The Home Affairs Select Committee said the UK has “laid out a welcome mat” to criminals, with chair Keith Vaz saying £100bn was being laundered through the country every year.
The MPs also called for a separate criminal offence if a person refuses to hand over money and assets derived from crime.
They said the current system for enforcing confiscation orders imposed by the courts is failing, with only a “paltry” 26p in every £100 being made back.
The MPs were also shocked to find that only 335 out of 1.2 million property transactions last year were deemed to be suspicious by law enforcement officials.
Committee chair Keith Vaz said: “"At least £100bn, equivalent to the GDP of Ukraine, is being laundered through the UK every year. The proceeds of crime legislation has failed.
“London is a centre for money laundering, and its standing as a global financial centre is dependent on proactively and effectively tackling money laundering.
“Investment in London properties is a major route which tarnishes the image of the capital. Supervision of the property market is totally inadequate.”
Labour MP Mr Vaz also said the National Crime Agency’s (NCA) system for reporting suspicious transactions was “not fit for purpose”.
He said it was so overburdened that it was “a futile and impotent weapon in the global fight against criminal financing, with no indication from the Home Office as to when a new state-of-the-art system will be purchased”.
The system is said to be was capable of processing 20,000 reports a year, but it currently deals with more than 380,000.
A spokesman for the NCA conceded the system was “not effective or efficient”, but was awaiting a Home Office review before deciding how to update the software.
RECOMMENDATIONS
Among the committee’s recommendations, MPs said lettings agents must undertake due diligence on clients and make reports to the NCA’s suspicious activity reporting regime.
They also called for specialist “confiscation courts”, which would grant judges the ability to compel offenders to attend hearings.
Non-payment of a confiscation order would be a crime, under the MPs’ recommendations, and offenders would have their debts removed and would remain in incarceration until all outstanding debts had been paid off.
"To enforce this, we recommend that no criminal be allowed to leave prison without either paying their confiscation order in full, or engaging with the courts to convince a judge that their debt to society is squared," the committee said.
They added: "It appears that some criminals view paying back their proceeds of crime as an option rather than a requirement - essentially a choice between payment and prison.”
The Government insisted it was making progress in recouping the proceeds of crime.
A Home Office spokesman said: "We are committed to attacking criminal finances, making it harder to move, hide and use the proceeds of crime, as set out in the Serious and Organised Crime Strategy.
"And there is clear evidence we are making progress in this effort; the government seized a total of £1.2bn from criminals between April 2010 and March 2016, with more assets recovered in 2015-16 than ever before."
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