Elliot Berman
The Financial Action Task Force (FATF[1]) recently updated its Risk-Based Approach Guidance for the Real Estate Sector. This update was prompted by increasing risks of money laundering and terrorist financing (ML/TF) using real estate transactions. The guidance “provides real estate professionals involved in real estate transactions, with the requisite tools and examples to support the implementation of FATF standards enabling the implementation of a risk-based approach to anti-money laundering and countering the financing of terrorism.”
The guidance highlights good practices for a risk-based approach (RBA)for transactions in all types of real estate. Coverage of the guidance includes real estate agents and other professionals involved in real estate transactions, such as lawyers, notaries, real estate developers, title insurers, and accountants.
What is the RBA? FATF views the RBA to be “an ‘essential foundation’ of a country’s anti-money laundering/countering the financing of terrorism (AML/CFT) framework. It requires identifying, assessing, and managing the ML/TF risks to which a country, economic sector, or institution is exposed.
What stakeholders should be involved in implementing the RBA for the real estate sector? Implementing the RBA should be done at the national level. The process should draw together a broad group of stakeholders, including:
- policymakers
- financial services supervisors
- law enforcement
- Financial institutions and other financial service providers, and
- Representatives from the real estate sector.
How should the RBA be applied to the real estate sector? The national legal and regulatory should be based on the risk assessment performed by the country’s regulators or FIU on the nation’s economy. The laws, regulations, and supervision process should be commensurate with the risks identified.
Does the real estate sector pose a special risk for ML/TF? The guidance notes that criminals seek out financial channels that have less robust AML/CFT regulations. They also look for areas of financial activity with ineffective mitigation control by the sector professionals. In many countries, the real estate sector has not been fully integrated into the AML/CTF regime applied to banks and other financial service providers. This coupled with the ability to engage in large value transactions in real estate, presents a higher risk profile.
Are there other factors that the contribute to the risks for real estate transactions? Some additional risk factors in these transactions are:
- Variations in the availability and the quality of information on the beneficial owners in real estate transactions, making some transactions very opaque
- Variations in requirements to record and report the source of funds used in the transactions
- In some countries, real estate transactions offer indirect benefits to corrupt Politically Exposed Persons (PEPs) and criminals such as ownership of real estate can provide a pathway to residency or citizenship, or create an air of respectability
- The high value of commercial real estate and its ownership through layered corporate entities, and
- Transactions can be completed without financing, which avoids using regulated financial service providers and leaves them in the hands of less regulated professionals.
How should countries mitigate ML/TF risk in the sector? The level of mitigating activity should increase with the level of risk. Where countries look to use “simplified measures” they should be aligned with assessed risk. Supervisory authorities should be separate from real estate practitioners. Supervisors should have skilled staff with subject matter expertise and the tools necessary to meet their mandate.
Real estate professionals should be required to have policies and effective procedures in place, supported by staff with the skills to implement them. The procedures should include ongoing assessment of ML/TF risk.
What do real estate professionals need to know about ML/TF risk? Building on each country’s legal and regulatory structure, real estate professionals need to assess their ML/TF risks. The risk assessment should include these risk categories:
- Geographic factors
- Client risk, and
- Transaction risks.
Based on their assessment, they need to take adequate actions to create and implement policies, procedures, and controls to effectively mitigate and manage the identified risks.
What else is in the guidance? The guidance also includes:
- Case studies of effective national risk mitigation efforts. These studies “are designed to” provide a useful roadmap to nations which are working to add the RBA for real estate transactions to their national AML/CFT regimes
- A detailed discussion of the elements of the risk assessment process, and
- Guidance for supervisors.
For more information about the guidance, listen to this episode of This Week in AML.
[1] The Financial Action Task Force (FATF) is an independent intergovernmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognized as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard. www.fatf-gafi.org