Financial institutions aren’t the only entities that should fight money laundering. Realtors can also make a big difference. From customer due diligence to suspicious activity red flags—we’ve made a comprehensive guide to AML compliance in the real estate sector.
On December 21, 2020, Zamira Hajiyeva, the wife of jailed Azerbaijani banker Jahangir Hajiyev, lost an appeal against a court ruling that will seize her sizable fortune. Now, Mrs. Hajiyeva will have to say goodbye to her London home and a golf club worth more than £22m ($31m) if she fails to explain the origins of her funds.
The British National Crime Agency has grounds to suspect that Mrs. Hajiyeva’s fortune was built through money laundering. When purchasing property, Mrs. Hajiyeva used front companies belonging to her husband, who’s in prison for corruption. Had the realtors determined who’s truly behind the companies, these shady deals could have been avoided.
Every year criminals launder $1.6 trillion through real estate. Voluntarily or not, realtors contribute to this problem. Today, we’ll dive into how dirty money gets washed through this sector and what Anti-Money Laundering (AML) measures businesses can adopt to prevent it.
If a criminal wants to legitimize their funds, purchasing a luxury mansion is a good option. Let’s dive deeper into why real estate is so attractive for money laundering:
All in all, regulatory loopholes, high (but subjective) prices, and lucrative investment opportunities make real estate an attractive money laundering instrument.
Legitimizing assets through properties is fairly easy. All it takes is buying a house with illegal cash, selling it for the same price, and, voila, you’ve washed some dirty money. Here’s what a typical scheme looks like:
Criminals use a variety of techniques to launder money through real estate, including shell companies, shady financing schemes, and overvalued prices. Here’s our breakdown of the most popular methods, based on research from the European Parliament and guidance from the Australian Government.
These are just a few examples of how money gets laundered through the real estate sector. To learn about all of the methods, check out the Australian Government’s guidance.
Around the globe, anyone involved in the real estate business is obliged by law to comply with AML requirements. Therefore, companies as well as agents, brokers, and other professionals risk penalties—lawsuits, fines, and even imprisonment—if they are caught in a money-laundering scheme.
Let’s take a look at how major jurisdictions supervise real estate businesses. Click on each territory to learn more.
In 2018, C$5.3 billion ($4 billion) were legitimized through properties in British Columbia alone. FINTRAC, Canada’s financial regulator, found that many real-estate companies are violating AML requirements. In fact, some realtors have even voluntarily agreed to launder money for criminals.
To combat this problem, the Canadian government updated its AML law in 2021. It made Politically Exposed Person (PEP) and beneficial ownership checks mandatory for all reporting businesses, including real estate firms and professionals. Non-compliance with these rules can cost up to С$2 million ($1,6m) and/or 5 years imprisonment.
In 2018, the 4th European AML Direction (4AMLD) brought real estate agents into its regulatory scope, obliging them to comply with all AML requirements, including customer verification.
Under the latest rules, 6AMLD, sanctions for money laundering now apply to businesses, not just individual employees. For instance, if a single realtor colludes with criminals to overvalue a property’s price, their entire agency will face severe sanctions, such as confiscation of assets and even closure.
The Financial Action Task Force (FATF), an inter-governmental body that fights money laundering and terrorist financing, comprises 37 member countries and two regional organizations. These include Australia, the EU, Russia, the UK, the US, and more.
Under the FATF’s Recommendation 22, the real estate sector falls under the Designated Non-Financial Businesses and Professions (DNFBP) category. DNFBPs located in FATF member countries are required to conduct customer verification, among other AML requirements.
London is a foremost destination for criminals seeking to launder money. Although the UK’s primary AML regulation has long required real estate professionals to follow AML obligations, these measures don’t seem to be enough.
To solve this problem, Britain enacted the Unexplained Wealth Order (UWO) in 2018. This means that, if a person cannot explain the source of their funds, all of their property can be seized by the court without an investigation. Mrs. Zamira Hajiyeva’s case, which we mention in the introduction, is an example of the UWO in action.
Under the USA PATRIOT Act, real estate businesses and professionals must be AML-compliant. Although this sector was given a temporary exemption from verifying customers, it can still be prosecuted for engaging in money laundering.
In 2015, a Phoenix real estate agent was jailed for 4 years for participating in a money-laundering scheme. She willfully accepted illegal funds, put property in her name, and rented property to criminals.
London is a foremost destination for criminals seeking to launder money. Although the UK’s primary AML regulation has long required real estate professionals to follow AML obligations, these measures don’t seem to be enough.
To solve this problem, Britain enacted the Unexplained Wealth Order (UWO) in 2018. This means that, if a person cannot explain the source of their funds, all of their property can be seized by the court without an investigation. Mrs. Zamira Hajiyeva’s case, which we mention in the introduction, is an example of the UWO in action.
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Customer verification is arguably the most important AML requirement, as it alone can reduce money laundering in the real estate sector. Let’s cover it first.
Regulators worldwide require real estate businesses to conduct KYC checks on their customers. When dealing with clients, businesses should take into account industry-specific laundering methods, such as the use of anonymous companies and third parties. Here are a few rules on how to do this:
Luckily, there’s no need to build the whole KYC process from scratch. Customer verification can be entrusted to KYC providers that can run the checks in an efficient and compliant way.
Other obligations for real estate businesses and professionals include adopting a risk-based approach, compiling an AML program, and more.
Here’s our short breakdown of the major procedures. Note that the exact list of requirements depends on jurisdiction.
If a business is new to the world of AML, it can reach out to a legal expert who can help evaluate their money laundering risks and create a suitable AML compliance program. Sumsub’s legal team is always happy to help.
Real estate professionals play a major role in screening for money laundering, since they act as intermediaries in most transactions. Here are the red flags they can look out for to spot criminal activity:
We’ve compiled a downloadable checklist with the main red flags. Feel free to save it to your device.
If an agent notices any of these red flags, they should file a Suspicious Activity Report (SAR) to a financial intelligence unit.
There are different requirements for reporting deadlines. For instance, the Bank Secrecy Act (BSA) in the US requires completing a SAR within 30 calendar days of the incident. Whereas, in Turkey, the filing window is 10 working days.
To submit a report, businesses can use web reporting systems.
Read more from our series on money laundering:
Money Laundering Within the Art Trade and What Art Dealers Can Do About It (With the Checklist)
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