Q&A - how big a problem is dodgy money in London?

The issue of money laundering and questionable money flowing through the UK property market, especially London, has had a light shone on it more than ever by the war in Ukraine.

Here, we chat to Tom Lyes, Head of Legal and Property at Armalytix, about dirty money, Buy to Leave, overseas investment and Open Banking's role in cleaning up the market.

How big a problem is dodgy money in the UK property market, London in particular? Is it deserving of its laundromat nickname?

A recent Treasury Select Committee report said: “Since 2019, it appears that economic crime has not reduced but has instead continued on an upward trend.

The digitisation and decentralisation of finance has created a playground for money laundering and fraudulent activity, and the London property market is the biggest area of concern. Criminals prey on time-poor employees who are not necessarily specialists in fraud detection, by hiding behind huge and unnecessary piles of paperwork.

As our economy is no longer trust-based, but rather proof-based, firms are under increasing pressure from regulators to know more about their customers, and the increasing data sources that they have to take into account. This is leaving them struggling to verify the data. It is therefore no surprise that the property market finds itself at the centre of a scandal.

With recent figures revealing that £1.5 billion worth of property in the UK has been bought by alleged corrupt Russians, it’s clear that the London property market is filled with illegal Russian money and has developed its unfortunate, but deserved, ‘laundromat’ nickname.

How can companies protect themselves from reputational and financial risk?

The importance now placed on data collection is huge. It is all leading to more complex and longer forms. Combining this with people’s demand for a digital experience means that manually filling in forms no longer has a place, and any experience that isn’t digital is perceived as a negative one.

Fortunately, smart technology has been developed to drive effective checks with accurate digital data gathering, analysis and evidence to back up conclusions as a part of everyday processes that will provide greater comfort and protection for firms.

Will too many checks and balances deter foreign investors from investing in the UK - whether property or otherwise - when it is arguably needed more than ever, post-Brexit?

Whilst there is regulatory and societal pressure to make checks more effective, at the same time smart technology is rising to meet the challenge of making the whole process of these checks faster, more accurate and overall, more efficient. Where the purchase is with legitimate funds therefore, there should be little drop off in what is an extremely attractive market. What it will do perhaps is deter those who wish to invest dirty money, and that is surely a positive for all. 

Will tougher checks help to limit the practice of Buy to Leave - where wealthy overseas investors simply see a London home as a trophy asset, designed to simply go up in value?

Tougher and more effective checks, combined with the new Register of Overseas Entities will in perhaps inevitably limit this to some degree as any such properties being purchased with dirty money should be weeded out or at least have a deterrent effect from the increased scrutiny. However, tougher checks on their own will not necessarily completely limit this practice when the money is legitimate, and that becomes a wider societal question. 

How could open banking help in all this? Are enough people aware of what Open Banking is and does?

Providing a standard and secure method to connect businesses and banks, Open Banking enables the sharing of data and access to banks’ services. The overall aim of Open Banking is to provide greater financial transparency, making the lives of businesses easier and handing customers more control over their financial journey.

Open Banking therefore ensures that data can be shared between a customer and a company in a safe, secure and transparent way, allowing customers to control what data is shared, which is particularly important in light of increasing fears around data security. It also creates an easy, stress-free digital experience that doesn’t require the filling out of forms and the hassle of collecting past financial data, which creates a greater digital journey and an enhanced customer experience.

For companies, Open Banking allows them to hand over control of data sharing to third parties, which can act as a data sharing bridge between the customer and the intended recipient. They can easily access multiple data sources, which can then be collated into an easy-to-read report for firms to complete any compliance or due diligence checks.

For the legal sector, the introduction of Open Banking has saved companies 90% more time that used to be spent on source of funds checks. As the day-to-day administration and compliance requirements are taken care of by Open Banking technology in the background, employees regain essential time, which is unlocking workplace productivity and is boosting companies value add activities and profit margins.Open Banking is certainly gaining good momentum, particularly as with effective implementation, technology and oversight, it helps to address serious issues. Whilst people may not know its name, they will be increasingly experiencing its effects, from these checks, to cloud accounting to money management and other apps that are making their day to day better.

Has the war in Ukraine had an impact on the amount of foreign money in the London and UK property market?

In light of the sanctions on a select number of Russian billionaires and banks, the geopolitical situation continues to evolve. As discussed above, London’s reputation is at stake with MPs rightly pointing out that it is arguably the money-laundering capital of the world. The biggest effect that the war in Ukraine has had is for it to hit home why these AML checks matter at the highest level.

While the government has committed to increasing transparency to counter this money laundering, most of this ‘dirty money’ still comes through the purchase of London-based properties. New figures have revealed that £1.5 billion worth of property in the UK has been bought by Russians who are facing allegations of corruption.

The sanctions will therefore inevitably cause a reduction in the money flowing in. However, longer term AML checks and business processes need to be widely implemented and in a scalable and digital way in order to address these money laundering and fraud concerns at every level.