Financial crime: navigating the digital landscape

In the ever-evolving realm of the UK real estate sector, investors find themselves at the intersection of challenges and opportunities. Embracing a digital transformation is not just a choice, but a necessity to ensure compliance and thwart the increasing sophistication of financial criminals.  This shift is driven by the demand for innovative strategies capable of navigating the complexities of global transactions in real estate. The reason for this need is the sheer scale of the money laundering issue, not just in the UK real estate sector, but the UK as a whole. According to the National Crime Agency, the amount of money laundered in the UK could be between £36bn and £90bn.  These sky-high figures remain estimates because not all money laundering activity is currently captured. This is not through a lack of trying on the part of the NCA. In the 2021-22 financial year, it received more than 900,000 suspicious activity reports. This was up 21% on the previous year, denying more than £300m to suspected criminals in the process.  Preventing this amount getting into criminal hands is significant, but there is clearly more that can be done. This is especially true in the UK real estate sector, where Transparency International highlights that questionable funds from around the world totalling £6.7bn have been invested in UK property since 2016. In 2022, some of London’s most expensive areas saw millions arrive from sources suspected of money laundering activities. Transparency International’s data suggested that £430m has been invested in the City of Westminster and £283m in Kensington and Chelsea by those suspected of being linked to money laundering.  This is why those in the UK real estate sector recognise the need to counteract financial crime. However, they also know it is expensive to do so. The British Bankers’ Association estimates that its members collectively spend at least £5bn a year on core financial crime compliance, including enhancing systems and controls and recruiting staff. As with any modern, expensive, yet vital infrastructure, they know that it will have to be up to the task. As criminals arm themselves with technology to achieve a higher success rate, those in real estate will have to arm themselves accordingly.  A comprehensive digital strategy is imperative. This strategy has to blend advanced technologies, continuous education, collaborative efforts among stakeholders and a proactive stance on compliance monitoring.  Criminal tactics and strategy will evolve as they ever have. However, powered with technology they are accelerating at an alarming pace.  To combat this acceleration, digital defences must adapt to preserve the integrity of the real estate market and safeguard the interests of investors. If we try to fight these rapidly evolving and technologically enhanced criminals with analogue processes, then the industry will remain vulnerable to attack.  The trajectory of UK real estate investment now pivots on a robust and technologically adept approach, fortifying the industry against emerging threats in this era of digital transformation. Learning from success The real estate industry is undergoing a paradigm shift, drawing inspiration from the banking sector’s triumph in integrating cutting-edge technologies and stringent compliance measures.  Faced with vast and intricate transactions, professionals in the field are having to revolutionise their approach to bolster efficiency, mitigate risks and ensure regulatory compliance. This journey seeks to strengthen the foundations of the real estate business, realising that technology – and potentially artificial intelligence – is required to keep pace with the rapidly evolving digital landscape which criminals are using to further their own plans. Anti-money laundering In the UK, the spotlight is firmly on the real estate sector concerning anti-money laundering efforts. The government’s National risk assessment of money laundering and terrorist financing 2020 identified the country’s property sector as a high-risk area for money laundering. In response, the industry is embracing digital solutions to address multifaceted challenges, aiming to stay ahead of the growing sophistication of financial criminals. A pivotal development in this landscape is the Financial Action Task Force’s updated guidance on a risk-based approach for the real estate sector. This comprehensive blueprint, developed in collaboration with the private sector and shaped by a public consultation in March and April 2022, provides valuable insights for industry players navigating the complex terrain of risk mitigation. At the core of a successful risk-based approach lies an AML-focused, business-wide risk assessment.  This assessment, tailored to the specific size, scale and nature of the firm, serves as the cornerstone of a successful risk-based strategy. When well-designed, it explicitly considers broader inputs such as the national risk assessment and covers key inherent risks, including geography, customer and product/service risks. A robust risk assessment sets the stage for a comprehensive and effective risk-based approach. The technological advantage Implementing AML controls based on a business-wide risk assessment is vital for identifying and mitigating potential risks effectively. This involves evaluating geographical locations, client profiles and types of transactions.  For real estate firms, understanding inherent risks includes identifying complex transactions, client types, geographical considerations and potential exposure to money laundering activities. To tackle these challenges, robust customer due diligence and know-your-customer procedures need to be tailored to identified risks. Automation becomes crucial, especially for larger firms, as reliance on spreadsheets becomes operationally cumbersome.  When fighting attacks at scale, that traditional approach is not only cumbersome, but ineffective. Especially when viewed through the scale of more than 900,000 suspicious activity reports collated by the NCA. Automated systems and processes ensure compliance with the diverse regulatory landscape, making it a necessity for efficient operations that work. Automation need not be prohibitively expensive or time-consuming to implement. By leveraging existing technologies, firms can efficiently track customer due diligence records and key risks. This approach enables the automation of approvals and reviews, offering ongoing management and real-time reporting against key risks and metrics, providing a cost-effective and agile solution to these challenges. Continuous improvement One of the critical areas of control weakness lies in the robust application of customer or client risk assessment. This, alongside other risk assessment data, supports the identification of risk scores against agreed thresholds.  Then, customers or clients are categorised into specific cohorts based on their risk factors, and high-risk customers undergo additional due diligence measures, known as enhanced due diligence. These enhanced measures should also be applied to related transactions. In the face of scrutinising tens – if not hundreds – of thousands of transactions and numerous customers, the challenge lies in effectively and efficiently applying these risk controls to real estate transactions. Enhanced due diligence measures for high-risk transactions should involve additional scrutiny, verification steps and ongoing monitoring to ensure compliance with AML regulations. Technology-driven screening and monitoring play a crucial role in supporting the detection and reporting of potentially suspicious activities. Automated systems, when properly calibrated, analyse real estate transactions against predefined risk indicators, identifying anomalies that may indicate potential money laundering.  The development and implementation of know-your-transaction controls serve as a powerful surveillance and deterrent solution, tailored to understand the expected transaction patterns of customers. One of the key failure points seen in the past in other mature operating environments is the commitment to continuous improvement in controls.  Real estate firms should regularly reassess the effectiveness of their AML controls and make adjustments based on the evolving risk landscape. Embracing a culture of continuous improvement enhanced by technology will enable firms to stay ahead of emerging threats and ensure the robustness of their AML controls. In conclusion, building a set of AML controls for the UK real estate sector requires a strategic and adaptive approach, integrating technology to navigate challenges and seize opportunities. By embracing digital solutions and fostering a culture of continuous improvement, real estate businesses can create a robust defence against money laundering activities while maintaining compliance with regulatory requirements in the ever-evolving landscape of the industry. Ian Stott is head of financial services and Babar Hayat is head of technology and transformation at Konexo Photo © Aedrian/Unsplash