The UK’s financial institutions are estimated to handle hundreds of billions of pounds worth of criminal funds annually. The government’s National Risk Assessment of Money Laundering and Terrorist Financing and the National Strategic Assessment of Serious and Organised Crime reports continue to conclude that the UK property market is an attractive target for domestic and international money laundering networks. What does that mean for mortgage brokers and professional service providers?
A recent example of a money laundering network in action is known as the ‘Troika Laundromat’. The Organised Crime and Corruption Reporting Project (OCCRP) recently identified them, named after the Russian Bank Troika Dialog who the OCCRP have alleged have control of the network. ‘Laundromat’ is a name given to a network whose purpose is the avoidance of international financial sanctions by Russian oligarchs or politicians and the movement of criminal or sanctioned funds out of Russia to be laundered through the global financial system.
If we take a look at a simplified summary of how the Troika Laundromat supposedly functioned, we can see how the criminal funds quickly spread across the world, and the areas of the chain where stringent due diligence is necessary. Allegedly, Troika Dialog established companies in the British Virgin Islands, where companies aren’t required to publish details of their incorporation or ownership. These companies then paid company formation agents to incorporate an array of shell companies, created without any legitimate business purpose, potentially using fake addresses and Directors. The Lithuanian bank, UkioBankas, was chosen by Troika Dialog to hold the shell companies’ accounts. Historically, UkioBankas has poor compliance controls and has been willing to allow suspicious transactions through without much scrutiny. The funds were subsequently moved through Western Europe via multiple transactions, often in the name of mule signatories or signatories with stolen identities.
Amongst the alleged beneficiaries of the network are Sergei Roldugin, Vladimir Artyakov and Ruben Vardanyan. Roldugin, is a close associate of Vladimir Putin, Artyakov, a former Russian State Governor and Vardanyan, the CEO of Troika Dialog. Between them, they’re alleged to be linked to the use of $80million worth of the networks funds, either owning the companies that received transactions, purchasing property across Europe or paying off UK-based credit cards and London school fees.
Property investment is a popular choice for criminals looking to launder funds and find ways around financial sanctions. The mortgage industry needs to be particularly vigilant to avoid being used as a vehicle for these actions.
So where do financial service providers stand in all of this?
The regulated sector is advised that it is most vulnerable when interacting with non-regulated advisors, representatives and intermediaries. Property transactions involving multiple parties have the potential to be complex; that complexity is attractive to money launderers. A broker finds themselves as one of the professional service providers acting as gatekeepers to the UK property market. A commitment to due diligence is key to ensuring brokers don’t unwittingly allow money launderers access to the UK market.
What can be done?
Well, plenty, actually. These compliance tips are not intended to represent formal compliance advice or instruction from us, nor do they represent our opinion on the accuracy, or any other factor, of the OCCRP report. They are intended merely as reminders and reference points to published regulatory requirements:
- These ‘Laundromat’ networks and businesses, created by organised criminals, are designed to have the appearance of legitimacy. Industry guidance suggests that professionals in the field look out for red flags and inconsistencies, even when dealing with seemingly legitimate or regulated businesses.
- When dealing with arrangements involving the use of offshore companies or funds in high-risk jurisdictions, further due diligence should be taken.
- Criminals communicate with each other, banks and brokers who practice poor diligence are therefore at danger of being repeatedly taken advantage of by organised crime groups.
- The addresses and companies linked to a client should be scrutinised; do they exist, are they consistent, do the companies look like they trade?
- Identities of applicants should be confirmed. Does their mortgage application make economic sense, does it fit with their profile?
- The applicants source of wealth should be taken into account, i.e. how do they normally make their money? Is it through an obviously legitimate source, such as PAYE income from a reputable firm, or is it from a higher risk source, such as irregular income from a cash-intensive business that they own?
- The applicant’s source of funds should also be considered. This will normally be in terms of the deposit, but could also be the loan repayments, particularly if overpayments or balloon payments are made. Is the source of funds the same as the source of wealth? I.e. savings built up from their regular income, or is it from another source?
- It’s a regulatory requirement that relatives and ‘close associates’ of Politically Exposed Persons are treated in the same way as PEPs. Sanctions and PEP screening should be undertaken on customers.
- PEPs are to be treated as such, even for a period of time having recently left office.
- Customers with relevant links to high-risk jurisdictions, such as Russia, should be placed under extra scrutiny, regardless of whether they appear to be based in the UK.
- Take particular care in dealing with customers and transactions that have a higher risk of involving sanctioned entities or frozen assets. Unlike more standard forms of criminal or terrorist property, dealing with sanctioned assets or individuals results in automatic criminal liability unless a defence can be made out. Lists of sanctioned entities are updated all the time, so make sure you’re up-to-date.
It appears that due diligence, from all parties involved, can be an effective safeguard against further criminal practices in the sector. For more information on reporting suspicious activity that may be linked to money laundering, please find further guidance here.