Is foreign money laundering boosting Aussie property prices?

Is foreign money laundering boosting Aussie property prices?

We keep hearing government ministers and industry players say that the best way to improve housing affordability is to boost housing supply. The problem is, there are other forces contributing to soaring property prices. And one of them is foreign money laundering – something our governments seem reluctant to tackle.

Back in April, my first blog post for Montgomery looked at the fact that Australia was singled out by Transparency International as having worse anti-money laundering provisions than US, Canada, and the UK. Australia had severe deficiencies in all the 10 criteria that they examined.

Now another international organisation has raised the same concerns. This time it is the OECD Working Group on Bribery in International Business Transactions who on 19 December released its phase 4 evaluation of Australia’s implementation of the “OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”.

In general, Australia gets relatively good marks for the progress it has made since the last evaluation on the payment of bribes. This is good news in general for Australian society and also for investors as it should lead to Australia being a more attractive market for foreign companies to invest in and also lower the risk of Australian companies engaging in bribery, which could come back and hurt them, if it is discovered, with severe impact on share prices.

However, the report criticises Australia for not doing enough to combat the inflow of corrupt money into Australia. And one of the major findings is that Australia has inadequate systems in place to prevent the laundering of foreign corrupt money through the real estate sector. The report notes:

“The review team noted the views of J.C. Sharman, an Australian academic and international AML/CFT and anti-corruption expert, on the Australian AML/CFT system’s failure to counter the flow of corrupt proceeds from abroad into the Australian real estate sector. Prof. Sharman attributes the gap to a lack of willingness to take action rather than a lack of capacity, stating that Australia has some of the most powerful AML/CFT laws in the world. He provides several examples where banks or AML/CFT authorities have failed to act on suspicious payments, and information from interviews with Australian bankers that believed the Commonwealth Government did not take seriously enough the issue of inward flows of corrupt proceeds.“

And also:

“Under Australian law, real-estate agents, accountants and auditors, members of the legal profession, and other Designated Non-Financial Business Professionals (DNFBPs) are not subject to AML/CFT obligations.”

The Australian government promised to implement the second tranche of Anti-Money Laundering laws which would make actors involved in property transactions subject to AML/CFT obligations well over a decade ago, but nothing has happened despite multiple deadlines having been set (and missed) by governments from both sides. The reason for not implementing seems to be lobbying efforts by the actors who would become subject to the laws.

Without getting into a philosophical debate about the distorting effect that very high prices has on an economy, what we can take away from this is that as more and more pressure is put on the Australian government to do something about the situation, eventually something will probably happen and, given the amount of foreign buying of real estate over the last few years, whatever happens will not be positive for house prices.