A summary of Faulty Towers: Understanding the impact of overseas corruption on the London property market by Transparency International UK (2018)
As well as providing homes, the UK property market has long been recognised for providing a reliable investment opportunity. Whilst much of this investment will be from genuine investors seeking a steady income, there is now substantial evidence to show that:
‘UK real estate, particularly in London, is attracting corrupt officials and businesspeople who have stolen money from some of the most impoverished and repressed countries in the world’ (p4).
Since 2015, Transparency International UK (TI UK) has been examining the potential impact this illicit wealth might be having on London through surveying Londoners and analysing open source data such as the Panama Papers, articles by investigative journalists and Land Registry data. In so doing, they reveal how people launder stolen money into the property market, often through the use of ‘anonymous’ companies registered overseas. These organisations cannot be found on a public register and leave few paper trails, allowing their owners to enjoy their gains without scrutiny.
The London housing crisis
In London, house price rises consistently outstrip wage increases, dozens of prospective buyers compete for a shrinking pool of affordable stock whilst rent prices rise ever higher. As a consequence, it is becoming more difficult to afford to stay in London for average people, with the Government admitting the UK housing system was ‘broken’ in February 2017.
Overseas investment is just one of a range of factors that may be driving the crisis. Others include the lack of social housing, increased domestic demand and the shortage of development land. But TI UK’s report reveals that corruption overseas is also likely to play a significant contributory role, albeit in some slightly unexpected ways.
Understanding overseas investment into property
A significant amount of illicit investment into the property market stems from individuals buying homes to launder corrupt funds to conceal its criminal origins. This cleanses large amounts of illicit wealth in a single transaction and provides the individual with a valuable asset. London property retains value and often offers almost certain profit, with prices rising even amidst uncertainty over Brexit in early 2016.14
Corrupt individuals also buy homes in London because they provide a bolt hole in case they fall out of favour in their home country. Buying mansions in sought after areas of London or in exclusive new build developments comes with status, helping corrupt individuals distance themselves further from past corruption offences a practice which can be described as ‘reputation laundering’.
The London property market is highly vulnerable to corrupt wealth flowing into it. Analysis of open source material found over £4.2 billion worth of properties bought with suspicious wealth.
Corruption causes high levels of instability abroad leading to ‘crisis capital’ being placed in safe havens like London. Since 2006 around £100 billion of hidden inflows have entered the UK.
House prices are affected as illicit wealth and crisis capital entering the UK increase demand in the London housing market, particularly at the top-end; ‘the ripple effects they generate resonate across London’,
New build developments are built targeting wealthy international investors and are not meeting demand for affordable homes. In 14 landmark London developments almost 40 per cent of future homes were bought by those from high corruption risk jurisdictions.
London’s role as a global safe haven is resulting in homes being purchased and not used. Areas with higher levels of property owned by anonymous companies also have high levels of abnormally low electricity usage; an indicator for empty or underused homes.
Young people are moving out of London in record numbers due to the cost of housing. Over half of Londoners responding to our survey said wealthy overseas investors are causing house prices to rise and more than 1 in 5 believed money laundering was a motivating factor for overseas investment.
Transparency International UK warns that if these issues are not addressed, corruption abroad will continue to have a negative impact on the London housing market.
The report’s findings pose a problem for policy makers: how can you ensure the property market is not distorted by corruption overseas without unintentionally excluding innocent investors, many of whom might be seeking to escape from tyranny and instability in their home?
Transparency International UK makes the following recommendations to the UK government:
- Introduce greater transparency to the property market
- Reform the UK’s anti-money laundering system
- Retain tackling global corruption as a key priority
If these recommendations are followed, says TI UK, the negative impact overseas corruption inflicts on the people of London and its property market will be reduced and the UK’s role as a safe haven for illicit wealth will be diminished.