.

One small firm was approached by an intermediary acting on behalf of two overseas property investors based in Singapore and Pakistan.

The firm did not carry out conveyancing work but accepted the instruction on the promise of significant fees.

The firm was asked to help these investors find and purchase commercial properties amounting to £6 million.

The clients never corresponded with the firm directly: all instructions were through the intermediary.

Uncertified passport copies were accepted as proof of identify.

No further customer due diligence, enhanced due diligence or source of funds checks were carried out on the investors.

The firm received an initial down payment of almost £250,000 before any work started.

The property purchases aborted and the funds were later found to be proceeds of fraud.

All funds were successfully recovered by the banks involved.

Lack of international conveyancing experience

In similar circumstances, solicitors inexperienced in international conveyancing have been instructed in several property transactions involving Chinese nationals.

In one case, the solicitor was completely new to conveyancing.

Each transaction involved complex funding and ownership arrangements between the buyer, family members and other individuals based in China. This involved:

• using multiple bank accounts operated by buyers’ cash payments
• deposits into various accounts
• complex inter-account transfers
• funding sources inconsistent with buyers’ known occupations

Lack of geographic connection

Organised crime groups have been known to use property portfolios to launder money from criminal activity, including cannabis production, human trafficking and prostitution.

One group linked to human trafficking operated a prostitution business through businesses that presented as massage establishments.

The group shopped around for a solicitor and an estate agent outside its geographic area. Both professionals were engaged on one-off bespoke bases.

The first solicitor approached declined to act and submitted a suspicious activity report (SAR) to the National Crime Agency.

However, the group approached a second solicitor who agreed to act.

This solicitor failed to properly scrutinise the services they were being asked to provide within the context of the known business activities.

There was little question about why the group was engaging a solicitor outside the area of the proposed transaction and their local businesses.

Lack of examination of the source of funds meant risk indicators were not identified and reported. This included:

• cash deposits from unconnected overseas third parties
• proof of multiple declarations of earnings on mortgage application forms

Use of agents

A regional law firm was appointed to act as the agent for a London practice in acquiring high-value property in rural England.

The London firm received instructions from the purchaser’s agent, a non-UK national resident in a high-risk jurisdiction.

The purchaser was also a non-UK national resident in a high-risk jurisdiction with a prominent public position and internet profile.

Funds to pay the property price and associated costs to the seller’s agent were received by the regional firm’s client account from the London firm.

The transaction’s structure meant the regional firm did not have sight of the ultimate client, source of funds or source of wealth.

No due diligence was carried out and the regional firm relied on the London firm.

The purchaser was later found to have spent time in prison for financial crime in the high-risk jurisdiction.

It is unknown whether funds used to buy the property were proceeds of crime.

However, there were several risk indicators:

• opaque transaction structure
• the involvement of a high-risk jurisdiction
• the involvement of a high-profile client

These warning signs might have led the regional firm to carry out enhanced due diligence before acting.

Rushed transaction

A solicitor was instructed that the sale of a residential property should take place very quickly, with no searches.

The solicitor met with the clients, but the passports they supplied were later found to be poorly altered forgeries.

The clients were fraudsters who had hijacked the property and identity of the true owners.

The property was sold without the true owners’ knowledge or permission.

The fraudulent proceeds of sale were then sent to an unrelated business bank account in the name of a jewellery company.

Funds paid into client account before transaction

A solicitor was instructed in a residential property purchase.

The solicitor accepted £20,000 cash into the client account before the purchase took place and before AML checks had been completed.

The client was evasive and agitated in communications about the transaction. They were also unable to produce evidence of photographic identification.

A SAR was made to the National Crime Agency.

The client was convicted of fraud and money laundering offences.

The solicitor was later referred to the Solicitors Disciplinary Tribunal (SDT) for not complying with their AML obligations.

In another case, a longstanding client of more than 40 years instructed a solicitor in the purchase of several residential apartments.

Before source of funds checks had been carried out, £336,00 was transferred to the firm’s client account.

The purchase of the apartments did not take place and the funds were returned to the client.

The solicitor was referred to the SDT, which noted that the solicitor should have checked the source of funds, even though the client was longstanding.

The SDT issued an admonishment and ordered the solicitor to pay costs and the tribunal’s costs.

Inflated property value

A solicitor was instructed in the purchase of a large residential property.

This property later transpired to be a garage that had been falsely marketed at an inflated price above its true value.

A vastly inflated and fraudulently obtained mortgage had been borrowed against the property.

The purchase completed and the funds were circulated through the firm’s client account.

The funds were paid out to multiple unconnected third parties, including the purchaser.

Offer over asking price

A solicitor was instructed in the sale of a 60-acre mixed lowland woodland. 

A purchaser offered to buy the land at asking price. 

However, the offer submitted to the client was received from an individual not connected to the purchaser. A link could not be established with this unknown third party. 

The client rejected the first offer, which was unusual as no other offers had been made. 

The asking price offer was later increased by £50,000 above the asking price. 

This second offer was accepted, and exchange of contracts took place. 

Before the first transaction completed, the purchaser advertised the woodland for sale by auction with a third-party auction firm not supervised for money laundering.

The sole director of the purchaser (a UK legal entity) was a director of 9,852 other UK companies per Companies House search.

The purchaser’s registered address was also the same registered address for 24,985 other companies at Companies House.

The purchaser’s solicitor confirmed the funds for the purchase were held in the solicitors account on behalf of the purchaser before the transaction had been agreed.

This ‘jumping the gun’ approach raised questions about the validity of the source of the funds.

The case presented many risk indicators. The key point is the buyer was already looking to sell the woodland in an auction, even before completing on the purchase of the woodland. 

The solicitor withdrew from this instruction.

Third-party funds

A solicitor was instructed to act in the purchase of a central London property.

The funds were gifted by the purchaser’s father, an overseas businessman.

Due diligence checks on the father found material adverse information relating to potential financial crimes.

This supported other publicly available information that outline the father had links to organised crime and had accumulated his wealth through unsavoury methods.

The father worked as an adviser for a former overseas politician and was linked to other overseas politicians.

He had also allegedly personally benefited from the privatisation of state property and assets.

The solicitor withdrew from the instruction, as evidence suggested the father was trying to launder the funds of illicit activity by purchasing property in his daughter’s name.

In another case, a solicitor was instructed by overseas nationals in a property purchase. 

It was discovered that the funds originated from multiple unknown third parties in China. 

Due to China’s strict currency restrictions, the funds may have been remitted through high-risk international money exchanges or alternative banking platforms. 

Some of the funds were marked as loans. However, there were no loan agreements or repayment terms.

Other risk indicators included:

• the property not being located in the region of the firm
• pressure to complete the process quickly
• instructions that no property searches be done

Complex funding or corporate structure

Complex and/or circular corporate ownership structures can be misused by criminals to mask the true beneficial ownership of a company.

In one case, a firm was instructed by a property development company in the purchase of land to build a retirement home.

Acquisition and construction was to be funded by recruiting investors, who would receive a share of the profits once operational.

The investment funds would be held by the law firm and distributed on the client’s instructions to fund the purchase price and other project costs.

Ultimately, the funds were depleted by project costs. The project collapsed and no home was built.

Over half the £1 million investment funds were received in US dollars from a non-UK citizen with an internet presence in a high-risk jurisdiction.

The firm did not carry out due diligence on these or any other investment funds.

The project costs were paid to incorporated entities whose control and ownership overlapped with the corporate client.

The firm had never previously carried out this type of work and historically only dealt with litigation.

Although it is unclear if any of the funds were the proceeds of crime, potential indicators of money laundering included:

• the receipt of funds
• overlapping control and ownership structure of the corporate entities
• the collapse of the scheme

In another case, a solicitor was instructed by a client with a complex offshore structure to purchase two commercial properties.

The structure was managed by an overseas trust and company service provider, with an overseas national as the ultimate beneficial owner.

The structure had also featured in the Panama Papers, leaked files from the database of the world’s fourth largest offshore law firm.

The purchase completed with minimal AML checks. The funds were transferred to a firm based in the Middle East.

Evidence later indicated the funder was the father of a known member of a recognised terrorist organisation sanctioned by the UK and United Nations.

The solicitor should have identified that the property purchases may have been:

• derived from funds linked to terrorist activities
• acquired for furthering terrorist-financing related activities

Other risk indicators included:

• the nature of the UK assets (cash-based retail business and faith schools)
• third-party introducers involved in the transactions

Politically exposed person

A solicitor was appointed to act in the sale of newly built private residential apartments in West London for a reputable established UK property developer. 

A sub agent was appointed in Hong Kong to source potential foreign buyers. 

The sub agent received an offer from an overseas couple to acquire 15 new build apartments within the development.

The overseas purchasers set up a UK-registered company as a vehicle for the purchase, which was beneficially owned and controlled by an overseas resident husband and wife.

The husband is an overseas government minister (politically exposed person or PEP) in a high-risk country and the son of a former prominent overseas politician.

The wife is also a PEP due to her association with the husband and father-in-law.

The solicitor carried out enhanced due diligence checks to establish their source of funds and source of wealth.

These identified several risk indicators, so the solicitor withdrew from the instruction.

Vendor fraud

Vendor fraud involves fraudsters hijacking a property and posing as the owners to sell it without the true owner’s knowledge or consent. 

A sole practitioner was instructed on the sale of a residential property in London. 

The property was found to be derelict, and the true owner (a vulnerable elderly person) was living in a care home.

Fraudsters had broken into the property and effectively hijacked it to sell and benefit from the criminal proceeds.

Aside from an identity check, no other customer due diligence or source of funds checks were carried out.

Forged signatures and documents on file and sale completed quickly.

The deposit funds were received and paid by the solicitor to an unconnected third-party overseas.