The author of this article argues that until anti-money laundering is addressed consistently across the globe, there will still be room for the criminals to operate, but in a free society the challenges are clear.  

The war against money laundering never ends, and for years, one of the conduits for dirty money has been property. In this article, Katherine Campbell, counsel and head of real estate disputes at law firm Reed Smith, considers the state of play. The editors of this news service are pleased to share these views and invite replies. The usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

For years, the property markets in the major European and US cities have provided a lucrative outlet for money launderers across the globe. The key to their success is the complex web of offshore companies and trust structures that can be created to channel the proceeds of crime, coupled with the lack of transparency in most countries’ corporate and land registries. 

The result is that it has been far too easy in the past for the ultimate beneficial owners of these property investment vehicles to hide their identity. The war in Ukraine and corruption amongst Russian elites has only served to bring into sharp focus the serious work that needs to be done in this area.

In the UK, The Economic Crime (Transparency and Enforcement) Act, which came into force in 2022, now requires all foreign companies that own property in England and Wales to register their ultimate beneficial owner at Companies House. Many companies have completed the complex process of registering and verifying the information, but, although the deadline for registration was 31 January 2023, thousands of companies are yet to register. 

Those companies will be subject to criminal penalties, including daily fines and imprisonment of officers, together with arguably the much more effective sanction of having restrictions placed on titles at the Land Registry, which will prevent them from selling existing properties, purchasing any new real estate, or refinancing existing property. If any transactions are found to have been carried out in breach of the new laws, the proceeds are also likely to be caught under the Proceeds of Crime legislation and will be liable to confiscation.

So far, so good. Steps are being taken in the right direction, designed to draw the UK in line with the EU. At the same time, however, the EU Court of Justice has taken a seriously backwards step, ruling on a claim brought in Luxembourg by various companies and individuals against a 2019 Luxembourg Law that established just such a register of beneficial ownership. 

In the EU, public registers of beneficial ownership were introduced in 2018 by the EU’s fifth anti-money laundering directive; they are truly public, with much personal information about individuals being available to anyone who cares to search. Luxembourg had enshrined this into its national law in 2019. Previously, the fourth directive had limited access to competent authorities and those with a legitimate interest.

In the Luxembourg case, the Court of Justice found that a potentially unlimited number of people would be able to find out about the personal and financial status of a beneficial owner under Luxembourg’s law. It also found that once the data had been made available to the public, it could also be freely disseminated, leading to potentially serious misuse of the information. 

Among the arguments made in the Luxembourg District Court had been the rather persuasive one that, due to one of the beneficial owners’ role in a real estate company, he was required to travel to countries with unstable political regimes and disclosure of personal information might significantly increase the risk of his being kidnapped.

The court therefore found itself balancing the benefits of the right to the information from an anti-corruption point of view with the interference with the privacy rights of the individual. Ultimately, the court said that public access to the information “constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data” enshrined in Articles 7 and 8 of the Charter of Fundamental Rights of the European Union. 

As a result of the EU ruling, EU national courts must also comply and some EU countries are now closing their registers, albeit temporarily, while the court process plays out, so as not to fall foul of the ruling. This is clearly a severe blow for the international fight against money laundering; the tension between data protection and anti-corruption is an obvious corollary of the EU’s action to date to combat money laundering. 

Many take the view that the EU had taken a step too far with the fifth directive to a point where a search is no longer limited to what is strictly necessary or proportionate, as was the position under the previous directive, but rather where anyone can access private personal data and pass it on.  

In the UK, this has been addressed by ensuring that information – such as home addresses, dates of birth and email addresses – does not have to be disclosed on the register. But the divergence between the UK and the EU creates very real problems for international property holding companies which are subject to disclosure across the globe. The homogeneity that the UK legislation was trying to create has, at least for the time being, been knocked off course.  

Meanwhile in the US new rules are also to be introduced through the Corporate Transparency Act 2021, effective from 1 January 2024, whereby most corporations and companies created or registered in the US will be required to report information concerning their beneficial owners.  

This followed a report in September 2022 by the Financial Crimes Enforcement Network (FinCEN) on the Anti-Money Laundering Act 2020, which set out new rules for the reporting of beneficial ownership information. The approach in the US is more property based than privacy based. Consequently, US law enforcement is perceived to have been given a wider remit than their EU counterparts in combatting corruption and money laundering. It should be noted, however, that even the US approach will not permit completely unrestricted public access to the information recorded. 

The Luxembourg case illustrates the growing privacy divide between the EU and the US, which will do nothing to alleviate the continuing compliance challenges for those benign global companies who will have to navigate through the differing regimes. The scale of the challenge in the UK is daunting – it was only topped by the US in a recent ranking of global money-laundering hotspots, with an estimated £88 billion laundered through the UK every year. It is too early to say if The Economic Crime Act is making a dent in this huge shortfall. Until anti-money laundering is addressed consistently across the globe, there will still be room for the criminals to operate, but in a free society the challenges are clear.