Is foreign money laundering boosting Aussie property prices?
Another cause of our overheated property market has come to light in a recent report by Transparency International (the global anti-corruption watchdog). Based on their findings, it appears that money laundering by foreign ‘investors’ is at least partly to blame.
The report, released on 29 March, compares Canada, US, UK and Australia on 10 criteria, with a less than flattering outcome for Australia. Indeed, Australia was found to have severe deficiencies in all 10 criteria that the report covers and was placed square last in the comparison (UK had 1 deficiency out of 10 criteria, Canada 4 out of 10 and US 9 out of 10). The criteria examined by Transparency International and its comments on Australia’s deficiencies are presented in the table below.
| Criteria | Australia’s deficiencies |
| Problem 1. Inadequate provisions of anti-money laundering provisions. | · Real estate agents and developers, lawyers, accountants and others involved in the buying and selling of real estate are not covered by anti-money laundering rules. |
| Problem 2. Identification of the beneficial owner of legal entities, trusts and other legal arrangements is still not the norm | · In Australia, the AML/CTF Act does not require due diligence or the identification of beneficial owners of customers in real estate closings. |
| Problem 3. Foreign companies have access to the real estate market with few requirements or checks | · Foreign investment approval by the FIRB is required for foreign individuals and companies wishing to purchase property, but information disclosed in the application is not systematically used to mitigate the risks of money laundering.· Beneficial ownership information is not systematically disclosed in order to apply for such approval.· Foreign companies are allowed to purchase property without having to provide information on their real owners to any sort of title registry. |
| Problem 4. Over-reliance on due diligence checks by financial institutions leads to cash transactions going unnoticed | · Customer due diligence on real estate related transactions is only performed by financial institutions; there are no checks on cash transactions. |
| Problem 5. Insufficient rules on suspicious transaction reports and weak implementation | · In Australia, current anti-money laundering rules, including the requirement to submit suspicious transaction report, do not apply to real estate agents or to any professional involved in real estate deals. Even if a real estate agent suspects illegal activity, there is no requirement to report it. |
| Problem 6. Weak or no checks on politically exposed persons and their associates | · In Australia, real estate agents, lawyers and accountants are not subject to anti-money laundering rules and consequently there are no rules requiring enhanced due diligence on customers who are PEPs, or their associates |
| Problem 7. Limited control over professionals who can engage in real estate transactions: no “fit and proper” test | · In Australia, real estate agents are required to have a licence to open a company or act on their own, but requirements to register as a real estate agent vary across different states. As they do not have anti-money laundering responsibility under the current legal framework, there is no requirement to register with the supervisory body for anti-money laundering supervision. There is also no “fit and proper” test for money laundering |
| Problem 8. Limited understanding of and action on money laundering risks in the sector | · No money laundering risk assessment has been conducted in recent years.· Lack of mitigation measures against vulnerabilities of real estate agents, developers, lawyers, and accountants identified in previous assessments and studies, but not acted upon. |
| Problem 9. Inconsistent supervision | · Professionals involved in real estate transactions are not subject to anti-money laundering obligations, and therefore are not monitored by competent authorities or self-regulated bodies. |
| Problem 10. Lack of sanctions | · Professionals involved in real estate transactions are not subject to anti-money laundering obligations, and therefore there are no sanctions for non-compliance with reporting requirements.· The involvement of professionals in money laundering schemes is punishable, but criminal prosecution against real estate agents, developers, accountants and lawyers seems limited |
Basically, what it comes down to is that the professionals involved in facilitating real estate transactions in Australia are not covered by the same anti-money laundering rules that govern financial institutions like banks, fund managers and even casinos.
This means that an individual looking to invest $25,000 in one of the Montgomery funds (the minimum investment size) or even put on a $50 Lotto gamble through an account with Tatts, must provide detailed identification under the Anti-Money Laundering Act, including detailed “know your customer” rules and strict reporting requirements.
Yet they can buy a multi-million property with very few questions being asked, as only if you need a mortgage from an Australian bank will you be interacting with someone who is covered by the AML Act.
Credit Suisse noted in their report titled “Shanghai? Shenzhen? Sydney!”, published on 23 March 2017, that foreigners are currently buying 25% of the new dwelling supply in NSW and 16% in Victoria and investors from China account for 77% of the total foreign buying. Combine this with the fact as per Transparency International’s report, that 70% of Chinese buyers pay in cash without borrowing from any local banks, and it is apparent that a minimum 54% of the foreign buying of real estate – or about 12% of the total value of real estate transactions in NSW and Victoria – is not subject to Anti-Money Laundering checks at all!
One can only wonder what the overvalued Sydney and Melbourne real estate markets would look like without this additional capital inflow…
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Pranav
:
Completely agree with Luke – there isn’t going to be any action.
A situation like this makes any sort of local tinkering with taxes or debt utterly useless. Any attempt to strengthen AML Act is thwarted by political class mostly due to lack of will but also it looks xenophobic which is a political suicide. This current set of affairs now relies on a world superpower reigning in their investment – everyone knows the likelihood of that happening.
Scott W
:
The majority of my professional focus is the Chinese market for an ASX 200 company. We work with large companies in China, part state owned and part listed. The boss of this evidently state owned business has me driven around in his Maybach, and according to the staff has a personal asset base of RMB5million. This type of thing is standard fare in China. While we have done all the checks on the companies we deal with, and they are doing a good job for us as a market partner, it falls into a cover all explanation we have come to accept about the culture, both business and personal in the place, ‘ this is China…’ is the explanation for almost everything. When thinking about corruption in China there is a line from an old U2 song that explains it clearly ‘throw a rock in the air, you’ll hit someone guilty’
Luke Fennell
:
I read articles like this and know that there will be no action from the regulators. They are cornered now by the state the market is in and nobody wants to be seen to have ‘burst’ the bubble. I sense that the government is hoping that the tide will turn and the property market will sort itself out without anyone being able to point to the government and claim that they ’caused’ the crash. The ridiculous claims and counter claims about what happened to the property market when CGT rules were changed last time in the late 1990s is a good example of why doing anything will be linked to subsequent outcomes regardless of whether or not it is reasonable to make any link at all. Put in on the list of risks to the property market and keep going – nobody is game to touch anything there at the moment.
Scott W
:
Luke I agree with your comments, and would add that the vested interest factor for the majority of the voters being in the market makes then scare stiff of anything that is perceived to reduce the paper wealth of the voters. The looming issue though is that the portion of voters who can’t get into the market is now becoming very large and they are getting angry and waiting for the next election to punish anyone who they feel is keeping the bubble intact. Australia is not like Europe where successive generations of renting have conditioned people to not feel entitled to own their own home. This is going to bring about a political revolution of sorts because the non property owners don’t give a damn if the economy is crunched and all the mortgage holders are buried because if have fast become and class divide with the elephant in the room being that Australia unlike the USA etc has compulsory voting.