Beneficial ownership in the spotlight

Just as the 2016 edition of this Index was being released, the leaked ‘Panama Papers’ revealed extensive patterns of illegal financing and tax avoidance, often centred on real estate. We explore the reactions and responses of the real estate industry to these revelations.

Public debates fuel real estate response

In the context of these massive leaks, four areas of real estate regulation and enforcement have seen the most robust and widespread actions in the past two years:

• Enforcement of anti-money laundering (AML) laws;
• The undertaking of ‘know your client’ (KYC) checks;
• Increased disclosures to halt insider trading and tax avoidance; and
• The tightening of beneficial ownership rules.

These came on the heels of broad recognition in the sector that property investments, especially in the residential sector, are often a preferred destination for illegal money laundering operations

It is clear that the scope of scrutiny has widened. Enforcement efforts have tended to be historically focused on fund managers, but are extending more broadly to advisory, brokerage and property management roles. International real estate service providers have tended to set the pace for the whole industry, adopting a single code of conduct across borders. Verification and documentation are becoming increasingly central to operations.

The UK taking the lead on addressing beneficial ownership

While anti-money laundering regulation is relatively well-established, beneficial ownership legislation is much less advanced. The United Kingdom is taking the lead on this issue, with a planned national register of overseas owners set to be introduced in 2019. Other European markets, such as Denmark, have also tackled the issue – and we may see further action as the EU’s Fifth Anti-Money Laundering Directive comes into force.

Regulatory requirements are sometimes lacking, even in ‘Highly Transparent’ markets where enforcement is robust. In countries like Australia, New Zealand and Sweden, this is an active topic of discussion, and we are likely to see changes going forward.