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Nothing to see here? Middle-men in the UK and Spain are falling short of anti-money laundering requirements

Street art shows a young boy laundering sacks of cash in a washing machine

Photo by Michael Hornsby, Transparency International

Theo van der Merwe

Anti-Corruption and Anti-Money Laundering Policy Officer, Transparency International

Last week, investigative journalists revealed the assets held in Europe by the family of Azerbaijan’s former Minister of Security, Eldar Mahmudov. The revelations show how Eldar Mahmudov's children, Anar and Nargiz Mahmudov, created a business and real estate empire without apparently raising suspicions from the ‘gatekeepers’ involved, such as corporate service providers, lawyers, notaries and real estate agents in the UK and Spain.

While the Cayman National Bank closed several accounts linked to the siblings in 2016 due to their relationship with politically exposed persons and unconvincing explanations on their source of funds, other professionals continued supporting Anar and Nargiz as they incorporated companies and bought assets in different countries. In doing so, they may potentially have breached their anti-money laundering obligations. The cases in the Mahmudov family story fit a pattern of inaction by corporate service providers and other intermediaries.

The countries' own assessments and mutual evaluation reports by the Financial Action Task Force highlight that the sectors in which non-financial obliged entities in Spain and the UK operate are particularly high-risk for money laundering. However, despite this heightened risk, these professions submit relatively few report Suspicious Transaction Reports (STRs).

For example, in Spain, real estate agents submitted just 44 STRs in 2017. The country’s Financial Intelligence Unit (FIU) also emphasised that the STRs that were submitted demonstrate a lack understanding as well as knowledge of their customers and the source of funds used in transactions. A 2019 follow up report published by FATF in 2019 confirmed that real estate agents remain highly vulnerable to facilitating money laundering.

Notaries submitted 383 reports to Spain’s FIU in 2017 - about half of the reports submitted by non-financial professionals. Given the central role that notaries play in Spain’s anti-money laundering framework, this high share of the total is to be expected: notaries are involved in most of the transactions related to company formation and transfers of real estate.

On the other hand, lawyers submitted only 21 suspicious transaction reports. Accountants only submitted nine, leading Spain's FIU to raise concerns given the “inherent risk in their professional activity, described in numerous typologies reports.”

In the UK, corporate service providers and real estate agents submitted 23 and 635 Suspicious Transaction Reports in 2019 respectively – making up less than 0.2 per cent of the total.

In its 2017 National Risk Assessment, the UK Treasury noted several important trends that echo the dynamics of the Mahmudov case. For example, in an analysis of Suspicious Transaction Reports linked to property, 27 per cent involved companies and trusts and 36 per cent involved the attempted use of intermediaries. It further noted that 75 per cent of investigations involving land and property concerned assets purchased by companies registered overseas, most notably in its Crown Dependencies: notorious secrecy havens Guernsey, Jersey and the Isle of Man.

Part of the problem is also a lack of effective supervision and sanctions.

In Spain, the supervisory approach to professional enablers is a work in progress. Only recently, the FIU, responsible for supervising both the financial and non-financial sector, has improved measures to supervise lawyers, accountants and real estate agents, including by carrying out onsite and offsite inspections. In 2014, the FIU inspected 13 real estate agents, but only three in 2018. In total, the FIU inspected 39 real estate agents, sanctioning nine firms. However, there is no information available on the extent of the sanctions.

In the UK, identified cases of anti-money laundering breaches by intermediaries led to small sanctions. In 2014/1015, of the seven sectors regulated by Her Majesty's Revenue and Customs, including real estate agents, the total fines applied amounted to just £768,000, with an average fine of £1,134.10. Knowingly submitting false and misleading data to Companies House is a criminal offence under the Companies Act of 2006 and should be proportionately sanctioned as such. In the UK and elsewhere, these kinds of measure could act as a credible deterrent against submitting false or misleading data, ensuring gatekeepers perform their duties sufficiently.

The web of companies and real estate linked to the Mahmudov family might not necessarily prove wrongdoing, but it certainly raises many questions about the role of gatekeepers in enabling the corrupt to fly under the radar undetected. Ensuring a mix of effective supervision of these gatekeepers and proportionate sanctions in cases of malfeasance is crucial for making sure the world’s kleptocrats do not go unchecked. This, in turn, can help put an end to the global flow of dirty money - ensuring that the proceeds of corruption cannot be stashed abroad with impunity, and out of reach of those to whom it rightfully belongs.

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