Money laundering is not just a concern for bankers and the financial industry – it is used to conceal the proceeds of criminal activities and can take place in a variety of ways.
Money laundering can have an impact on the property market and in this article we examine what those employed in Cayman’s property market can do to limit its occurrence.
Money laundering is the process of concealing the identity of illegally obtained money so that it appears to have been obtained from a legitimate source. The process generally takes place in three stages:
• Placement – the placing of the original funds into the system by deposits or other means, such as purchasing monetary instruments. This is often the easiest stage to detect money laundering.
• Layering – separating the funds from the illegal activity by processing them through complex transactions.
• Integration – creating the appearance of legitimate funds by the use of additional transactions. It is this stage that has the most relevance to the property world.
Property investment is an easy way of integrating money through purchases, re-sales and mortgages and as such is becoming one of the most prevalent ways of laundering illegal funds. Indeed, The Royal Institution of Chartered Surveyors has stated that ‘recent legislation has made it more difficult for money launderers to operate within the banking and financial services industry. This means that criminals may be attracted increasingly to the property market to launder illegitimate funds.’
One of the most common methods of money laundering involving property is through the purchase of an investment property, such as a commercial building or high-end residential rental property.
The illegally obtained funds can be passed on through the purchase price for the property, whilst ‘clean’ money can be recouped through the rental payments.
A particular example of this is in the case of a 66,000 SF business park in the suburbs of London that was purchased in 1998 for approximately $15 million, the funds for which came from a Russian arms dealer in the Angola civil war. The Russian was fronted by two Englishmen who scouted out properties on his behalf. The Englishmen agreed the purchase price and the property was sold into a nominee company, paid for with the laundered money.
This property produced in excess of $1.5 million each year in ‘clean’ money and, with the rise in property prices, could have been sold several years later for a further $20 million in apparently legitimate funds.
This method of money laundering has particular significance in the Cayman Islands with its attractive market of high-end rental properties on Seven Mile Beach and the opportunity of tax free rental income and good rates of return. It is therefore vital that all property professionals are aware of what they can do to reduce the possibility of being inadvertently involved in money laundering.
In order to reduce the opportunities for money laundering the United Kingdom Government enacted The Money Laundering Regulations 2003, which came into force on the 1st March 2004. The regulations are devised to ensure that those businesses identified in the regulations have effective anti-money laundering systems and controls. From a property perspective this will mainly apply to estate agents, realtors, auctioneers and property professionals who offer investment advice and arrange mortgages.
These regulations require property professionals to put into place effective anti-money laundering systems and controls. This means that the individual or firm must:
• Set up identification procedures in respect of those wishing to enter into a business relationship, even in the case of one-off transactions.
This involves obtaining formal proof of identification from the prospective client, such as through a combination of passport, driving licence, national identity card or similar. Should you not obtain satisfactory identification you should stop all business transactions with the individual or company involved.
• Introduce record-keeping and internal reporting procedures including appointing a money laundering reporting officer. This would include keeping copies of any evidence identifying that client, together with keeping a record of all transactions for a minimum of five years from the date the business relationship ended.
• Ensure that all employees are fully aware of any money laundering regulations effecting their business and have training in recognizing and dealing with transactions that may be related to money laundering.
Whilst mandatory in the United Kingdom where applicable, these regulations should at the very least be considered ‘good practice’ in the Cayman Islands and acted upon in all relevant circumstances. It is vital that all those involved in the property market in the Cayman Islands maintain a high level of vigilance against the possibility of money laundering through property, in order to avoid the market being impacted by illegal funds.
Simon Watson is the director of Deloitte Property Consulting Services. He is a Fellow of the Royal Institution of Chartered Surveyors, a founding Board member of RICS Caribbean and the Caribbean representative to RICS Americas. Simon has 20 years experience in surveying, half of that experience gained in the Cayman Islands. Deloitte Property Consulting Services provide a comprehensive range of services including project and construction management, contract and financial monitoring of projects, valuations and appraisals, quantity surveying, property management and insurance claims adjusting services.
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