Law firms must continue to remain vigilant to red flags and suspicious activity in property transactions as research reveals the number of Suspicious Activity Reports (SARs) submitted by legal and conveyancing professionals has fallen by 13% year on year.
The SARs Annual Statistical Report 2023 reveals the SARs figures for independent legal and conveyancing professionals have dropped from 2,859 reported in 2021-2022, to 2,526 in 2022-2023.
A Suspicious Activity Report is a disclosure made to the National Crime Agency (NCA) about known or suspected money laundering or terrorist financing. Law Society guidance states ‘If you are an MLRO working in the regulated sector, you must make a SAR if you know or suspect, or have reasonable grounds for knowing or suspecting, that a person is engaged in money laundering.‘
And while these numbers look high, they are low when taken in the context of the total number of property transactions. According to figures published by HMRC there were 1,376,080 property transactions (seasonally adjusted) in financial year 2021/22; representing just 0.2% transactions. The percentage remains the same in 2022/23 where there were 1,208,310 transactions and 2,526 SARs submitted.
“Identifying warning signs early allows lawyers and conveyancers to conduct enhanced due diligence, ask more questions and potentially file a suspicious activity report (SAR) with the NCA. It’s easy to slip into thinking that AML checks are a box-ticking exercise, but money laundering and financial crimes have real victims that are only a few steps removed from the money that is being transacted.
Says Tim Barnett, CEO of Credas Technologies who acknowledges that while most property buyers are above board, common red flags can indicate that funds from illegal activity are being filtered into a property purchase or sale.
“Identity verification is a crucial part of the risk-based approach that companies in the regulated sector are obligated to take under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) regulations 2017.”
Lawyers and conveyancers need to stay alert to red flags and report unusual activity that comes across their desks, says Barnett,
The most common techniques for laundering money are:
- Third party proxy: Using a third party or proxy to make the purchase on behalf of the real buyer, avoiding the link between the property to the criminal in official records.
- Irregular sale prices: An irregular sale price with a buyer paying significantly above or below market value can be considered a red flag – a transaction like this can allow larger sums to be laundered through mortgages, while undervaluing lets surplus illicit cash change hands separately.
- Obfuscated Source of funds: The source of funds used for a deposit or fees may seem suspicious – for example large amounts of physical cash with no paper trail. If funds are coming from an unrelated third party or foreign account, more questions should be asked.
- Location of the buyer: A buyer purchasing property located in a high-risk territory purchasing property where they neither live or work for no clear reason can be a red flag. This distance makes it harder for authorities to uncover connections between parties.
- Shell companies and trusts: A buyer might be using a shell company or trust to purchase and hold properties on their behalf. These entities can help conceal the true ownership of the properties, making it difficult for authorities to trace the illicit funds back to the perpetrators. It pays to look at beneficiaries and trustees carefully – if it’s a family trust, are they all family, or are there unexplained people in the mix?
- Cash transactions: Criminals may use large amounts of cash, or direct bank transfers, to purchase properties outright or to make significant down payments, making it harder for authorities to trace the funds’ origin.
- Related parties: Frequent buying and selling between related parties is a potential sign of cycling funds through property to appear legitimate.
The Law Society, Solicitors Regulation Authority (SRA), and Council for Licensed Conveyancers (CLC) have also produced their own anti-money laundering guidance and toolkits for legal professionals. The CLC’s ‘red flags’ document can be reviewed here.
