Purchasing real estate is often used as a method in the final stage of the money laundering cycle, to integrate illicit funds into the legal economy. This type of money laundering also provides a secure investment for criminals, as properties can be rented out or sold at a higher price at a later point.
The real estate market is also an industry that has recently ramped up their anti-money laundering efforts. In this endeavor, a general risk assessment is first and foremost essential. Which means that real estate businesses need to assess how their services can be used for money laundering and terrorist financing. Unclarities surrounding the financing of a purchase and ownership are often suspicious behaviors that can point to illicit activity.
Main areas of risk assessment for the real estate industry:
- Customer risk: who is the buyer and are there any other parties involved? As well as issues with finding out who the customer is or with a customer who is unwilling to answer questions.
- Transaction risk: source of funds, complexity of the payment, but also the type of property, the valuation of it (undervalued or overpriced) and use of cash.
- Geographical risk: location of the property versus location of the buyer, either if these do not match or if the location is known to have weak anti-money laundering regulations.
So, the risks have been assessed - now what?
There also needs to be routines put in place for how to handle these risks. To mitigate these risks, the real estate businesses need to comply with Know Your Customer (KYC) regulations, undertake screening for Politically Exposed Persons (PEP) and Sanctions, as well as conduct risk assessments - both on the general and customer specific level.
Last but not least it’s crucial to investigate the Ultimate Beneficial Owner (UBO), which can be a complex identification process due to a potential third party acting as a legal owner or shielding behind a company vehicle. In these kinds of criminal schemes, the beneficial owner stays anonymous to keep financial crimes undetected.
As with other industries, suspicious behavior and transactions need to be reported to the local authority, for official investigation. Reporting suspicious activity in the real estate industry has historically been and is still relatively low.
The negative effects of criminals being able to fund their crimes - with the help of laundering money and passing them off as legitimate - is that criminal organizations will be able to commit more of all kinds of crimes, e.g: drug- and human trafficking. In addition, however, the negative societal effects from specifically money laundering within the real estate industry is that it also contributes to properties getting less affordable and unfair competition in real estate purchases.