How To Prevent Money Laundering In Real Estate Transactions

Carrying out detailed due diligence is one of the ways used in preventing money laundering in real estate transactions. Due diligence goes beyond the normal way of verifying the client’s identity but understanding his/her background, source of wealth and business rationale for the transaction. When it comes to buyers who are individuals, it’s important that you verify his/her identity through documents that have been issued by the government, confirm occupation and sources of income and understand how funds were accumulated prior to the purchase. For corporate buyers, due diligence entails identifying the beneficial owners who control the entity, know how the business operates and confirming that the purchase of the property is in line with the purpose of partaking in a legitimate business.

Enhanced due diligence should apply where risk indicators point to; buyers from high-risk jurisdictions that are synonymous with corruption or weak financial controls, politically exposed persons who hold or have held prominent public positions, payment of cash for high-value transactions and complex ownership structures that involve various entities or jurisdictions. All these must undergo additional scrutiny and includes; requesting for additional documents that show sources of funds, conducting adverse media screening to identify negative news about party or parties involved in the transaction and engaging third-party services to verify relevant information and investigating his/her background thoroughly.

There should be standard procedures for members of staff to follow. A real estate company might implement a checklist that requires verification of beneficial ownership for all corporate purchases, documentation of sources of funds for cash transactions that are above a certain threshold and review by supervisors of transactions that meets the criteria for ‘high-risk’. Real estate brokerages could adopt policies requiring agents to complete a transaction risk assessment form, in order to document the parties involved, the structure of the transaction and warning signs identified during their interaction with the client.

There are technology and data analytics tools that can identify suspicious patterns and real estate transactions is not an exemption. Transaction data can be analyzed and anomalies identified such as properties purchased way above or below the market value, unusual patterns in transfer of ownership and connections between unrelated transactions that involve the same beneficial owner(s). Machine learning algorithms can process huge amounts of public records, identify clusters of activity that suggest a well-coordinated operation to facilitate money laundering.

Various sources of data would have been integrated into these tools. Systems can combine records of transaction, databases of registration of companies, sanctions lists and databases for politically exposed persons, to provide a detailed risk assessment. For instance, when a property is being bought by a shell company, automated systems can trace ownership through different layers to identify the eventual beneficial owner(s) and flag it, if those individuals appear on the watchlist or have a history that points to elevated risk.

The deployment of geographic information system mapping can reveal patterns that can’t be seen in individual transactions. For instance, by engaging in the visualization of properties that have overtime been bought across neighborhoods, analysts can identify areas where unusual buying activity is concentrated or see patterns where various properties in proximity have been bought by entities who have concealed ownership. These patterns have helped investigators to identify operations in money laundering that intentionally spreads transactions across different neighborhoods to avoid being spotted.

Many real estate agents, loan officers, among others, receive minimal education about what money laundering entails, the risks and warning signs. Therefore, it is important to adopt detailed training programs that teach employees on how to spot suspicious behaviour, know the common techniques used in money laundering, and make them understand that they have a duty to report. The training must expose them to case studies and practical examples that they can relate with while carrying out their daily activities. Training should not be a one-time and that’s all thing but should be carried out regularly to ensure employees are kept abreast of current money laundering techniques and regulations.

Again, suspicious activity report (SAR) filing is vital for preventing money laundering. The quality of SARs varies significantly with the most useful reports providing detailed narratives that explain why the activity was viewed as suspicious, giving details of the transaction and relevant documents in support. A well-prepared SAR filing for a real estate transaction will state that the buyer's occupation and income where inconsistent with their ability to make purchases with large cash. There were evasive responses for sources of their funds, shell companies with no apparent business purpose including the transaction amount and information that identifies the party were used. This information will help investigators to pursue the matter.

Encouraging voluntary SAR filing by entities not strictly required to report further strengthens the system. Some industry participants have begun doing so by recognizing both their exposure to liability if they knowingly facilitate the criminal’s activity and their role in protecting the integrity of the real estate market. Creating provisions that protect those who report in good faith from liability can encourage more voluntary participation.

International collaboration and information sharing have become essential as money laundering activities are also cross border in nature. The Financial Action Task Force sets international standards for anti-money laundering measures and evaluates countries' compliance with these standards. Real estate money laundering often involves moving funds between jurisdictions, exploiting differences in regulatory requirements and level of enforcement. Bilateral and multilateral agreements allow law enforcement agencies to share financial intelligence and coordinate investigations to fight these illegal activities.

Being Vigilant is key. When agents, title officers, lenders, and lawyers commit to knowing their clients, question suspicious circumstances and refuse to facilitate transactions that are questionable, they will hamper money laundering activities from taking place. However, this vigilance should not paralyze commercial activities that are legit. Professionals should understand the important role they play in protecting the real estate sector, instead of only being focused on closing deals.

In fact, some criminals have begun using cryptocurrency to buy property, taking advantage of the pseudonymous nature of blockchain transactions and the relative novelty of crypto in real estate markets. As digital assets become more integrated into real estate transactions, users including professionals must understand the risks money laundering poses that is specific to crypto and develop suitable procedures for conducting due diligence.

Finally, the goal is not to make transactions burdensome but to prevent money launderers from carrying out their activities therein, thus, safeguarding the real estate sector.

Real estate companies can take advantage of our comprehensive AML/KYC course, taught by one of the best hands in the UK to train their employees on ways to combat money laundering and become grounded in anti-money laundering and know your customer.