In simple terms, money laundering is the process in which criminals make dirty money appear to be clean. Criminals launder money for three reasons. First, money is the lifeblood of any organization which engages in criminal activity for financial gains. Money is required to maintain a good relationship with corrupt officials, a buy-out from situations which would otherwise lead to conviction, business operating expenses, maintaining stock and a lavish lifestyle. Secondly, criminals have to cover the trail of their source of funds and wealth or else it can become incriminating evidence. Third, the proceeds of crime are usually the target of investigation and seizure. The criminal must protect his wealth from seizure by making them look legitimate.
Real estate is one method of cleaning dirty money and categorised by the Financial Action Task Force as a high-risk sector for money laundering.
How can real estate help to launder money?
Real estate transactions are known to have been used in all three stages of the money laundering process.
Stage 1: Placement
The first step in money laundering is to introduce illegal proceeds into the financial system. This can be done by splitting the money into smaller amounts and investing each in a different way such as purchasing financial instruments, valuable goods or property.
The launderer would make the payment by cash or cheque, corporate loans or accounts situated in jurisdictions notorious for facilitating the hiding of money, hide behind a shell company or another individual such as a relative, to cover their identity.
Stage 2: Layering
The scope here is to distance the illegal proceeds from the true source of funds through a sophisticated layering of financial transactions to obscure the audit trail and sever the link with the original crime.
The property bought would be resold, swapped exchanged or bartered. Criminals may also use the illicit funds to pay for renovations to increase the value of the property. Moreover, contractors and tradespeople may not declare the cash payments received for the renovation money to evade tax, thus facilitating the money launderer’s layering and integration process.
Stage 3: Integration
Here the illegally derived proceeds are returned to the criminal from what appears to be a legitimate source. The criminal proceeds are now fully integrated into the financial system and can be used for any purpose.
The launderer sells the property to a bona fide purchaser or goes through a real estate agent and the money re-enters the economy as legitimate payment for the sale of a property. The launderer might also consider renting the property to get income from the investment before selling it.
What are the obligations of the real estate agent?
The Financial Intelligence Analysis Unit provides a set of implementing procedures which provide guidance in the implementation of the Prevention of Money Laundering and Funding of Terrorism Regulation. Below is a high-level overview of the salient points in the implementing procedures:
The real estate agent is obliged to identify the persons involved in the negotiations of the property by asking for the name, surname, date of birth and residential address. If a legal entity is involved, the real estate agent is to identify the owners of the entity and the individuals who control the entity (referred to as the Ultimate Beneficial Owners – UBO).
After identifying the individuals, their identity should be verified to ensure that the individuals are who they claim to be. This is done by referring to government issued or other accepted official documents such as an ID card, passport or driving license to verify identity, together with a utility bill or bank account statement to verify the address. The real estate agent should also verify through reliable and independent sources whether the client is subject to sanctions, law enforcement or politically exposed, and running searches to identify alerts which could indicate involvement in money laundering or funding or terrorist activities.
If it is not a onetime transaction, but rather an ongoing business relationship, such as dealing with construction companies, then the client is to be monitored. The monitoring frequency is determined by the risk category assigned to the individual or entity.
The estate agent is to keep a record of their clients, including the identification, verification, source of wealth, source of funds, transaction details and a copy of the contract. All records have to be kept for five years which start to elapse from the termination of negotiations, relationship or completion of the transaction.
Internal Reporting Procedures
The real estate agent is to appoint an internal reporting officer with whom internal reports on suspicious transactions are filed. The designated person shall consider the reports on suspicious transactions and have access to any information which could assist in determining whether the suspicion should be reported to the FIAU.
Upon determination of suspicion of money laundering activity, this is to be reported as soon as possible to the FIAU. The real estate agent is protected from breach of confidentiality to disclose the information to the FIAU.
The real estate agent is to make sure that all the employees are aware of the regulation and their obligations as required by the Prevention of Money Laundering and Funding of Terrorism Regulation.
How to recognize a money laundering transaction
The following are some of the signs of money laundering activity in the real estate market which might help real estate agents identify the potential money laundering activities, take appropriate steps to mitigate the risk and if necessary report to the authorities.
- The name of the client purchasing the property is changed unexpectedly at the last minute with no explanation
- Client sells or buys the property below or above market value
- The clients are high ranking foreign political officials, their associates or family members
- Clients feature in sanction lists or related to sanctioned individuals or entities
- Adverse media is identified on the clients which might indicate involvement in money laundering or funding of terrorist activities
- Buyer or seller involved in several companies which are now insolvent
- The seller asks for payment to be split in a number of cheques payable to third parties not connected to the property deal
- The property is resold in quick succession each time at a higher value to acquainted or related third parties or companies and trusts controlled by the same individuals
- Payment is made in cash with the buyer not wanting to disclose the source of funds
- The client purchases the property without a bank loan and this does not match the financial profile and characteristics of the buyer
- Payment is made through an account situated in a high-risk jurisdiction because it has a weak AML regime, notorious for supporting terrorism or political corruption
- The client purchases property without visiting it
- An unexplained geographical distance between the buyer of the property and its location
- Client purchases a number of properties in a short time without concern of their condition
Identifying one or more of these indicators does not necessarily mean that the buyer or the seller is engaging in money laundering activities. The real estate agent needs to be aware of these indicators and the risk factors and exercise sound judgment based on their experience of the industry and knowledge of the customer profile. When red flags are raised, every employee involved in the transaction should be aware of what actions to take and act immediately.
Professionals such as lawyers, accountants, real estate agents, trust and company service
providers are the gatekeepers. Unknowingly they can provide an entry point for those seeking to misuse legitimate financial and corporate systems for money laundering. StartKYC can provide gatekeepers with the tools required to facilitate compliance. Contact us to know more.
The information, views and opinions in this article are being provided solely for educational and informational purposes and should not be construed as advice. StartKYC Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions included in this article.