For banks and other financial institutions, detecting money laundering through real estate fraud is a unique challenge because US real estate agents and lawyers aren’t required to have anti-money-laundering initiatives, making it easier to launder money via all-cash purchases of houses, condos, and other properties
Why? In the U.S., real estate agents and lawyers aren’t required to have anti-money-laundering (AML) initiatives — they don’t have to conduct due diligence on transactions or report suspicious activity. At the same time, real estate buyers can be shell companies whose ownership is hard to ascertain.
So financial institutions start the race with one hand tied behind their backs, in a manner of speaking. Given the lack of clarity for some real estate purchases, it’s vital for financial institutions to implement thorough AML processes for real estate-related transactions. Certainly, there’s likely to be a limit to what you can find out about a real estate buyer; but the stronger your protocols, the less your chance of being implicated in a fraudulent transaction.
Real Estate: A Key Money-Laundering Vehicle
Why is real estate appealing to money launderers? There are a number of reasons, including:
- Ease of cash conversion — All-cash deals for real estate aren’t uncommon and can be done without involving many parties beyond an agent and a lawyer.
- Potential for appreciation — Buying a high-end condo in Manhattan, for example, means there’s a good chance a fraudster could sell it for a profit later. There’s also the potential of earning legitimate rental income via the property.
- Prestige — If you’re an oligarch in Russia looking to move money out of the country, why not also be able to boast you have property in an exclusive market? It’s also practical: you can stay in the place when you’re visiting the area.
A Cloudy Environment
There have been prominent examples of real estate being used for money laundering and financing criminal or terrorist activity — such as the Iranian government, via a shell corporation, buying and managing a New York skyscraper and using the rent money gather to fund terrorist operations. It’s one reason why the European Union (EU) included a beneficial ownership disclosure requirement in its Fourth AML Directive in 2017.
But in the U.S., although legislation has been proposed in Congress to require true beneficial ownership information, bills have gone nowhere. And since 2002, the US Department of the Treasury has exempted real estate agents from conducting due diligence and reporting suspicious transactions. Given the strength of the real estate lobby, few believe these exemptions will change any time soon.
You can also download this handy, interactive Checklist for Handling Real Estate-Related Transactions to make sure that as a financial institution, you’re taking the necessary steps to protect business!
Ross Delston, an independent Washington, DC-based attorney who is an anti-money laundering expert, says “the obvious foreseeable consequence is that, compared to other jurisdictions that have implemented these rules, the U.S. is a good place to do business for criminals. It’s been a good place to be for years, but I would argue it’s even more attractive right now.”
Even the recent application of Geographic Targeting Orders (GTOs) by the Treasury’s Financial Crimes Enforcement Network (FinCEN) has its limits. These GTOs require, among other things, certain US title insurance companies to report beneficial ownership information of legal entities making “all cash” or “non-mortgaged” purchases of high-value residential real estate in Manhattan and in Miami-Dade County, Fla.
GTOs “are temporary fixes that are mainly designed to get more information about real estate in major markets,” Delston said. They’re flawed because they only apply to title insurance companies, again exempting real estate agents and lawyers from obtaining beneficial owner information. And GTOs only apply to specific markets for a limited period of time. So, if Miami-Dade is under scrutiny, criminals are more likely to buy homes in other parts of Florida.
What Financial Institutions Can Do
Real estate money laundering is a test for financial institutions’ AML procedures. But there are strategies to reduce the chances of being implicated in real-estate related money laundering. While you might be unable to look at every wire transfer, you can use a risk-based approach and look at the ones that you determine have the highest risk, based on a set of criteria.
Potential red flags include:
- Size of transaction — If a real estate purchase is substantially higher or lower than the average market value of the property, that could indicate the transaction has other purposes than just acquiring a property.
- Location of property — A real estate purchase in a particular geographic area known for a history of questionable activity is a red flag. These areas range from popular, high-appreciation markets like New York and London to areas covered by a FinCEN GTO. For example, Bexar County, Texas is considered to be a popular location for Mexican cartels to buy property.
- Location of buyer — If the buyer is a shell company based in a country with a history of money-laundering activities, such as the British Virgin Islands or Mauritius, they should merit greater scrutiny.
- Disparity between buyer, bank and property location — A sign of possible fraud is when a company in one location sends a wire transfer from an institution in another, higher-risk location to buy a property in a third location. For example, if a customer is an international company in Spain that sends a wire transfer from an account in the British Virgin Islands for a condo purchase in Manhattan, that should be a red flag.
Other factors are less clear-cut. The type of property popular for laundering activities will vary depending on location — condos are more likely in New York, single-family homes in Bexar County. And given how hot many of these real estate markets are, it’s a challenge for banks to investigate each transaction, as many real estate purchases will be legitimate investments.