Annually, international criminal activities result in an approximate $1.4 trillion laundered through the real estate industry, and unfortunately, realtors, whether intentionally or not, play a role in facilitating this issue. In this blog post, we'll explore the process of how illicit funds are laundered through this sector and provide insight into the Anti-Money Laundering (AML) strategies that businesses can implement to combat this problem.
The real estate industry is a magnet for money laundering activities. Criminals seeking to legitimise their illicit funds often turn to purchasing luxury properties as a means to accomplish this goal. Let's delve deeper into the reasons why the real estate sector is so appealing for laundering money:
Investment potential: Property is viewed as a stable investment option, with the strong potential of being rented out or sold for a higher price in the future.
Subjective pricing: Properties can often be purchased at prices much higher than market value without raising any suspicion, especially in prime locations.
Capacity to launder large amounts: With the ever-increasing price of real estate, criminals can launder enormous amounts of money in a singular transaction.
Poor regulatory oversight: Compared to financial institutions like banks, non-financial sectors encounter limited scrutiny.
Whilst we won't guide you on how to launder via real estate, it's pretty easy. Simply purchasing a house with illegitimate funds and selling it for the same price - or more - and presto, you've successfully cleaned your funds.
Recently, the Australian government went ahead and analysed the most common techniques used to launder money through property, which include artificially inflated property values, shell companies and suspicious financing schemes.
Mortgages and loans: Borrowing funds from a company creates the appearance of a legitimate property purchase. Though, in reality, the borrower is in control of the lender. The individual then uses their illegal funds to "repay" the loan. Another strategy is the implementation of mortgage schemes, where mortgages are obtained from banks and repaid with a combination of smaller cash amounts, combining both legal and illegal income.
Anonymous firms: Acquiring real estate through front companies preserves anonymity. This can be achieved relatively easily as most countries don't require corporations to disclose the identities of their actual owners.
Restoration: Contracts for property restoration can be drafted and paid for explicitly to legalise illicit funds.
Check out the Australian government's in-depth research: https://www.austrac.gov.au/business/how-comply-guidance-and-resources/guidance-resources/typologies-and-case-studies-report-2012
According to the law, every individual involved in real estate must adhere to Anti-Money Laundering (AML) regulations. As a result, companies, agents, brokers, and other professionals face the risk of legal repercussions, such as lawsuits, fines, and imprisonment, if they are discovered to be involved in a money-laundering scheme.
The most crucial AML regulation is customer verification, as it can single-handedly minimise money laundering in the real estate industry. Let's discuss.
Real estate firms are mandated by regulators worldwide to perform Know Your Customer (KYC) evaluations on their customers. When interacting with customers, businesses must consider laundering methods that are specific to the industry, such as the employment of unidentified companies and third parties. Here's a few guidelines on how to accomplish this:
Checking for Politically Exposed Persons (PEP): Given that numerous dishonest officials favour using real estate to launder their money, it's critical for agents to verify all of their customers against both domestic and international PEP databases, in addition to conducting adverse media checks.
The origin of client funds: An agent is required to verify the sources of funds and wealth. This can be accomplished by requesting bank statements and asset declarations from the client. The disclosed information should align with the sum that the client is proposing to pay.
Beneficiary checks: If the purchaser is a company, it is critical for agents to verify its Ultimate Beneficial Ownership (UBO), given that numerous criminals employ shell firms to conceal their identities. To identify beneficiaries, agents can require that the company disclose its UBO data to verify it against beneficial ownership registries.
Sanction screening: Agents can refer to both the OFAC's sanctions lists and the FATF's grey and blocklists. Prioritising screening of both sellers and buyers for sanctions is critical, given the high number of sanctioned oligarchs and politicians attempting to launder money overseas.
Did you know there's no need to do all of this yourself? Our platform verifies individuals, businesses and in an Australian first - even checks for graphical editing on documents.
Real estate professionals serve as the intermediary in most transactions, making them crucial in screening for money laundering. Below are red flags to watch for:
Over and under-priced property values.
Large amounts paid in cash.
Large discrepancies in official income vs. property value.
The use of shell companies.
If an agent notices one or more of these flags, they should get in contact with the Australian Transaction Report and Analysis Centre (AUSTRAC).