Beneficial ownership: A crucial aspect of AML compliance in real estate

The real estate industry is no stranger to complexity. With transactions involving numerous parties, intricate financial structures, and vast sums of money changing hands, it's no wonder that real estate has been a target for money laundering and illicit activities.

To combat these threats, governments and regulatory bodies worldwide have implemented anti-money laundering (AML) regulations. One essential component of AML compliance in the real estate sector is understanding and identifying beneficial ownership.

In this blog we will delve into the concept of beneficial ownership in real estate transactions and why it is vital for AML compliance. Conveyancers, in particular, will gain insights into how to uncover the true owners behind complex structures.

Understanding beneficial ownership

Beneficial ownership refers to the person who ultimately owns or controls an asset (for example, a property or a company), as opposed to the legal owners whose names appear on official documents.

In the context of real estate, it means identifying and verifying the individuals or entities that actually control and benefit from the property involved in the transaction, even if their names are not directly associated with it.  

This distinction is crucial in the fight against money laundering because criminals often hide their illicit wealth by holding assets through complex ownership structures. They may use shell companies, trusts, or other legal entities to obscure their involvement, making it difficult for authorities to trace the true source of funds.

Definition of an individual PSC of a UK company

Under Schedule 1A of the Companies Act 2006, an individual (“X”) meets one or more of the following conditions in relation to a company (“Y”), they must be registered as a PSC:

• X holds, directly or indirectly, more than 25% of the shares in company Y.
• X holds, directly or indirectly, more than 25% of the voting rights in company Y.
• X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of company Y.
• X has the right to exercise, or actually exercises, significant influence or control over company Y.
• The trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other specified conditions in relation to company Y, or would do so if they were individuals, and, X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.

Definition of a beneficial owner of an overseas entity

Under paragraph 6 of Schedule 2 to the Economic Crime (Transparency and Enforcement) Act 2022, a person (“X”) is a beneficial owner of an overseas entity or other legal entity (“Y”) if one or more of the following conditions are met.

• X holds, directly or indirectly, more than 25% of the shares in Y.
• X holds, directly or indirectly, more than 25% of the voting rights in Y.
• X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
• X has the right to exercise, or actually exercises, significant influence or control over Y.
• The trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above in relation to Y, and, X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

Examples of concealing beneficial ownership

Watch for: shell companies and layered ownership structures

Shell companies, which are legal entities with no significant assets or operations, are often used with multiple layers of entities and trusts to obscure the true ownership of real estate properties. Launderers may create multiple layers of shell companies registered in secrecy jurisdictions like Panama or the British Virgin Islands to make it virtually impossible to trace the funds back to their illicit origins.

In the news

The case of Jonathan Nuttall from Hampshire demonstrates why understanding beneficial ownership is so important in combating money laundering. Nuttall amassed wealth through unlawful means but held the assets in his wife Amanda Nuttall's name to obscure his involvement.

NCA investigators eventually unravelled the scheme by analysing around 100,000 transactions; finding the funds were laundered through shell companies in various countries. Though not the legal owner, Nuttall's beneficial ownership was uncovered, leading to recovery of millions in illegal proceeds.

Watch for: trusts and family offices

Trusts and family offices can also pose significant risks in real estate transactions due to their inherent complexity and potential for obscuring beneficial ownership. The separation of legal and beneficial ownership within trusts provides an opportunity for criminals to disguise their connection to properties used for illicit purposes.

Trusts can be complicated for several reasons. There is no public record of individuals involved as with the Companies Register - the trust agreement designates beneficiaries, but their identities are not publicly disclosed.

While for family offices, beneficial ownership is often difficult to determine due to their inherent features of stringent privacy, use of various legal entities, nominee directors and shareholders, and diverse asset portfolios.

Identifying all parties involved in a trust or family office run portfolio, verifying their identities, and scrutinising the source of funds is critical and also very difficult.

Watch for: real estate investment funds and collective investment schemes

Institutional investors, such as real estate investment funds and collective investment schemes, often pool money from various investors to purchase real estate. These structures can be challenging to assess for beneficial ownership, as the ownership interests are distributed among multiple investors. Furthermore, the investors themselves may be individuals, other funds, or even offshore entities, making it difficult to pinpoint the ultimate beneficial owner.

Beneficial ownership and the Register for Overseas Entities

The Register of Overseas Entities (ROE), introduced in the UK as of August 1 2022, marks a significant milestone in advancing transparency and combating money laundering within real estate transactions involving foreign entities. With the ROE in place, overseas companies conducting property deals in the UK must register with Companies House and provide more information on beneficial owners.

The implementation of ROE responds to concerns about the use of offshore shell companies and complex legal structures to obscure beneficial ownership in the UK property market. It reinforces the critical role of conveyancers in uncovering true ownership.

This new measure, intended to provide greater scrutiny on beneficial ownership, has meant two things for conveyancers: 

• Firstly, if your seller is an overseas entity, you now need to put stipulations in the contracts to make sure this is all subject to them getting an overseas entity registration code from Companies House. 
• Secondly, think twice if any overseas entity wants you to become an agent and register them against the ROE. The Law Society released its own guidance on ROE and counselled conveyancers to avoid being agents, recognising that verification for ROE purposes is a very different task to the risk-based approach to client due diligence under the money laundering regulations.

How to uncover beneficial ownership

Conveyancers play a critical role in uncovering beneficial ownership in real estate transactions. Here are some additional strategies they can use to achieve this:

In-depth due diligence

Conduct thorough due diligence on all parties involved in the transaction. This includes verifying the identities of buyers, sellers, and anyone with a significant interest in the property. Look beyond the names on official documents to uncover the true beneficiaries.

Understanding ownership structures

Familiarise yourself with different ownership structures commonly used in real estate transactions. This includes trusts, corporations, partnerships, and other legal entities. Be vigilant when you encounter complex ownership arrangements with no clear purpose, as they may be a red flag for potential money laundering.

Beneficial ownership registers

In some jurisdictions, beneficial ownership registers have been established to provide transparency about who ultimately owns and controls legal entities. These registers can be a valuable resource for conveyancers in their efforts to identify beneficial owners.

Suspicious activity indicators

Watch for other suspicious activity indicators. These might include high risk jurisdictions, shell companies in offshore jurisdictions, and evasive or suspicious client behaviour. These red flags should prompt further investigation.

Challenges of beneficial ownership identification

Current information

 Obtaining accurate and up-to-date beneficial ownership information can be difficult, particularly when dealing with complex ownership structures, nominee shareholders, and offshore entities. For this reason many compliance professionals choose AML technology providers that integrate into multiple company registers across multiple jurisdictions. They also prefer streaming APIs that provide real-time alerts when company data, such as shareholders percentages, change. 

Variability across jurisdictions

 The varying legal and regulatory landscapes in different jurisdictions also cause headaches for compliance professionals. The absence of a global standard in beneficial ownership requirements and privacy laws means that compliance professionals walk a tight line between beneficial ownership transparency and individuals' privacy rights. 

Evolving laundering methods

Criminals are continuously thinking of innovative ways of cleaning money and hiding true ownership. Just recently, Swedish police found gangs were using fake Spotify streams to launder their ill gotten gains. Cryptocurrency is another, now common, way of laundering and hiding identity. Compliance professionals struggle to keep up with, let alone ahead of, the latest and most innovative ways criminals are obscuring their ultimate beneficial ownership.  

Conclusion

Beneficial ownership is a critical aspect of AML compliance in real estate. Conveyancers and other professionals in the industry must be diligent in their efforts to identify the true owners behind complex ownership structures. Failure to do so can result in, at best, legal penalties and at worst, permanent reputational damage.

As the real estate sector continues to evolve, so do the methods used by criminals to launder money. To stay ahead of these threats, the industry must embrace technology, data analysis, and international cooperation. By doing so, we can ensure that real estate transactions remain transparent, secure, and free from the influence of illicit funds. In the end, beneficial ownership identification isn't just a compliance requirement; it's a fundamental safeguard for the integrity of the real estate market.