Leading up to the Russian invasion of Ukraine, the U.K.’s real estate sector had built up an unsavory reputation for being a great place to stash your illicit cash. Government risk assessments repeatedly flagged the sector as being a high risk for financial crime, in part due to improper implementation of due diligence checks by estate agents. Investigations by civil society organizations have revealed that a sizable chunk of high-value British real estate is owned by oligarchs, autocrats, and heads of government from around the world—typically through shell companies set up in tax havens with the explicit purpose of hiding their identity from the public. According to recent research, up to £19 billion may have flowed into U.K. property just to avoid new rules aimed at curbing cross-border tax evasion. Over time, the capital would go on to earn the nickname “Londongrad” thanks to the sheer number of Russian oligarchs that chose to move their money there, few questions asked.
With Russia’s invasion of Ukraine looking imminent, the political winds began to shift. The U.K. government decided to reintroduce landmark legislation making it much harder to own property anonymously. Among other things, the Economic Crime (Transparency and Enforcement) Act (ECA), would eventually require offshore companies that owned U.K. real estate to submit the identity of their beneficial owner(s) (the people who ultimately control the company) to a new Register of Overseas Entities. By forcing them to reveal themselves publicly, the goal was to make it harder for the corrupt and criminal to buy U.K. property anonymously.
It wasn’t immediately clear the ECA would have much of an impact. The main agency tasked with enforcing the Register and more broadly maintaining company registrations, Companies House, has a reputation for having little capacity to ensure that information submitted to it is accurate. As a result, over the past decade, U.K. company registers have become awash with false information, some of it farcical (one director of a company was listed as Adolf Tooth Faith Hitler), some of it malicious. Our own experience evaluating similar policies aimed at stripping away ownership opacity in the U.S. real estate sector have shown little evidence that they deter illicit investment.
In a new research paper for UNU-WIDER, we use public data on real estate purchases to investigate the impact of the ECA. Despite the initial skepticism about its effect, our initial findings suggest that the threat of the Register immediately began to deter investment in UK property from higher-risk jurisdictions. Following the reintroduction of the ECA, new purchases of U.K. property by companies based in tax havens fell substantially relative to companies based in other countries. We know from existing research that people use shell companies in tax havens to hide their identity when purchasing property. The drop in new purchases using companies originating in these countries suggests that the removal of anonymity made the U.K. a less attractive place to buy property.
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