UK Vows to Crack Down on Money Laundering: What Will This Do to the Property Bubble?

The London property market is already in trouble.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The British government has suddenly realized that the London property market is “becoming” a “destination of choice” for laundering the proceeds of overseas crime and corruption. And it has done what it always tends to do in delicate situations: it has called an inquiry into the matter.

“Given the threats that face the UK, the effectiveness of the regimes that we use to protect our financial system from misuse have never been more important,” said Member of Parliament Nicky Morgan, Chair of the Treasury Committee. “As part of our inquiry, the Treasury Committee will examine the UK’s role in international efforts to tackle money laundering and terrorist financing and implement sanctions.”

Earlier this month Prime Minister Theresa May said there was no place for “serious criminals and corrupt elites” in the UK — an absurd statement given that London’s Square Mile has been home to almost every major global financial crime and scandal of the last ten years, including Libor, Forex, the London Whale, and rampant gold and oil-price rigging. And for years the City of London has been the place where the world’s richest gangsters dream of stashing or laundering their cash. According to the British government’s own National Crime Agency, “hundreds of billions of US dollars” are laundered through banks in the United Kingdom every year.

Theresa May is not the first British prime minister to accuse the City of London’s property market of “being used” (as opposed to “offering its services”) as a conduit for so-called “dirty money”. In 2015 her predecessor, David Cameron, the son of a man who made his fortune operating a network of offshore investment funds, vowed to expose the use of “anonymous shell companies” to buy up luxury UK properties, often in London.

As part of a global effort to defeat corruption, foreigners would be prevented from buying UK homes with “plundered or laundered cash,” Cameron warned. Corruption, he added, is “a cancer which is at the heart of so many of the world’s problems” and must be tackled. Since then the UK government has done virtually nothing to tackle the problem, which should come as no surprise given how much the UK capital has come to depend on overseas demand, illicit or not, to prop up its real estate market.

New research by the School of Management and Business at King’s College London has shown that foreign property investors have added around 20% to UK real estate values over the period between 1999 and 2014, a period over which house prices almost tripled.

Using figures recorded by the Land Registry, the analysis shows that the average price is around £215,000 but would have been about £174,000 without the investment from overseas. In the capital, long the focal point of overseas property investment, the effect has been even greater. And the study found that “there is evidence that foreign investment reduces home ownership rates, suggesting that some residents may be priced out of the market in areas where foreign investors are more active and have to rent rather than own their homes.”

One major consequence of this trend has been to price most ordinary Londoners out of the market. Buyers from overseas don’t just have an effect on the upper end of the housing market where most of their demand is concentrated since there is a “trickle down” effect to less expensive properties, the research shows.

In a 2017 poll conducted by YouGov on behalf of Transparency International UK, 54% of Londoners said they believe house prices are being ratcheted up by rich people from overseas cornering the high-end property market. More than 1 in 5 of respondents thought international buyers were purchasing property in order to launder money. And now, the government is once again showing an interest in the problem.

But is it really? After all, if the capital’s struggling real estate market is as dependent on the proceeds of international crime as even the government now seems willing to concede, what would happen if much of that demand were to suddenly dry up due to fears of a government crackdown?

London’s property market is already in trouble, having entered a prolonged period of stagnation since the Brexit vote in June 2016. Those at the top end of the global wealth and income scale — just about the only people left who can afford to buy residential property in London these days — either have less money to spend or are spending it elsewhere. Some are even splashing it around other parts of the UK, where better value deals can be found.

UK’s prime regional housing markets continue to outperform London’s top postcodes. Prices in the capital dropped by 1% year-on-year in the previous quarter, according to Nationwide’s monthly survey of the market, once again making it the weakest of all the UK’s regions in terms of price growth, a position it has held since late 2017.

At its zenith London’s property market was estimated to be worth as much as the annual GDP of the world’s ninth biggest economy, Brazil. But prices have fallen since then. If the trend continues, it could become a serious problem for the UK economy as a whole. For that reason alone the UK’s government’s latest threats of a crackdown on illicit funds entering the market should be taken with a healthy dose of skepticism. By Don Quijones.

Two large British outsourcers are also on the verge of collapse, and the vultures are circling. Read… Was Carillion’s Collapse the Beginning of the End for UK’s Outsourcing Sector? 
 

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  34 comments for “UK Vows to Crack Down on Money Laundering: What Will This Do to the Property Bubble?

  1. raxadian
    Mar 30, 2018 at 2:31 pm

    I will be greatly surprised if anyone goes to jail over this. Specially Brexit means the UK needs money badly.

  2. Old Engineer
    Mar 30, 2018 at 3:12 pm

    Seems unlikely anything will change significantly. Because, as the article makes clear, as far as the City of Long goes, “if it weren’t for dirty business they’d have no business at all.” (With apologies to the old Hee Haw show.)

  3. Iyamwutiam
    Mar 30, 2018 at 3:47 pm

    I think the whole point of Brexit was to continue to be the safe haven and avoid transparency of British banks.

    This is just a puppet show with the requisite mouthing of platitudes necessary for polite circles.

    • caradoc
      Mar 30, 2018 at 6:23 pm

      Unaffordable housing helped drive Brexit.

      I know people who actively campaigned for Brexit to help bring down property prices for their kids.

      If supply doesn’t move up demand needs to be reduced – Brexit.

      • Nicko2
        Mar 31, 2018 at 2:23 am

        They are literally shooting themselves in the foot. Once Brexit happens, the economy will tank. Foreign investors will flow in and scoop up a deal….while many UK citizens will find themselves without a job and burdened by inflation…and unable to pay a mortgage.

        • IDP
          Apr 2, 2018 at 3:37 am

          Youth in the UK are not up for the building trades or harvesting crops. The UK and Brexit = the epitome of idiocy. Its the single worst business idea ever. They get more from the EU than they pay in and their exports are to the EU primarily. They are actively asking for a lost decade or more.

          The leavers lied implicitly about the overall benefits for this. I cant think of one thing I will miss here in Germany from the UK LOL

    • Steve clayton
      Mar 31, 2018 at 10:27 am

      The whole point of Brexit is to show the establishment were not going to accept what’s happening to our country anymore. Immigration is a joke.

      • JohnMu
        Apr 9, 2018 at 1:25 am

        Presumably you meant “we’re” not “were”.
        The whole point of brexit is the establishment showing they are not going to tolerate any threat to their money and power. You, and many others, believed the massive amount of lies spouted by “useful fools”

  4. Rates
    Mar 30, 2018 at 4:07 pm
  5. John
    Mar 30, 2018 at 5:17 pm

    Its got more to do with London being the destination of mass immigration.
    Money Laundering is just another part of the London property equation

  6. caradoc
    Mar 30, 2018 at 5:46 pm

    London property has served multiple roles to the very wealthy foreign types.

    Currency diversification, capital appreciation, bolt-hole diversification, convenient parking place for excess cash outside of owners home jurisdiction/taxation & some laundering.

    It has also fed buy to let acquisition that has helped dry-up supply of properties for ordinary buyers, push up prices and increase the percentage of the indigenous population having to rent.

    People in the public sector in London can’t afford to buy their own home but without these people the city won’t run.

    This needs addressing else the Tories will suffer even more at the polls.

    Limiting the number of houses any individual can own would be a start and closely vetting foreign sources of funding for any purchase would help clean it up too. This is no longer an optional policy.

  7. William Smith
    Mar 30, 2018 at 5:59 pm

    This is not just a London problem, chinese have been laundering money through Sydney & Melbourne (australia) property markets for a long time. Now australia has woken up and is is cracking down. China is also attempting to severely limit exfiltrated loot (they even execute “elites” caught cheating: this is a good thing). Unless the whole world fixes this, the problem will never go away because it puts those countries who “do the right thing” at a financial disadvantage. The world needs to agree that only citizens of a country can own property (including commercial property) in that country. Much like china does by requiring all overseas companies wishing to set up shop there to be “partnered” with a local company (with govt ties). In my opinion, only the type of draconian regulation that china (and probably russia) has can hope to succeed against the now entrenched rapacious evil globalization that has been unleashed post WWII. Governments must work for the good of *their* local people as a first, second and third priority. The rise of Trump shows that the “natives are restless” and well should all politicians be very scared for their own positions if they are not working for the good of the people. The people have had enough of being treated like serfs (unable to own land) and Brexit & Trump are just the start.

    • sierra7
      Mar 30, 2018 at 6:52 pm

      Kind of reminds me of the song, “What Are You (They) Gonna Do When We Come For You!” Good post Mr. Smith!

    • d
      Mar 31, 2018 at 1:38 am

      “(they even execute “elites” caught cheating: this is a good thing).”

      Are you that naive??

      The corruption hunt, is simply a purge of those who do not support Xi.

      The chinese on the street know this, and dont care, as at least some corrupt officials, are being removed

    • Nick
      Mar 31, 2018 at 8:12 am

      Australia hasn’t woken up and is not cracking down. As a matter of fact Australia abandoned the commitment to implement AML recommended policies.
      Just now 3 of the top banks got caught laundering money for the Calabrian mafia- via real estate. This was police tapping mafia phones and had no choice but to expose the banks.
      China has implemented very strict capital controls that caused the drying up of Chinese buyers.
      If you turn up with a bag of cash and procure a house in Sydney, no one will ask any questions.

      Last, current government was dragged kicking and screaming to agree on a royal banking commission. Even then the government managed to dilute the commission reference scope.

    • Auld Kodjer
      Apr 2, 2018 at 7:01 pm

      Australia is not doing enough. FATF 2015 report:
      “… Australia … should improve supervision of its regulated sectors. Most designated non-financial businesses and professions (DNFBPs) are still not subject to anti-money laundering / counter-terrorist financing (AML/CTF) requirements and have insufficient understanding of their risks. These include real estate agents and lawyers, which the authorities assessed as high risk for money laundering and terrorist financing. The report concludes that Australia should do more …”.

      As for China, they are a little schizophrenic in regard to capital flight. Too much is not a good thing, but they sure as hell like the “soft colonization” of Australia. Chinese continue to massively flout FIRB regulations to dominate real estate purchases in prized suburbs.

      • d
        Apr 2, 2018 at 10:24 pm

        Australia is a State when any asset of any type, can be seized by the State and the previous owner (once teh State Seizes Something they are deem the current owner) must then prove at their expense that the liquidity used to procure the asset was tax paid.

        What is, and has been the issue in Australia for some time, is that the focus of the Draconian Australian laws, is in the wrong place. It is on Small and medium Wealth individuals the State does not like when it should be on Banks. High wealth individuals, and Foreign/Entity’s persons abusing the Australian system.

        Until recently Australian banks would lend to forigners based on what the Foreigner CLAIMED they earnnt Off Shore, no questions asked of documentation. IF the Foreigner had the required deposit for Property whilst White Australian single men. Were required to produce their life history certified in triplicate.

        Australia dosent need any more Legislation, Regulation, or Regulatory bodies, it simply needs to point what it has at the real problem. Whilst leaving the Scapegoats who Dare to Ride Motorcycles, alone. The Amount of tax they may be avoiding is a mere fraction of what the state spends persecuting them. meanwhile foreigners (predominantly chinese) launder billions through Australia in the process creating a massive property bubble in Eastern Australia. Making it impossible for ordinary Australians to even raise a deposit, let alone actually get a loan for property.

  8. Jon
    Mar 30, 2018 at 7:45 pm

    Would usa do the same thing and stop all the foreign laundered monies coming from China?

  9. Pavel
    Mar 30, 2018 at 8:35 pm

    It’s not just money laundering but people thinking UK property is a good investment. I’ve seen newspaper ads in e.g. Singapore and Malaysia marketing UK property to locals, who will buy the flats sight-unseen and often before construction is even finished. There was a piece in The Guardian recently about a Hong Kong investor who had paid hundreds of thousands into a Manchester property scheme which went completely bust and she lost her money:

    “We all thought the UK was a safe place to invest,” says Florence Leung, a retired Hong Kong accountant who put a substantial chunk of her life savings into a unit in Baltic House, and has since had to return to work to make ends meet.

    Along with many others, Leung said she was wooed at a lavish promotional roadshow at a hotel in Hong Kong and convinced to pay 80% of the price of a student flat upfront, with promises of 6% interest on her deposit, followed by guaranteed 9% returns in rental income once the project was finished. Months later, buyers received requests for further funds to complete the building, before North Point Global announced it was stopping work all together – and couldn’t refund the buyers’ deposits.

    –Edgy urban apartments, lavish promos – and a trail of angry investors

    • Nicko2
      Mar 31, 2018 at 2:29 am

      The Brits practically invented the property game. ;)

      • d
        Mar 31, 2018 at 2:48 am

        But America crated the insane and unsustainable rules, it is played by now.

  10. KPL
    Mar 31, 2018 at 1:48 am

    “If the trend continues, it could become a serious problem for the UK economy as a whole. For that reason alone the UK’s government’s latest threats of a crackdown on illicit funds entering the market should be taken with a healthy dose of skepticism.”

    In other words…FRAUD is fine with the government as long as it helps the economy.

    Businesses with FRAUD AS A BUSINESS MODEL (Barclays) is a win-win. Businesses get away with a slap on the wrists (get out of the jail free card) and governments gets revenue in the form of fine. What is not to like? Just talk of rule of law. Don’t walk the talk! After all in what way does it help government’s revenues if a few criminals are jailed. Better to let me loose so that they can commit more crimes, providing an endless source of revenue for the government.

    Just a good way of destroying society and making people who do the right thing look like the jackasses they probably are!

  11. Steve clayton
    Mar 31, 2018 at 2:17 am

    Coming from the UK, London is like a totally separate country to the rest. Property prices in London are crazy so any reduction in prices is good news.

    • MooMoo
      Apr 4, 2018 at 11:12 am

      ‘Like’ a “totally” separate…

      did you really write that?

      or are you channeling Zappa???

      • Lindsay Berge
        Apr 7, 2018 at 8:26 am

        MooMoo, I am puzzled by your comment. Do you not have similes in the version of English you speak? London is indeed ‘like a totally separate country’ to the rest of England, not literally but figuratively.
        The Bible is full of similes such as ‘But the wicked are like the troubled sea, when it cannot rest, whose waters cast up mire and dirt.’ (Isiah 57:20) Is God chanelling Zappa too?

  12. Podge
    Mar 31, 2018 at 4:37 am

    Britains total history has being based on money laundering. No laundering, no economy.

  13. unit472
    Mar 31, 2018 at 8:03 am

    For the 95+% of people who will not be selling their property in the next year or two the value of their home is mostly just phantom wealth that won’t be realized until the home is actually sold. Sure it feels better to have your house be worth $1 million than $800,000 but unless you are using your equity as loan collateral it has no real economic impact.

    OTOH the actual sale of a property does have economic impact even if it at lower price than paid. Loans are made, commissions earned , tradesman paid to ready the property for sale and furnishings are bought by the new owners so is it a bad thing for the real economy if the British government seized or forced the sale of properties bought with money with no provenance?

    • d
      Mar 31, 2018 at 3:36 pm

      “Sure it feels better to have your house be worth $1 million than $800,000”

      Not when they base teh property taxes on the valuations. Many peopel are being forced from their homes and communities, as they can not afford the property taxes

    • MooMoo
      Apr 4, 2018 at 11:39 am

      …has a lot to do with discretionary spending aka – how rich you feel… which impacts velocity of money

  14. Corto Norvegese
    Mar 31, 2018 at 5:17 pm

    The US and UK allow ownership through anonymous shell companies where the ultimate beneficial owner remains 100% concealed. Granting the privilege of property rights to such an entity undermines both the support of the locals’, the ultimate guarantors of said arrangement, and the efforts of developing countries to combat corruption. If the US and the UK were serious about fighting corruption, crime and money laundering, they would do away with this awful relic, and in the case of the US, use its clout to force other jurisdictions to do the same. But that is never going to happen. Too many well connected people are benefiting too much from the current state of affairs.

  15. robt
    Mar 31, 2018 at 7:25 pm

    So ‘almost tripling’ is OK except for the last 20% caused by hot money?
    The UK welcomed most of the oligarchs kicked out by Putin after they cleaned out the till in Russia, leaving nothing. At the time the main criteria for residency seemed to be: bring money, no questions asked.
    Does Britain now plan to confiscate it, or at least take a (big) cut?
    There was a short news video piece on CBC last week about a bus tour in London that visits all the homes of the ‘secretive’ oligarchs, Hollywood Homes of the Stars style, with the tour presenter dealing out lurid ‘facts’ about how much the residence cost, the reported income of the owner, and ‘how could they possibly afford that?’ in the basest form of agitprop expression. A good question would be if all these oligarchs are so secretive where does all this detailed information come from that a tour bus hostess can regale it to a busload of tourists and locals, and have a video made to be presented around the world as ‘news’?
    Bizarre, as are many things in Britain in recent weeks which defy rational analysis; only to be described as collective (government) insanity.

    • fajensen
      Apr 2, 2018 at 3:52 am

      Does Britain now plan to confiscate it, or at least take a (big) cut?

      Sounds like it, a Strike for Justice(tm) against the Evil Russian(tm) and filling the empty coffers (a bit) while diverting attention away from Carillon & Co who actually looted the pantry. Sounds like A Plan.

      OTOH – it could be the usual “waffle-waffle-waffle”. An inquiry can go on for many years until everyone has lost interest in it. The government can claim to be “doing something” while at the same time “waiting for the outcome of the inquiry on the matter to be able to make an informed decision”.

      Personally, I think they will do a compromise: Some, specific, Russians gets creamed publicly. Most, especially the Saudis, never even hear a thing and the inquest will die in its own pee alone and unloved after 2 or 3 election periods (the iron rule of western democracy – when there is scummy deals to be done, get the opposition involved too).

      where does all this detailed information come from

      “The Donut”, GCHQ in Cheltenham. Then MI5.

      ‘Tis likely that someone “spooky” drinks with a mate who happens to do research for the tour company. Not a leak, mind, a controlled release of agitprop so that the background story is “out there” for nicking the chattel of selected Russian oligarchs.

    • ML
      Apr 2, 2018 at 4:04 am

      “how could they possibly afford that?’ “

      The short answer is (answers are) low interest rates, a comfortable relationship with debt, creative accounting, basically because some people have more money.

      The question itself originates the politics of envy. A previously thin layer of socialism having become thicker in recent years, privilege is now a big issue. A by-product of austerity, people tend to judge others by reference to their own financial and often parlous state.

  16. ML
    Apr 2, 2018 at 3:51 am

    Having been invited to tour a house in a road in London where the average prices of houses is GBP £25M, i found it fascinating that the house doesn’t have a garage and has only a small garden. I wrote an article, for a property website upon which I have established a following, about the experience comparing what I considered to be value for money with the sale in the part of England where I live of a larger property with about 20 acres of land which went for GBP £6M. Travelling to London takes about 2 hours by car. Quicker apparently by train and presumably faster by helicopter.

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