Money laundering, mythical beasts, oligarchs and data dumps

Money laundering, mythical beasts, oligarchs and data dumps

The Chupacabra is a native creature of Panama. The name comes from the animal’s reported penchant of attacking, killing and then drinking the blood of it’s prey, often goats.

Please humour me for a few paragraphs while keeping this thought in mind.

It has very recently come to light that offshore companies now own more than £200bn of UK residential property.

The Land Registry released, in April, a complete list of 40,000 offshore companies that own nearly 100,000 properties in England.

Many of these are in the most affluent areas of the country. London in particular. And a number of the individuals behind these companies would appear to be Russian ‘oligarchs’ although I am sure that in BBC speak, “other nationalities and/or job descriptions are available” to buy.

If you want to buy a car, house, open a bank account, get a mortgage, engage a lawyer or an accountant there are a number of hurdles us mere mortals need to overcome.

Buying a house with a mortgage requires very significant levels of checks these days if you are a mere UK resident.

Without a mortgage, it would seem, sees a very different picture, especially when ‘oligarchs’ and associated trades are involved in the vast movement of ill-gotten or plundered wealth.

It does seem to be the case that Animal Farm ‘Orwellian’ rules apply with some people being more equal than others.

The FCA clearly scratched the surface last year when it fined Barclays some £72,069,400 for failing to “minimise the risk” that it may be used to facilitate financial crime. For the record, the fine was the largest fine imposed by the FCA and its predecessor the FSA for financial crime failings.

The FCA said “Barclays did not obtain information that it was required to obtain from the clients to comply with financial crime requirements. Barclays did not do so because it did not wish to inconvenience the clients”.

So the big question here is, what checks are made when foreign oligarchs, despots, drug barons, dictators and other offshore potential ‘shady’ types buy billions of pounds worth of UK property?

Why is it that in the UK, the first, possibly only checks are about if you are who you say you are with proof by way of an original document selection from a list such as a passport or drivers licence, council tax and utility bills rather than a requirement of proof by audit trail of where the money has actually come from, ignoring any sensitivities that could fall into the category of “not wishing to inconvenience the clients”. 

But wait, a simple money laundering web-based solution is now at hand to assist the ‘authorities’ in that process.

A scan through the Panamanian law firm Mossack Fonseca’s recent , largest ever, leaked data dump should suffice, showing how clients too important to question or upset let alone inconvenience, can launder money, dodge sanctions, evade tax and avoid inconvenience.

And that brings me back nicely to the Chupacabra.

In this case it manifests itself in the form of many of Mossack Fonseca’s clients whose ‘fiscal blood sucking’ activities have been well and truly exposed.

In future will the computer say no?

Panacea Comment for advisers Hasta la vista, baby

Having until the end of 2012 owned a home in Spain for almost 10 years, I along with many others who have had the same experience will certainly know that the rain in Spain does not stay mainly on the plain.

Spain’s public debt is currently 92.1% of GDP and it topped €1 trillion for the first time despite years of government-imposed austerity. The economy in Spain is starting to show some signs of life and that is good news, but, with that sign of life comes the prospect of a new wave of UK second home-buying looking to take advantage of what appears to be very low prices linked to very favourable exchange rates.

We Brits do just love the idea of a holiday home bargain in sunny Spain and were the dominant international players in the Spanish market in 2012/13 accounting for 16.6 percent of the foreign total and 22.5 percent of the European total.

But making a rapid and sadly sinister move up the table were Russian buyers who accounted for 13 percent of the sales to European non-Spaniards, in 2003 Russians made up just 3 percent of this total.

This rapid rise is mainly because Spain offers residency, with very few strings attached, to non-European Union nationals who spend at least €500,000 on a property in the country. A great way to get those ‘Roubles’ out of Russia, but a bad way to provide ‘access all areas’ by way of the Schengen visa agreement.

But before you or any of your clients get swept away in a tide of euphoric bargain hunting, here are some things that you should know to avoid getting swept away in a tide of something quite toxically different. Would-be buyers can visit the very useful Spain-specific property advice pages on and watch the FCO’s new video on YouTube.

Spain has a glut of unsold properties, those part built, those built but not yet sold and of course the ‘pre-owned’ variety. And within this glut of unsold housing stock lurks many dangers, and not always in the form UK focused homebuyers may anticipate.

Here are a few tips from someone who has been there, read the book and got the tee shirt.

  • It is a sad fact, in my experience, that the Spanish, particulary on the Costas, have a habit of telling you what you want to hear rather than what you need to hear.
  • Despite a lot of corruption being stopped with many ’bad boy officials’ being locked up for it, some buyers have been caught up in serious property problems leading to emotional distress and loss of home, personal effects and financial fortunes.
  • Poorly policed urban planning laws have resulted in some 300,000 illegal homes being built in Spain. In the UK a new build very rarely gets to a completion and sale without many checks and balances. This was not the case in Spain.
  • A question asked of me on numerous occasions was, ‘can you trust your lawyer’? A question not often a consideration in the UK, but many property frauds and miss-buying has come about as a result of poor legal representation, conflicts of interest linked to less than reputable estate agent practices, especially by expat Brit agents who see ‘Wild West’ business opportunities. Agents fees are huge, 3% upwards for a sole agency, sometimes as much as 10% can be charged on a multi agency basis. The total legal costs associated to a property purchase transaction are normally between 10% and 14% of the purchase price, with a mortgage involved it will be more.
  • The banking processes do not help prevent fraud opportunity as monies from a sale of your Spanish property can take 2-3 business days to travel between your lawyer and your bank account. By this time a crooked lawyer could have closed shop and disappeared with your cash.
  • New properties that were subject to bank repossession from busted developers flooded the market from the beginning of 2013. They were cheap, very cheap. Why, because Spain decided to put these ‘repo’s’ into a ‘rotten bank’ with the aim to sell off cheaply to recover the losses quickly by way of the mixture of low purchase prices and newly increased taxes on that purchase. Tax is set at 10% of the purchase price, 21% for land.
  • The unintended consequence for many who had been trying to sell ‘pre-owned’ homes was that their prices were hit or their general salability voided.
  • Spain now sees second homes as a good source of taxation revenue. Some of these are quite cunning. For example, no property can be rented out without a licence to say it can be. This costs. Second homes are now assessed with a rental value to allow taxes to be raised whether or not you rent it out or not. Many may ignore this but eventually the system catches up with them, mainly when they try to sell.
  • There are many hidden costs involved in owning a home in Spain. You have wealth tax, property tax, local council taxes, rubbish collection tax, utilities (of course) and something called ‘community fees’ if you live in an apartment complex.
  • Community fees vary, but for an apartment complex of say 50 properties this could be anything from around 3,000 Euros upwards to 10,000 Euros per property a year. This money is to allow gardens to be maintained, pools maintained, security (yes it is often needed) utility costs, cleaning, communal furniture, staff, administration, legal costs etc.
  • Second homeowners, especially non-Brits in my experience, have a cavalier attitude toward paying these. Without these fees being paid by all, in full and on time, the services cannot be provided. It is not unusual in apartment communities for over 50% of owners to be in arrears with these fees. The legal system makes it very easy to not pay and it can take years to get the fees paid via the courts. Non-payment is made worse as often these errant owners rent the properties out and keep that revenue. Property content and building insurance is vital.
  • The most sought after properties in Spain are ‘frontline beach’- full ocean view. These require extra maintenance, and of course extra cost is attached to do it.
  • New build properties in Spain look fantastic in every way. But often danger lurks beneath the gloss. They are many and varied. Electrics are often not too good, poorly finished construction can cause subsidence and when it rains, water can come in from some very strange places- above, below and from the sides.
  • In my experience property developers in Spain flew very close to the sun, warranties and guarantees may exist but trying to get them enforced takes years and often a court intervention is needed.
  • Crime is a problem, especially in Southern Spain. It is in part a result of huge local unemployment problems, illegal immigration, drug running as well as other organised crime. Historically this was seen as a ‘British’ exclusive, but today the sophistication of eastern block criminal activity, linked to a Spanish passport for that 500k Euro property spend, has exposed some extraordinary cunning, violence and in extreme cases death. Last year a Costa del Sol turf war broke out and police fear more bloodshed
  • Legal system, language and notaries. The legal system in Spain is dreadful, it is slow and laborious. In Spain, if you are unlucky enough to find yourself in the legal system, criminal or civil, allow for huge tactical delays, high costs and the need for professional representation. You absolutely will need to pay for interpreter services because the legal system and process is Spanish with the language written and spoken being Spanish. Buyers and sellers will need a lawyer and a notary, and ideally a ‘Power of Attorney’.
  • A local representative you can trust. Vital if you only intend to visit a few times a year. They can deal with all those niggling little problems of life in Spain that occur at a cost that is far cheaper than last minute air fares. Think: problems with water, electricity, repairs, deliveries, burglary, taxes etc.
  • Police, now that is interesting. In Spain there are three kinds of police: local, national and ‘green’. Local are just that and their activities are confined to policing the town they are employed by. National is ‘Guardia Civil’ who have access all areas. The ‘Green’ police take care of beaches and boundary enforcement matters between private and civil property. The police can be very heavy handed; fines can be imposed on the spot and if you are unlucky enough to be arrested, do not expect the police to deal with you in English. Again, you will need an interpreter and at your cost.
  • Driving. The roads are generally fantastic unless they are not. Speeding fines are imposed on the spot, if you have no money to pay you will be driven to a cash point or your car impounded until you can pay.
  • Property rentals. If you rent out your property on a short term, an agent is needed, you will be taxed on the rental. Agent services are generally very poor and cost far more than they are worth. The reason you need an agent is that many owners who rent see their rental properties in a very different way to the owner occupier. Trashing of property by holiday renters is not unusual in my experience and so you need somebody close to the action to deal with it. Long-term renters are a bigger problem as they often tend not to pay the rent after a short while and the legal system makes it very difficult to get rid of them quickly. And when you do, again, expect a trashed property.
  • Neighbours. As above really, as you cannot choose your neighbours and you certainly cannot choose who they rent to. Make sure of the rules that apply in your ‘Urbanisation’, who enforces them (if they actually do) and how they deal with the idiot element.
  • Councils are a nightmare. Taxes must be paid to them and if you buy a ‘pre-owned’ property you will need to make sure any unpaid taxes are paid before you buy or you will be liable. Tax demands come to your property in Spain, not to you in the UK.

I hope this has given an insight into the realities of owning that dream home in the sun. Spain is a beautiful country, the people generally very welcoming and tolerant. But before you buy, do consider the above points.

And if you want a good and reputable lawyer, I can recommend this firm, Manzanares, who represented our community for over 10 years and acted for many buyers and sellers there too.

They have produced this useful guide to home buying in Spain that you can download, they speak excellent English, although there is a legal protocol in Spain that legal documents and formal legal discussions are conducted in Spanish.

There is a Spanish proverb; De ilusión también se vive”. In English it means roughly that ‘we live in hope of our dreams becoming a reality’. But dreams can become nightmares too.

Remember that before you buy.

No problemo!

The blame for pain lies mainly in…

The buy-to-let market is never far from the headlines given there are still some deluded individuals out there who believe renting out property is some sort of ‘get rich quick’ scheme that requires no investment, resource, planning or brains.The facts of the matter are that it requires all those things and much more, and given the economic and lending environment of the past few years it has required them in spades.

Most recently we have the Bank of England requesting further powers not just for residential mortgages, but also the buy-to-let market, that will allow it to introduce LTV limits and debt-to-income ceilings on mortgages secured by landlords. It would seem that some believe buy-to-let lending is responsible for a multitude of sins – the stoking of house prices, the fall in first-time buyer numbers, the lack of house building in the UK and, most probably, global warming. All blame for these can apparently be laid at the door of landlords in the private lending sector.

This move by the Bank of England one might suggest paves the way for full regulation of the buy-to-let sector at some point in the future by the FCA. We are already getting partial regulation of mortgages taken out by ‘accidental landlords’ in 2016 when the European Mortgage Credit Directive comes into force and I suspect there will be a number who believe a sector which currently accounts for approximately 15% of all gross lending now needs to be fully regulated. The fact that buy-to-let is an investment decision and there is still no real clarity on who is actually being protected under statutory regulation, are questions that we still await answers on.

I sometimes feel like the powers that be believe the buy-to-let sector is some sort of ‘dirty secret’ they should be apologising for, when in fact it has been a particularly powerful and necessary force over the past decade or so. Of course, there were excesses in the lending community pre-Credit Crunch but thankfully those ‘practitioners’ have gone to the great buy-to-let lending graveyard in the sky and we are now left with a group of lenders who are practicing responsible lending to the nth degree.

So when I see David Cameron announce to the Conservative Party Conference that the latest addendum to the Help to Buy Scheme – the building of 100,000 homes offered to first-time buyers at below market value – will not be accessible to landlords as if they are somehow criminals, it makes my blood boil slightly. Because the fact of the matter is that without the private rental sector the ‘housing gap’ would be a chasm and the Coalition Government should forget this at their peril. With social and affordable housing levels having plummeted it has been the private rental sector that has taken up the slack and helped a roof over people’s heads that might otherwise have a complete lack of housing options.

The positives in all of this are that the buy-to-let market now has strong foundations upon which to build and I fully expect it to grow its lending share in the years to come. As stated above, it’s come a long way from its pre-Crunch days – landlords have to stump up a sizeable deposit to get a  mortgage (at least 20%) which means they have considerable skin in the game, whilst lenders have stricter criteria in terms of rental cover and have focused much more on ensuring arrears levels remain under control.

While the number of lenders active in the sector continues to grow – the launch of Fleet Mortgages next month adds another to the competitor pack – advisers have grown their knowledge base and are in a position to help and support their landlord clients like never before. Resources for advisers are readily available on sites like Panacea and specialist distributors are also active and able to help those advisers both new and established in the sector.

Given the positive nature of the sector at the moment, one suspects that not even the spectre of full regulation could dampen the spirits of buy-to-let practitioners, however these forthcoming rule changes will impact on businesses and firms should make sure they explore their significance and the cost and resource it will require to maintain compliance.

Is property back on the agenda again?

In our opinion the commercial property market could well be poised for a period of growth.

“Giant pension fund piles into property as analysts say now is the time to snap up cheap exposure” is typical of recent headlines from the money and business pages of the national press. And they may have a point.  Property investors have seen their holdings fall on average 11.4% over the past five years (source Lipper), with some investors losing a quarter of their cash. This in turn is leading many to believe that the asset class is now undervalued and primed for recovery.

Why might your customers be interested?
For most people, the largest investment they make in the property market is in their own home. A fortunate few, branch out into ownership of rental properties, which has in many cases provided a healthy income stream and some potential for capital appreciation, but also brings with it landlord responsibilities and the anxiety of finding good quality tenants.  However, for those wishing to invest in property without the complications of buying and managing a rental property themselves, or wanting to diversify into non-residential buildings, property funds provide an alternative as they allow small investors to become part owners of many large properties.

With direct ‘bricks and mortar’ property funds, rental income can be relatively secure in comparison to other asset classes because of factors like long lease lengths (typically five years or more), less risk of default than residential properties and upward-only rent reviews, meaning that rental income often increases by at least inflation each year.  However a major downside of direct commercial property investment, is that property markets are highly illiquid compared to most other financial instruments such as equities or bonds, meaning that buying or selling a property can take a long time, and stressed conditions can make it difficult to sell a holding in the fund.  In addition the higher than average costs associated with buying property such as stamp duty, surveys and legal fees need to be paid and can affect the value of the fund, rental growth is not guaranteed and unpaid rent could affect the performance of the investment.

Alternatively indirect commercial property funds can buy shares in companies that invest in property and tend to be more liquid investments. The majority (over 80%) of these property companies are Real Estate Investment Trusts (REITs), and have greater tax benefits than other listed property companies. REIT companies don’t pay corporation tax on their assets, on the condition that 90% of profits are paid to shareholders as dividends.  REIT holders pay either 20% or 40% tax, on dividends because they’re classed as property-letting income.In contrast Property Investment Trusts, which pool money to buy property and property company shares are considered to be like any other company, so tax on dividends is only 10% for basic-rate payers and 32.5% for higher-rate payers.

Why now may be the time to invest?
Analysis of returns from 42 funds in the IMA Property Sector by shared equity mortgage provider Castle Trust showed the worst fund lost 26.6% over the period from mid-2007 to June 2009 and the Investment Property Databank Index lost 42% of its value. Since then there has been a gradual recovery but this has been below trend when compared to other asset classes.

Many analysts are commenting that these indicators show contrarian investors are poised to snap up property funds. Caisse, Canada’s largest pensions company, announced in January 2013 plans to buy C$10bn of global property over the next 18 months to boost returns.

UK commercial property prices fell in 2012. But Legal & General’s own property team believe that there are a number of drivers, particularly the attractive valuations available in the sector, that makes them more optimistic about returns in 2013 and beyond. They’ve taken the view that assets such as equities have already seen the benefits of loose monetary policy, and commercial property could be next, although conditions may remain challenging for certain sectors and asset types.

Standard Life recently commented that property could be the surprise profitable asset class of the next decade, predicting better returns from bricks and mortar than shares.  Rental yields currently sit at 6%, compared to the average FTSE 100 company which pays a dividend of 3.5% or 2% from a UK Government bond.

Cass Business School said Caisse’s plans to up property exposure were typical of pension funds looking for income in non-core assets such as property.  With its predictable long-term, and usually inflation-linked, income streams, and attractive premiums to compensate the investor for their illiquid nature, property assets currently offer more attractive yields than bonds of a similar risk profile. Indeed, in the final quarter of 2012, property proved to be three times more popular than infrastructure debt as the pension scheme de-risking asset of choice. With gilts unlikely to rise by any meaningful extent anytime soon, there is good reason to believe that non-core property investment will continue to strike a chord with those UK pension schemes who want to de-risk and more efficiently match their assets to their liabilities.

So  – is it time to take a look at your clients property investments again?
Of course, as always, all the usual warnings and caveats apply, but we strongly believe that property is worthy of further consideration, and could retake its place in portfolios as a diversified income generating mainstay for some of your clients.

John Hart,
External Funds Director,

Legal & General

Investment Management Research Unit (IMRU).

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