Corruption

Lord Rooker Excerpts

Thursday 18th June 2015 Grand Committee

Asked by

[Lord Rooker]

To ask Her Majesty’s Government what assessment they have made of the level of corruption in the United Kingdom in the light of the recent report of Transparency International UK, Corruption on your Doorstep—How corrupt capital is used to buy property in the UK.

[Lord Rooker (Lab)]

My Lords, I want to seek the Government’s view on the contents of the report entitled, Corruption on your Doorstep—How corrupt capital is being used to buy property in the UK, published by Transparency International UK in mid-March. This quite remarkable report analysed data from the entire corporate holdings of property in England and Wales at the Land Registry and matched them with the files of the Metropolitan Police’s Proceeds of Corruption Unit. It found that 75% of properties under criminal investigation use offshore corporate “secrecy jurisdictions”. This is where the legal system has a deliberate veil of secrecy that obscures the identity of those arranging corporate structures.

More than £180 million-worth of property in the UK has been brought under criminal investigation as the suspected proceeds of crime since 2004. This is believed to be the tip of the iceberg. Some 40,725 London property titles are held by foreign companies, and they occupy, by the way, 70 million square feet, which is two and a half square miles. Moreover, 89.2% of these are incorporated in a secrecy jurisdiction—some 36,342 properties. Of these, 38% were registered in the Virgin Islands and 16% in Jersey. In 2011 alone, £3.8 billion-worth of UK property was bought by British Virgin Islands-registered companies.

It is crystal clear that UK Crown dependencies and British Overseas Territories are the preferred option for concealment for those under investigation. Indeed, by cross-checking the files, the report makes it clear that 100% of overseas trusts and companies that hold titles for UK property under investigation for grand corruption are registered in offshore financial jurisdictions, rather than in major economies. In three London boroughs, an astonishing number of properties are owned by companies in an offshore secrecy jurisdiction. In Westminster, the figure is 9.3%; in Kensington and Chelsea it is 7.3%; and in the City of London it is 4.5%.

The Prime Minister, to his credit, has done more than his predecessors in trying to get to grips with international money laundering. His moral compass is working somewhat better than others’ in this respect. He requested in 2014 that all British Overseas Territories make changes so there is public transparency regarding who owns companies and trusts. None has taken up the request to do this. Two considered it and then said no. We therefore need unilateral action to address the risks posed to the UK.

UK property is a safe haven in an unstable world, but it should not be a safe haven for corrupt capital stolen from around the world, much of it from poor countries, helped by laws that allow UK property to be owned by secret offshore companies. For example, it has been estimated that more than $1 trillion has been taken out of developing countries—poor countries—through a web of corrupt activities, adding to global poverty. The Transparency International report made 10 recommendations, four to the Government direct, four to HMRC and two to the Land Registry. I would like a response to all these in due course, but today I will highlight just four. The first is indeed the key recommendation in the report: that, before completing a purchase on a property, overseas companies should be required to submit to the Land Registry the same details that UK-registered companies must submit to Companies House. This will establish transparency regarding who owns the companies that, in turn, own so much property in the UK.

The second recommendation is that estate agents’ anti-money laundering responsibility should be extended to include due diligence checks on the purchaser, not just the seller. At present, the legal responsibility on estate agents is only to check one side of a property transaction. Of course, in theory purchasers should have been checked by their own legal representatives. However, under Section 330 of the Proceeds of Crime Act 2002, such representatives and advisers do not commit an offence if they fail to report suspicious activities that they learned about in “privileged circumstances”. Of course, many court cases have extended the area of privileged activities. In the last decade there has been an 82% fall in suspicious activity reports from solicitors. This just shows the scale of the problem. I understand the reason for Section 330 but let us require the estate agents to vet both sides. That is the easy and practical solution.

Thirdly, there should be greater co-ordination between the 27 anti-money laundering supervisors in the UK. Some of these have responsibility for parties involved in money laundering through property and the suggestion is that the Treasury should regularly convene a property working group for all the anti-money laundering supervisors with responsibility for property transactions.

I had a brief discussion with Transparency International and these are the three top issues from its report to highlight today. There is a fourth. The Government should consider introducing unexplained wealth orders—UWOs—and explore the feasibility of using this mechanism in the UK. It was not in the original report but Transparency International launched a discussion paper on unexplained wealth orders on 10 June and it was extensively covered in, for example, the Financial Times. Suffice to say, there were 354,186 suspicious activity reports filed in 2014 with the National Crime Agency. These led to 14,155 consent requests effectively to cover the backsides of the companies involved so that if they got caught out later they could say they had consent. Of these, 94 went to the Proceeds of Corruption Unit and only seven got refused.

If we had unexplained wealth orders, failure to respond to such an order or an inadequate response could then be used along with the initial grounds of suspicion in a recovery process against the asset by our law enforcement authorities. It is a serious issue because the director general of the National Crime Agency said in January that,

“the scale of money laundering is a strategic threat to the UK”.

It is clear that the prevalence of UK property holding by companies incorporated in secrecy jurisdictions is a major barrier to law enforcement. Of course, the percentage of properties purchased with illicit money is tiny compared to the market, but the values are huge. The £180 million I mentioned earlier referred to just 120 properties. We are talking about prime London property, not the mainstream property bought by those working here from overseas.

Further, our law enforcement agencies are not helped by the fact that the Land Registry does not record the value of all sales. That is a massive loophole that should be closed pdq. According to KPMG, the United Kingdom attracts the highest foreign investment volumes in European markets. In the first half of 2014 it was £24 billion, ahead of Germany at £16 billion. This is big money. Added to this, the UK has 250 foreign banks—more than any other country in the world. International investment into prime London was more than £7 billion in 2012. Savills’ 2013 report stated that 90% of new-build luxury properties were bought by overseas buyers. After the 2013 G8 summit—where the Prime Minister made his commitments, by the way—the UK was the first national jurisdiction to put forward legislation to enable a public registry of beneficial ownership. The Prime Minister was trying to deliver it via the Small Business, Enterprise and Employment Act—but even that is being got around. While I was searching the files and reading the papers I saw a report in the Financial Times on 6 June headlined “Transparency rules leave loophole, law firm claims”. The first paragraph read:

“A leading law firm has told wealthy clients they can avoid ‘unwanted public scrutiny’ from the new transparency laws, in a sign of widely criticised loopholes in the legislation championed by David Cameron”.

So there is work to be done in this area. I want to know, as do Transparency International and its supporters, what the Government are going to do. They have moved incredibly well, as I have said. I have paid tribute to the work of the Prime Minister, but the Transparency International report quotes extensively from key, named UK law enforcement officers about the problems that they have in this area. It seems to me that accepting their modest, considered recommendations would be giving our own law enforcement people the tools to do the job. I look forward to hearing the Minister’s response in due course.