Sophie Proctor
Money laundering through real estate is one of the common methods for criminals to clean their money as they take advantage of large amounts of money exchanging hands, thus transforming illegitimate funds into a safe investment. According to FATF, real estate accounted for a third of criminal assets confiscated globally between 2011 and 2013.
Why is money laundering a threat in real estate?
Money laundering through real estate can be done in a multitude of ways, so it is imperative for there to be a thorough understanding of the necessary KYC protocol. This includes the customer due diligence, spotting red flags, and reporting any suspicious activity. It was announced at the end of 2021 that the Biden administration would be paying closer attention to corruption in the real estate market, with special focus on the all-cash transactions in commercial and residential real estate.
Businesses need to ensure they are conducting their due diligence in order to determine the ultimate beneficial owner, as well as the origin of the funds being used to pay for the property. Some of the ways in which money laundering through real estate can be conducted include:
- Using illegitimate funds to pay off monthly mortgage payments
- Making all-cash purchases using several different back accounts, thus finding regulatory loopholes
- Manipulation of property prices, such as overvaluation to get the largest possible loan from a lender
- Disguising true ownership by using third parties to acquire the party on their behalf, such as a family member with no criminal record
- Using shell or offshore companies to conceal their identity when purchasing property, thus distributing the dirty money
What does real estate money laundering look like across the globe?
There is opportunity for laundering dirty money across the world, in particular in wealthy metropolitan cities like London, New York, and Vancouver. The UK’s Treasury Department has estimated that £4.4 billion of investment in UK real estate stems from politically exposed persons in high-corruption-risk jurisdictions. The lack of regulation to effectively address money laundering through real estate was exposed by the Panama Papers back in 2016.
In Canada, there are reportedly more than 650 organized criminal groups involved in mortgage fraud to launder money. Vancouver real estate is often utilized by criminals to conceal their dirty money as Canada’s criminal justice system is more lenient and had some of the most lax financial reporting rules in the developed world.
In 2021, Transparency International Australia’s chief executive said Australia had become the ‘destination of choice’ for the flow of illicit funds, which often end up in the property market. This was due to the lack of beneficial ownership register and flaws with the corporate registry.
In the US, 59% of property purchases by international clients are made in cash, according to the US National Association of Realtors. In 2015, the New York Times estimated that almost half of purchases of residential real estate over $5 million were made by shell companies. To help combat this issue, the FinCEN issued Geographic Targeting Orders (GTO) in 2016 which required insurance companies to collect and report information on all persons involved in real estate transactions costing over a certain amount of money.
Real estate transactions need customer due diligence and reporting of any suspicious transactions, however there are faults where sufficient technology is lacking. Unlike the banking sector, where stringent enforcement is in place, the ultimate beneficial owner or suspicious funds can slip through the cracks when it comes to property. These complexities of money laundering in the real estate market heighten the need for sophisticated technology as a method of meeting regulations.
How can AML RightSource help?
To help mitigate the global risk of money laundering in the real estate market, Arachnys provides in-depth Perpetual KYC solutions. This can help manage the burden for real estate companies to deal with heightened regulations and conduct background checks.
Unlike banks and other financial service providers, real estate firms can lack the sophisticated technology and resources that are needed to manage the risk of money laundering and fraud. This is imperative when conducting the necessary due diligence and customer checks, as well as identifying UBOs (ultimate beneficial owners) and AMM (adverse media monitoring). This leaves real estate brokers vulnerable to doing business with PEPs or criminals concealing their identity, or the true nature of where the funds originated from.
The PKYC solution offered by Arachnys offers a complex and unique approach:
- Technology to validate existing customer data to deliver a risk-based approach
- Delivers proactive monitoring of customer circumstances to ensure it is always identifying any changes
- Automated reviews using AI technology to reduce manual and labor-intensive processes as well as increase efficiency
- Incorporates both structured and unstructured data for the utmost configuration of the customer’s risk appetite
Overall, real estate firms and brokers need to be able to display their robust AML screening and compliance protocol to regulators. This spans from KYC checks, PEP screening, establishing UBO and regular AML compliance reports.