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Compliance Corner
Money Laundering and Real Estate

Karen Bannon March 23, 2017

Spring has sprung, which usually means the real estate markets ramp up.  This is good news for buyers, sellers, real estate professionals, financial institutions and even money launderers.

If you google “money laundering and real estate”, I think you will be amazed at the number of results involving organized crime, corruption, narcotics trafficking, tax evasion and other crimes. Simply put – the use of real estate is an internationally recognized method of money laundering. Criminals buy houses, buildings, parcels of lands, and other forms of real estate, as a way of laundering or concealing illicit funds. Criminals are drawn to real estate as a channel to launder dirty money for a variety of reasons: the ability to buy real estate with cash; ability to disguise beneficial ownership; reliability of real estate investment; and ability to increase the value of real estate.

Regulators have long been aware of the money laundering and terrorist financing risks within real estate industry.  The Financial Action Task Force, an international body developing and promoting policies to combat money laundering and terrorist financing, published papers in 2007 and 2008 detailing the risks which prompted member countries to assess their regimes, issue guidance and/or make changes to their legislation.  However, there has been a recent spike in attention by regulators to this sector and financial institutions should be prepared to be scrutinized on their client identification, reporting and record keeping practices.

FinCEN, the financial crimes enforcement network in the U.S., very recently renewed the existing Geographic Targeting Orders (GTOs) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay cash for high-end residential real estate in six major metropolitan areas.  The fact that the GTOs were renewed and that “about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report” makes it pretty clear that this is not going away. As FinCEN continues its current investigation, US financial institutions should review FinCEN’s previous news releases and consider looking at the direction given by other financial intelligence agencies around the world.

Canada’s FinTRAC and Australia’s AUSTRAC, the two nation’s financial intelligence agencies, each published guidance materials in November 2016 and June 2015, respectively, which detail the methods used by money launderers and provides guidance to reporting entities as to how to identify suspicious activity in the real estate sector. In addition to gleaning some regulator insight, looking at this issue through an international lens will help you to better understand the risks from a global payments perspective. In effect, it will make the processing of an international wire payment more efficient. To further assist, we’ve prepared the below list of key red flag indicators.

Ultimately, as financial institutions, we are on the front lines and need to take appropriate measures to ensure our organizations are not abused by money launderers, and must take appropriate steps to protect the interests of our clients and our partners and each other.