ESTATE AGENTS - MONEY LAUNDERING RISK- AN OVERVIEW

Money laundering through real estate integrates illicit funds into the legitimate financial system while also providing the criminal with a relatively “safe” property investment.

• https://www.europarl.europa.eu/cmsdata/161094/7 - 01 EPRS_Understanding money laundering through real estate transactions.pdf

Criminals can further enrich themselves by:

1. Renting out a property they have purchased 
2. Renovating a new property and re-selling it
3. Cashing in on property appreciation over time

In addition,

1. The price of real estate is fairly easy to manipulate and with collusion, the property can be over- or undervalued.
2. In fact, gatekeepers in the sector – realtors, property developers, mortgage advisors, brokers, etc. – have sometimes been found to be complicit and accept financial compensation to turn a blind eye to real estate money laundering.

Some other techniques that criminals use to launder money through real estate include:

1. Setting up shell companies or front companies to purchase a property.
2. Using cash or other non-transparent financing schemes.
3. Selling properties to co-conspirators
4. Using opaque trusts or third parties to act as the property’s legal owner

Examples of Money Laundering in Real Estate

1. Countries including the US, the UK, Australia, Canada, and Germany are known as money laundering real estate hubs, with hotspots in London, Toronto, Vancouver, and New York.
2. The US Department of Justice and its Kleptocracy Asset Recovery Initiative have worked on many residential and commercial property cases. In one case, a Honduran man pleaded guilty to receiving over $1m in bribes.
3. Being a government official, the defendant worked with his brother to launder money through international wire transfers and used the proceeds to purchase properties in New Orleans, including office spaces.
   • https://www.justice.gov/usao-edla/pr/honduran-man-indicted-conspiring-launder-over-1-million-bribes-and-funds
4. In February 2022, a private bank was alleged to have turned a blind eye to several illegal real estate transactions, including allowing an account owned by the Vatican to spend $350m investing in London property.
5. The Vatican was also found to have lost millions of euros to mortgage brokers – much of it donated by the Catholic community. Another allegation against the bank involved drug traffickers investing millions of funds, which they used to buy property in Bulgaria.
   • https://apnews.com/article/london-europe-voting-rights-business-religion-4abac4eee3bfd02205349c353906fcbf
6. Additionally, a report by Transparency International found that £1.5bn of UK property – mostly in London – was bought by Russians who had been accused of corruption and/or sanctioned.
   • https://www.transparency.org.uk/uk-money-laundering-stats-russia-suspicious-wealth
7. The nonprofit also found that 2,189 firms registered in the UK and its overseas territories were used in 48 Russian money laundering and corruption cases.
8. Combined, these cases involved more than £82 billion worth of funds disguised by rigged procurement, embezzlement, and bribery.

Money Laundering Red Flags in Real Estate

Money laundering real estate red flags, include:

1. Investors using multiple banks to stay under reporting thresholds
2. Sales conducted in cash with no mortgage lenders involved – in places like Miami and Manhattan, over 60 percent of real estate transactions of $2m+ made by international investors are cash transactions
3. A large disparity between the buyer’s income and the value of the property
4. Purchases where the ultimate beneficial owner is not clear
   • https://complyadvantage.com/insights/ultimate-beneficial-owner/
5. A third party making the property purchase (known as a nominee purchaser)
6. A large geographical distance between where the investor is currently located and where they are buying property
7. Properties purchased using “loan back” – money is deposited in an offshore bank account and borrowed back by a shell company, the owner of which happens to be the person who controls the offshore bank account
8. If the property is used as a physical base for other criminal activity, including if the property is being sublet – according to a webinar hosted by the Financial Action Task Force (FATF) on real estate money laundering
   • https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Webinar-real-estate.html
9. Other suspicious signs include sales between known criminals, ex-criminals, family members of criminals and/or politically exposed persons (PEPs). 

What is the Impact of Money Laundering on the Real Estate Markets?

1. Money laundering can have serious consequences on real estate markets, the economy, and communities.

A few examples of the impact of real estate money laundering include:

1. Property prices being artificially distorted, making it impossible for many people to afford housing (including rental) or commercial premises
2. Corruption
3. Unfair competition
4. Instability in the sector
5. Continuation of drug trafficking, human trafficking, terrorism, and other forms of organized crime

Regulations That Help Mitigate Money Laundering Risks in Real Estate

1. The FATF’s 40 recommendations on money laundering state that all designated non-financial businesses and professions (DNFBPs) be subject to risk-based AML supervision, including real estate.
2. However, in the US, professionals involved in real estate closing and settlements are not currently required to adhere to AML and CTF programs and regulations.
3. The US Treasury stated that the FATF found a low level of obligation implementation across jurisdictions as well as minimal suspicious activity reporting. They concluded that greater education is needed to successfully implement a risk-based approach to AML in real estate.
4. In line with these findings, the Biden administration announced it would be focusing on real estate embezzlement and corruption, with more scrutiny on all-cash transactions. This is one key loophole that real estate money laundering criminals continue to exploit.
5. “Gatekeeper professions” in Australia, including real estate companies, are not currently subject to the country’s AML regime either.
6. The CEO of the Australian Transaction Reports and Analysis Centre (AUSTRAC) has repeatedly voiced her concerns regarding this, singling out real estate as posing “a particular danger.”
7. Transparency International’s 2022 report echoed Rose’s concerns, highlighting the role of Australian real estate in the fight against Russian dirty money. The report noted that with no centralized real estate ownership register, it is exceedingly difficult to identify the ultimate beneficiaries of transactions and stop Russian Kleptocrats from investing in the country’s real estate market. As of March 2023, no amendments concerning gatekeeper professions have been announced.

Regulatory Focus Areas: Beneficial Ownership and Reporting

1. Criminals know that if they transact purely in cash, property professionals and gatekeepers are not obliged to obtain proof of identity or report suspicious behaviour. With an estimated third of US property sales financed purely with cash  in October 2022, FinCEN expanded its Geographic Targeting Orders (GTOs) to try to close this loophole.
   • https://www.mansionglobal.com/articles/nearly-one-third-of-u-s-home-purchases-were-all-cash-deals-in-october-01671645525
   • https://www.housingwire.com/articles/fincen-expands-gtos-on-all-cash-real-estate-transactions/
2. Many believe that GTOs are preferable to a “one size fits all” approach across the whole of the US. With these restrictions in place, it should be more difficult for criminals to purchase real estate in all-cash deals via shell companies.

Regarding AML measures in real estate, regulators have two key areas of focus:

1. The importance of identifying the ultimate beneficial owner (UBO) of any companies buying luxury property – the UK introduced the unexplained wealth order (UWO) legislation in 2018 and launched a public Register of Overseas Entities in 2022, which applies retrospectively and carries strict penalties.
   • https://www.gov.uk/government/news/the-new-register-of-overseas-entities-is-live
2. The importance of filing suspicious activity reports (SARs) – with the expectation on real estate professionals, legal advisers, and lenders to prioritize compliance.

How Can Real Estate Companies Detect and Prevent Money Laundering?

1. Property companies need robust AML compliance policies and real estate professionals need regular up-to-date training.
2. Experts from the FATF recommend that real estate professionals educate their clients about the importance of due diligence in the sector.

Important steps include:

1. Robust customer screening and transaction monitoring
2. Thorough sanctions screening
3. Understanding the difference between, and identifying, source of wealth (SoW) and source of funds (SoF)
4. Reporting suspicious transactions
5. Carrying out due diligence and now your customer checks
6. Verifying the UBO
7. Adverse media monitoring for PEPs
8. Technology is a key tool in the battle to spot real estate money laundering red flags, for example, smart software can be used to identify relationships and possible collusion between brokers and realtors.

Some numbers

1. According to the Organisation for Economic Co-operation and Development (OECD), money laundering through real estate is one of the oldest known ways to move and hide illicit funds.
   • https://www.europarl.europa.eu/cmsdata/161094/7 - 01 EPRS_Understanding money laundering through real estate transactions.pdf
2. Often viewed as a popular means to “wash” funds because large amounts of money can be laundered in one transaction, a Global Financial Integrity (GFI) report found that more than $2.3 billion was laundered through US real estate from 2015 to 
3. https://gfintegrity.org/wp-content/uploads/2021/08/Acres-of-Money-Laundering-Final-Version-2021.pdf

Source - https://complyadvantage.com/insights/real-estate-money-laundering/