You may be wondering why real estate agents have to comply with anti-money laundering regulations. They're not a bank, right?
Real estate transactions are one of the most common methods that criminals use to launder money and move around illicit funds. As a result, real estate agents are required to comply with AML regulations to prevent illegally obtained funds from being passed through them.
Since real estate transactions tend to involve large sums of money, it is tempting for money launderers to attempt to conceal a significant amount of illegal funds at one time. It can also be simple to conceal the identity of the owner of the property being purchased or sold, and the fact that property markets tend to appreciate makes this even more appealing.
Here are some of the AML risk areas relating to real estate:
Cash Only Transactions
The purchase of a property with cash is one of the highest risk areas that real estate firms need to be concerned with. The perpetrators may make payments from several different bank accounts to avoid reporting thresholds, and these red flags should be taken into consideration when conducting business.
There is also a risk that money launderers will use a significant amount of cash to renovate a home to increase its value so that they can resell it and obtain a receipt For their illicit funds.
Shell Companies, Trusts, and Third-Party Purchases
Since companies, trusts, and other third parties can purchase real estate, there is a risk that money launderers can use them to distance themselves from the transaction. They can disguise their true intentions by showing the company as a legal owner of the property so that the money can be funneled through their bank account instead.
When a third party purchases real estate, it can also complicate matters if assets need to be confiscated – creating yet another risk area related to money laundering in real estate.
Although most real estate purchases involve a third-party appraiser to determine the value of a home, there are occasions where some features may be of more value to someone than it would be to others.
Criminals can use this to their advantage and partner with a real estate agent who overestimates - or underestimates - the value of a property so that the difference can be settled in cash. This provides an opportunity for money laundering to occur, so real estate firms need to be on high alert when an offer comes in that is way off from the appraised value.
Another money laundering scheme in real estate involves leasing a property to a tenant who pays the "rent" with the illicit funds that were provided to them. This would then make those funds look like legitimate rental income.
Perpetrators can go one step further and skip involving the tenant - and make regular deposits into a bank account so that it appears that somebody is making rental payments.
Mortgages and AML
Unfortunately, even mortgages are not safe from money laundering schemes. Somebody can take out a mortgage on a home to make the transaction appear legitimate, only to then pay off the loan with illicit cash sometime later.
AML Requirements for Real Estate Companies
As you can see, real estate companies play an important role in detecting and preventing money laundering. As a result, they are subject to AML requirements and are regulated by the HMRC. This means that they have to follow their guidance on how to prevent financial crimes and comply with the rules that they set forth – and failure to do so can result in significant fines and penalties.
These requirements include employing customer due diligence measures, hiring a money laundering reporting officer, and reporting suspicious transactions.
Customer Due Diligence Measures
As we mentioned above, one of the reasons that real estate transactions are appealing to money launderers is the fact that they can remain anonymous or distance themselves from the entity making the purchase.
To prevent this, real estate firms are required to have customer due diligence measures in place that will allow them to confirm the identity of all of the individuals that will have significant control over the property transaction.
If somebody is selling, buying, or leasing a property, all of the buyers, vendors, lessors, and lessees to be properly identified. Companies can do so by obtaining information like their names, addresses, and legal documents that prove their identities.
Once the real estate company has identified these individuals, they must perform sanction screenings and PEP checks to determine the risk level associated with doing business with them. If they appear on one of these lists, the real estate transaction has inherently greater risk - and the firm should have proper procedures in place for dealing with this.
Employ a Money Laundering Reporting Officer
All companies in the real estate industry are required to employ a money laundering reporting officer. This person is responsible for ensuring the firm complies with AML regulations and that their procedures are up to date with industry best practices.
Similarly, this person can lead training sessions for the rest of the employees to ensure that they are also aware of which type of real estate transactions are at a higher risk of being used for money laundering.
Report Suspicious Activity
As a real estate agent, if you believe that a real estate transaction is being used for money laundering or other illicit purposes, you must complete a suspicious activity report and send it to the applicable agency.
Implications for the Real Estate Industry
The increase in money laundering that has occurred the real estate transactions means that AML regulations will continue to be imposed on the real estate industry. Companies must work to ensure that they meet all of the standards that apply to them so that they can avoid costly fines and penalties.
It is essential to set up the appropriate processes and procedures in place to prevent money laundering and terrorist financing, so investing in the right tools and technology early on will set you up for success in the future.
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