Today, the Prime Minister of the United Kingdom announced that the UK will publish information on property owned by foreign companies.
In a speech in Singapore David Cameron said: “The UK must not become a safe haven for corrupt money from around the world”.
He has committed to starting a central register of land owned by overseas companies this autumn, and will be consulting on whether to introduce a register of beneficial ownership of land in the future.
Why is this important?
Put simply London property is the currency of corruption. According to London’s police force, most grand corruption cases they investigate involve the purchase of UK property.
There are a number of reasons for this. Currently the UK’s Land Registry lists the ownership of land.
But land is often owned by a company instead of a person. If the company is based offshore in a secrecy jurisdiction like the British Virgin Islands where the ownership of companies does not need to be declared, all that will appear in the land registry is the name of an anonymous company, and nothing more. This is great for corrupt officials and tax evaders who need to stash large amounts of cash somewhere secret.
These offshore ownership structures allow for the secret transfer of valuable assets around the world at the stroke of a pen. No more trying to smuggle suitcases full of cash to make an illicit payment. All this can now be done at your lawyer’s office.
When the property comes to be sold, then whoever has the property has a legitimate source of income. Profits have therefore accrued thanks to some smart property investments. This is the defence that convicted money launderer and owner of Birmingham City Football Club Carson Yeung tried to deploy.
Although this dirty trade exists in many cities around the world, London property is particularly desirable for people looking to stash their assets for a number of reasons.
Firstly the London property market is liquid. If you want to quietly hold wealth and at some point convert your property into cash, London is an excellent place. There are vast amounts of transactions every year and it is easy to sell a home.
London is also seen as a safe bet, with strong legal protections for private property. Buy a London home and you can be relatively sure that in 20 years time it will still be there. The government won’t have appropriated your land. The last major land reform in England was well over 150 years ago, and that benefited the rich in any event.
Your asset will also most likely hold its value. The British have an ideological obsession with property ownership and successive governments have supported rising house prices in order to persuade people of the benefit of buying their home.
London property as a tax haven
The other big advantage is that London property is that it is cheap to maintain because London in effect acts as a tax haven for the super wealthy. There are no wealth taxes and no land value taxes.
Instead there is a relatively small land charge paid to the local government which is capped. This means an oligarch with a £25m mansion pays the same in taxes on their home as a relatively modest family on their home.
For a few years both Labour and the Liberal Democrats have advocated a mansion tax which would level the playing field. However, both parties were comprehensively defeated at the last election and share prices of estate agents surged as a result.
In comparison to other high value property markets the cost of owning a home in terms of tax is tiny. A recent study from Candy & Candy looked at the cost of owning a £10m home in London, Hong Kong, Singapore and New York.
Whereas over five years a property in New York would have to pay £900,000 in property taxes, in London this figure is just over £10,000. If you want to buy a property so you can just leave it and sit on the cash, London is the place to be.
A few years ago the UK did introduce a special tax on homes owned by offshore companies. But this was low enough so that many people just chose to pay the tax rather than to bring ownership back onshore.
Dirty money from around the world has been flowing into the London property market for years, so why do something now?
Firstly the flow of offshore cash into the London property market is now so vast that it is creating serious economic distortions. In some areas, such as Westminster in Central London, 10% of land is owned by offshore holding companies according to Transparency International. In total £122bn in property in the UK is owned offshore.
This has led to a boom in prices to the point that London property is now out of the reach of people even on reasonable household incomes. Average house prices in the capital are now over 10 times average incomes, in some areas it is more than double that.
Secondly, there is an increasing awareness that a large proportion of this money is the result of money laundering and corruption. A string of scandals in recent years have uncovered incidents where corrupt officials have hidden money in London property. This includes high profile cases such as Saif Gaddafi and James Ibori. Most recently Global Witness released a report last week detailing how £127m in property in London’s upmarket Baker Street was owned by the brutal former head of the Kazakh secret police.
Just three weeks ago Channel 4 broadcast a shocking documentary, From Russia With Cash, where an undercover journalist posed as a corrupt Russian government official and approached several estate agents about buying a property anonymously. All appeared happy to oblige (although some later claimed that they were simply stringing ‘Boris’ along). The documentary led to calls in parliament for greater restrictions in property ownership.
Last week, the head of the Economic Crime Command of the National Crime Agency gave an interview where he said that house prices were being inflated by money laundering.
David Cameron has made a big deal of his commitment to greater transparency of the beneficial ownership of companies. Announcing that this should be extended to land was the obvious next step.
The big question will be whether the UK follows though on a register of beneficial ownership of property and land.
At the moment all that is promised is a consultation. Criminals and money launderers who have large positions in the London property market can sleep easy – for now.
A consultation will be released, there will be months of lobbying from the money laundering facilitation industry. Proposals may be watered down and it will be well over a year until measures are put in place.
If a public register of beneficial ownership is taken forward, to whom will it apply? Will it only apply to new transactions? Or will it include all land currently owned in the UK?
If a register of beneficial interest is to be truly comprehensive, it will involve getting information from a number of highly secretive places. What if that isn’t forthcoming? What will be the penalty for non-compliance?
A key question which may well drive these decisions is what will be the impact on the housing market if the UK government goes the full way in publishing the real ownership of property.
Anecdotal evidence does suggest that house prices are very sensitive to attempts to crack down on illicit financial flows. In late 2014 there were reports that a combination of the sudden collapse in oil prices and economic sanctions following Russia’s interventions in Ukraine led to 70% of Russian buyers disappearing from London almost overnight. Following this, property prices in London’s highest value areas declined for the first time since the global economic crash.
Will the owners of the £122bn in UK property owned offshore really want to have their identities revealed? Or will they look elsewhere for somewhere to hide their money, sparking a fire sale? Will Cameron really put the pedal to the metal and introduce a full register of beneficial ownership if he is confronted with a collapse in house prices and and the consequences that will have for the vast industry of estate agents, developers, lawyers and financiers that has grown up around the trade in secret homes?
All these uncertainties mean that the party is not quite over for London’s money launderers. Although it may well be last orders at the bar.
P.S. David Cameron went out of his way to praise his Singaporean hosts for their superb handling of the country’s economy. But last time we checked, Singapore was the Switzerland of south east Asia. A place where the region’s superrich hide their wealth thanks the country’s infamous banking secrecy. This may be why Singapore is the largest single offshore destination for sales of high value property in central London according to internal documents from estate agents Savills and Knight Frank.