1 in 4 property developers fail to run checks on corporate buyers

More than a quarter of property development firms are not performing Know Your Business (KYB) checks on companies they sell properties to, according to brand new research from digital compliance experts SmartSearch.

SmartSearch’s new report - EV Uncovered III - Emerging financial sectors – has discovered that just 26% of property development firms are running property checks on corporate clients, despite the fact that buying property through shell companies is one of the most common ways in which financial criminals launder dirty cash.

The extent of the issue was highlighted last year by the publication of the Pandora Papers, which revealed that the UK’s property market is being abused to the tune of £billions by the world’s rich and powerful, who are using shell companies to covertly purchase properties.

While buying a property through a business is not illegal, shell companies do enable the ultimate beneficial owner (UBO) of that property to remain anonymous, enabling them to avoid paying UK tax and significantly increasing the risk of money laundering. Therefore, it is vital, not only to run a thorough business check on any corporate customers – including one that identifies the UBO – but also to run a comprehensive individual check on the UBO and any other directors in the company to ensure the business is not a bogus one being used to hide illegal activity.

However, SmartSearch’s research has revealed that not only are 1 in 4 property developers not running KYB checks, but less than half (43%) are consistently carrying out verification checks on the people running the business; 21% say they ‘sometimes do’, while 12% admit they either ‘never’ do it, or ‘rarely’.

Even amongst those property developers that do run checks, SmartSearch found that 62% are not identifying the UBO.

What’s more, just 30% of property developers ‘always’ run verification or screening checks on new individual customers, with 15% admitting they ‘rarely’ or ‘never’ verify new customers while 6% ‘rarely’ or ‘never’ run screening for sanctions or PEPs.

The research also found that 43% of property developers admit to having seen a rise in money laundering or financial crime attempts in the past 12 months and 36% have actually been a victim of financial crime in the past 6 months.

 “These findings are really shocking,” said Martin Cheek, Managing Director at SmartSearch. “It is well known that the UK property sector is incredibly vulnerable when it comes to financial crime due to the fact businesses are allowed to purchase, own and sell property. This makes the whole sector very murky when it comes to ownership, and therefore very attractive to money launderers looking for ways to clean large amounts of dirty cash.

“Estate agents have always been a huge target – and therefore are very tightly regulated - but the AML rules governing the property development sector have historically not been as strict even though it is arguably more at risk, as there is much more opportunity to launder huge amounts of cash due to the scales involved.”

Martin argues that any property developers not doing proper checks are leaving themselves wide open, meaning they are potentially enabling criminals to move money about – money that will have been earned by - and is continuing to fund – criminal activity.

“If the moral responsibility is not enough to convince property developers to take their obligations more seriously, the huge financial and reputational consequences might be,” Martin continued, adding:

“Our research shows that more than two-thirds (67%) of property developers admit to being worried they are committing an AML breach, and rightly so, as there have been multiple incidences of firms being fined and even imprisoned for money laundering.”

A recent example is the Dreamscape Homes case*, where property developers Audrey Osbourn, 66, and her sons Gary Moore, 44, Clayton Moore, 48, and Ian Moore, 45 were found guilty of multiple counts of mortgage and investment fraud and money laundering offences resulting in losses to investors of over £1.5m with the defendants benefitting over £2.8m. Ian Moor received a sentence of two years and four months, the other three were imprisoned for three years.

Despite the fact the property sector is so vulnerable, most – 66% - of those working within it do not believe it should be subject to the same checks as estate agents and other property businesses, with the vast majority – 82% - saying they are ‘confident’ none of their existing clients are on a sanctions or PEP list; mostly because they ‘trust’ them (43%) or because they have worked with them for a long time (45%).

Half of property development firms are still doing manual ID checks

SmartSearch’s report has not only uncovered a lack of AML compliance within the property development sector but also a worrying reliance on outdated and inaccurate manual processes amongst those that do run checks.

More than half (57%) of the property development firms surveyed for SmartSearch’s EV Uncovered III -Emerging financial sectors report still rely either completely on manual checks (46%) or on a mixture of manual and electronic checks (11%). A third (33%) say they run manual checks because ‘they always have done’ and almost half (49%) are under the misguided understanding that using hard copy ID documents is the only way to truly guarantee a person’s ID.

Martin Cheek, Managing Director at SmartSearch continued: “The fact so many property development firms are not running KYB checks is hugely concerning, and then to discover that even amongst those that do, many are not identifying the UBO and a huge number are still relying on hard copy documents to verify ID.

“The only way property development firms can be confident that they have accurately verified a business customer is to run a proper KYB check including UBO and director identification and verification.

“Our specialist International Business Reports are the most comprehensive KYB checks on the market. Using our triple bureau credit agency functionality, and cross checking with data from a wide range of global and domestic data sources -  including Companies House and the Dow Jones Watchlist – we are able to run reports on corporates and entities in more than 200 countries and identify and verify associated entities, directors, and beneficial owners.

“Our service completes a full KYB check, provides business identification data, shareholder and ultimate beneficial ownership detail and consolidated financial information. The service then runs full screening for PEPs and Sanctions on the beneficial owners and directors with a 98% accuracy, removing the issue of false positives. Our system also provides ongoing monitoring with alerts about any changes, ensuring customers remain compliant and audit-ready.

“We also offer Source of Fund checks – vital for all regulated sectors – but particularly important for property development firms so they can ensure their buyers are using legitimate funds.”

To discover more, visit SmartSearch.com

* https://www.cps.gov.uk/cps/news/family-property-developers-imprisoned-multi-million-pound-mortgage-and-investment-fraud