In what could be seen as a rerun of issues experienced by the London property market in recent years, the Brazil government is under extreme pressure to tackle the problem of secretive companies operating in the property market. This is an issue which was successfully tackled by the UK authorities when it was found that billions of pounds of London prime real estate were owned by offshore companies. The fight against potential money-laundering and other criminal activities obviously goes on but the UK government could be seen as something of a blueprint for their Brazilian counterparts.
Is this a major problem in Brazil?
A report by Transparency International found that $2.7 billion worth of property in São Paulo is owned by secretive offshore companies. Of the 3452 properties highlighted it was found that they were controlled by just 236 companies, the majority of which are registered in either Panama, the British Virgin Islands, Switzerland, the USA or Uruguay. Historically these areas have been strongly connected to alleged money-laundering and other criminal activities although it is worth reiterating that it is not illegal to own real estate via an offshore company.
This comes at a time when Brazil is under extreme pressure after an array of politicians were prosecuted for money-laundering and criminal activity surrounding one of the country’s largest oil producers. In many ways this call by Transparency International could not have come at a better time for bone fide real estate investors or a worse time for the Brazilian government.
Strong link to shell companies
Again, the fact that an offshore company owns real estate does not necessarily mean there is anything untoward. However, when you consider that 70% of large corruption cases analysed by the World Bank revolved around shell companies being used to mask the true owner of various assets, this does not bode well. It is also worth mentioning that real estate assets have been a favourite of money launderers for some time now with properties bought and sold relatively quickly and the sale proceeds reintroduced into the system as bona fides funds.
In many cases it is almost impossible to identify the underlying owners if assets are held offshore via shell companies. However, it is possible for the Brazilian government to pass new regulations which would legally oblige parties acting for buyers and sellers to identify the underlying parties. What kind of impact would this have on the Brazilian real estate market in the short term? Nobody really knows…..
Transparency is important
Transparency is very important in all investment markets because not only does it allow the authorities to identify potential criminal activity but it also boosts investor sentiment. Investor sentiment should never be underestimated because it can literally move markets and lead to the switching of significant funds in and out of a particular market. The Brazilian government has been under pressure for some time to make the political arena more transparent and now it seems that the real estate sector has joined that list.
Will the Brazilian government react to this call for great transparency? In reality they cannot afford to ignore it……