Nonresident Fellow - Global Economy and Development
Assistant Professor of Political Science - George Washington University
Research Fellow - Higher School of Economics
Florian M. Hollenbach
Associate Professor in Business & Politics - Copenhagen Business School
Leading up to the Russian invasion of Ukraine, the U.K.’s real estate sector had built up an unsavory reputation for being a great place to stash your illicit cash. Government risk assessments repeatedly flagged the sector as being a high risk for financial crime, in part due to improper implementation of due diligence checks by estate agents. Investigations by civil society organizations have revealed that a sizable chunk of high-value British real estate is owned by oligarchs, autocrats, and heads of government from around the world—typically through shell companies set up in tax havens with the explicit purpose of hiding their identity from the public. According to recent research, up to £19 billion may have flowed into U.K. property just to avoid new rules aimed at curbing cross-border tax evasion. Over time, the capital would go on to earn the nickname “Londongrad” thanks to the sheer number of Russian oligarchs that chose to move their money there, few questions asked.
With Russia’s invasion of Ukraine looking imminent, the political winds began to shift. The U.K. government decided to reintroduce landmark legislation making it much harder to own property anonymously. Among other things, the Economic Crime (Transparency and Enforcement) Act (ECA), would eventually require offshore companies that owned U.K. real estate to submit the identity of their beneficial owner(s) (the people who ultimately control the company) to a new Register of Overseas Entities. By forcing them to reveal themselves publicly, the goal was to make it harder for the corrupt and criminal to buy U.K. property anonymously.
It wasn’t immediately clear the ECA would have much of an impact. The main agency tasked with enforcing the Register and more broadly maintaining company registrations, Companies House, has a reputation for having little capacity to ensure that information submitted to it is accurate. As a result, over the past decade, U.K. company registers have become awash with false information, some of it farcical (one director of a company was listed as Adolf Tooth Faith Hitler), some of it malicious. Our own experience evaluating similar policies aimed at stripping away ownership opacity in the U.S. real estate sector have shown little evidence that they deter illicit investment.
In a new research paper for UNU-WIDER, we use public data on real estate purchases to investigate the impact of the ECA. Despite the initial skepticism about its effect, our initial findings suggest that the threat of the Register immediately began to deter investment in UK property from higher-risk jurisdictions. Following the reintroduction of the ECA, new purchases of U.K. property by companies based in tax havens fell substantially relative to companies based in other countries. We know from existing research that people use shell companies in tax havens to hide their identity when purchasing property. The drop in new purchases using companies originating in these countries suggests that the removal of anonymity made the U.K. a less attractive place to buy property.
Figure 1. Purchases of properties through tax havens fell relative to other jurisdictions following the fast-tracking of the Economic Crime Bill and the establishment of the Register
Not all of the credit can go to the Economic Crime Bill, as the invasion of Ukraine also led Russian investors—subject to either sanctions or stigma—to shift their investments away from Western markets. To disentangle these mechanisms, we used data leaks like the Panama and Pandora Papers to identify which tax havens are most popular with groups of people with different risk profiles: Russians, people from highly corrupt countries, and those from countries with an incentive to engage in tax evasion. When we do this, we do find that the initial drop in U.K. real estate investment is likely to be driven by Russians (who are more likely to invest through Cyprus or the Bahamas). But we also find a long-term drop in investment from places popular with the corrupt, suggesting that the threat of the Register has had an impact going beyond the general decrease in Russian investment seen worldwide.
Figure 2. The fall of purchase was partially explained by Russians reducing their investment in UK property, but also the ECA appears to have deterred corrupt individuals more generally
The decrease in inward investment in U.K. property has not been met with a substantial large-scale sell-off. Thus, the whole stock of U.K. real estate owned through tax havens has remained roughly the same since the introduction of the property register—at between £46-80 billion. This may change in the coming months as overseas companies come into full compliance with the register and feel more comfortable making property sales again. But as yet—despite much concern and evidence that offshore investment is driving up U.K. land prices, we did not find that house prices in the parts of England and Wales with a lot of offshore ownership decreased relative to other parts of the country.
Why did the new Register succeed in deterring secretive investment where other attempts have failed? Our best guess is that because the beneficial ownership information filed with the Register would be public, more eyes on the data means that it will be much harder to file false information and not get caught. As more and more companies have begun to comply with the Register, both reporters and civil society organizations have been combing through the submissions to highlight high-risk individuals, inconsistencies, and areas where the filing requirements could be improved. This stands in stark contrast to the database of beneficial owners of companies that have bought U.S. property that FinCEN controls and keeps private, the result being that it is much harder to connect the dots or spot problems with the data.
If public beneficial ownership registers are the way forward for fighting dirty money, it is disheartening to see that many European countries are taking steps in the opposite direction. A recent ruling by the European Court of Justice (CJEU) declared that public beneficial ownership registries presented too strong an infringement on privacy, leading several European countries—including Cyprus—to quickly close public access. Given evidence from our study and others showing that the threat of public registers tends to displace dirty money, this ruling is likely going to make EU real estate markets safe havens for ill-gotten gains in the future.
The story of the U.K.’s fight against dirty money isn’t over. Not all companies have decided to comply with the new Register of Overseas Entities and Parliament is still working to give Companies House the powers and resources it needs to fully ensure the data submitted to it is accurate. But our initial findings are a sign that policies that strip away anonymous ownership can help governments begin to turn the tide after years of being awash with dirty money.