FAULTY TOWERS Understanding the impact of overseas corruption on the London property market Transparency International (TI) is the world’s leading non- governmental anti-corruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption. Transparency International UK (TI-UK) is the UK chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at national and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anti-corruption expertise in the UK. Acknowledgements: Acknowledgements: We would like to thank Trust for London, The Joffe Charitable Trust and members of our Transparency Leaders’ Network for their generous financial support that made the research possible. We are grateful for the support and guidance of our research advisory committee: Jeff Kaye (Chair); Richard Brooks; Alessandra Fontana; Luna Glucksberg; Sophie Gaston; Helen Williams. We would also like to thank Leasehold Law LLP for their support and advice during this research. Principal research: Ben Cowdock – Transparency International UK Editor: Steve Goodrich – Transparency International UK Design: Philip Jones – Transparency International UK © 2017 Transparency International UK. All rights reserved. Reproduction in whole or in parts is permitted, providing that full credit is given to Transparency International UK (TI-UK) and provided that any such reproduction, in whole or in parts, is not sold or incorporated in works that are sold. Written permission must be sought from Transparency International UK if any such reproduction would adapt or modify the original content. Published March 2017. 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It should not be taken to represent the views of those quoted unless specifically stated. Printed on 100% recycled paper. Transparency International UK’s registered charity number is 1112842. Faulty Towers Understanding the impact of overseas corruption on the London property market Key Findings The London property market is highly vulnerable to corrupt wealth flowing into it. Analysis of open source material found over £4.2 billion worth of properties bought with suspicious wealth.1 Read more on page 9 Corruption causes high levels of instability abroad leading to ‘crisis capital’ being placed in safe havens like London. Since 2006 around £100 billion of hidden inflows have entered the UK. Read more on page 25 House prices are affected as illicit wealth and crisis capital entering the UK increase demand in the London housing market, particularly at the top-end; “the ripple effects they generate resonate across London” Read more on page 33 New build developments are built targeting wealthy international investors and are not meeting demand for affordable homes. In 14 landmark London developments almost 40 per cent of future homes were bought by those from high corruption risk jurisdictions. Read more on page 37 1 This is only based on publicly available news reports made between 2000 and December 2016. It does not include individuals who are yet to be publicly identified in media reports or court cases. 1 London’s role as a global safe haven is resulting in an underuse of housing stock. Areas with higher levels of property owned by anonymous companies also have high levels of abnormally low electricity usage; an indicator for empty or underused homes. Read more on page 51 Young people are moving out of London in record numbers due to the cost of housing. Over half of Londoners responding to our survey said wealthy overseas investors are causing house prices to rise and more than 1 in 5 believed money laundering was a motivating factor for overseas investment. Read more on page 53 Figure 1: Infographic showing how overseas corruption affects London and its housing market 2 Contents Key Findings ................................................................................ 1 Executive Summary ...................................................................... 4 Recommendations ........................................................................ 6 1. Understanding overseas investment into property ....................... 8 1.1 How much illicit wealth is invested into the UK? ........................ 9 1.2 Scale of the money laundering risk within the property market . 10 1.3 AML performance in the private sector ................................... 16 1.4 Trends in Tier 1 (Investor) visa applications ............................. 21 1.5 UK as a haven for ‘crisis capital’ ............................................. 24 2. How does overseas corruption affect the London housing market? .................................................................... 30 2.1 House Prices ......................................................................... 31 2.2 Housing Supply ...................................................................... 36 2.3 Community ............................................................................ 47 2.4 Perceptions ........................................................................... 53 3. International Comparison ....................................................... 56 3.1 Melbourne ............................................................................. 56 3.2 Vancouver.............................................................................. 59 3.3 New York ............................................................................... 61 4. Conclusions ........................................................................... 63 3 Executive Summary It has long been understood that as well as providing people with shelter and warmth, the UK property market is an attractive and reliable asset class. The term ‘as safe as houses’ has been used since at least the late nineteenth century and is still applicable to London property today, both for its ability to retain value like a safety deposit box and give a predictable return. Although a significant proportion of investment into the market is undoubtedly from completely legitimate investors looking to obtain a steady income, there is now a wealth of evidence to show that UK real estate, particularly in London, is attracting corrupt officials and businesspeople who have stolen money from some of the most impoverished and repressed countries in the world. In our 2015 report Corruption on Your Doorstep, we showed how these corrupt individuals laundered this money into the property market, often through the use of ‘anonymous’ companies registered in the UK’s Overseas Territories and Crown Dependencies. These secretive corporate vehicles cannot be found on a public register and leave few paper trails in their wake, allowing their ultimate owners to hide from scrutiny and enjoy their ill-gotten gains with impunity. Since 2015 we have been examining the potential impact this illicit wealth might be having on its prime destination, London. Understanding the role overseas corruption plays in the London property market could be crucial to those who live in the capital. Price rises consistently outstrip wage increases, dozens of prospective buyers compete for a shrinking pool of affordable stock whilst rent prices rise ever higher. As a consequence, it is becoming more difficult to afford to stay in London for average people, with the Government admitting the UK housing system was “broken” in February 2017.2 In response to this housing crisis the Mayor of London, Sadiq Khan, has launched an investigation into overseas investment into the property market to assess its scale and whether it is a contributory factor to the capital’s housing issues. Overseas investment is just one of a range of factors that is viewed to be driving the crisis. Others include the lack of social housing, increased domestic demand and the shortage of development land. We have identified that corruption overseas is also likely to play a significant contributory role, albeit in some slightly unexpected ways. There is undoubtedly a serious and continuing problem with corrupt money – wealth stolen from state budgets and extorted in bribes – finding its way into the UK. Using open source analysis this report identifies London property worth over £4.2 billion bought with suspicious wealth. There is also a significant volume of legitimate funds that come into the UK to seek a safe haven from instability and corruption abroad. For example in October 2012, following the Arab Spring – an event with corruption as a key driving force – investors from the Middle-East spent 50 per cent