Prepare For Increased Scrutiny Re: Real Estate Corruption

Regulations shine spotlight on cash transactions, offshore shell corporations

Real estate is a popular way to hide money, as recent events like the Panama Papers showed. While investing in real estate is usually legitimate, criminals and corrupt parties are using the market as a type of parallel banking system to store money and transact business, often employing shell companies to hide true ownership. With illicit transactions and real estate corruption on the rise, your financial institution must take steps now to prevent being ensnared in a money laundering scheme.

For banks, mortgage officers, and those in the real estate industry, understanding what the problem is and how it might present itself is the first step, says Kenneth Barden, a certified anti-money laundering specialist. The next step is putting key protections in place, he explains in his Eli Financial webinar, “Preventing Money Laundering and Corruption in the Real Estate Sector.”

The $2 Trillion ‘Anonymous Buyer’ Problem

Real estate is one of the most popular time-tested ways to launder money because of the sector’s relatively lax controls.

“Real estate has become a hot button item because you don’t need to do anything near the level of due diligence—the property sector does not necessarily care about the origins of the money,” said Hugh Jones, president and CEO of payment and compliance firm Accuity.

As much as $2 trillion in dirty money is laundered annually, according to the United Nations Office on Drugs and Crime.

“Money laundering through real estate is a growing problem in many cities around the world,” said Accuity writer Jay Ryan. “In the US and UK, the use of offshore shell companies in transactions, which allow the identity of the ultimate owner to be hidden, have become an area of concern.”

What to look for: As the Panama Papers showed, shell companies are one clue which can uncover nefarious activity.

In New York, for example, approximately $8 billion is spent every year on homes worth $5 million or more, and over half of these transactions are made through shell companies, The New York Times found in a 2015 analysis. “Nearly half of the most expensive residential properties in the United States are now purchased anonymously through shell companies,” the paper said. “The real estate industry does little examination of buyers’ identities or backgrounds, and there is no legal requirement for it to do so.”

But Increased Scrutiny Is Coming

The days of relaxed attitudes toward disclosure may be coming to an end. As a result of The New York Times investigation, New York City Mayor Bill de Blasio imposed new disclosure requirements on shell companies buying and selling property in the city.

This year, the government in the United Kingdom announced plans to crack down on money laundering for high-end property. In the U.S., reported Reuters, the Treasury Department extended a rule ordering title insurance companies to report all-cash real estate purchases in parts of California, Texas, Florida, and New York.

“The agency said since imposing the original order in January 2016, it has found 30 percent of these cash real estate transactions involve a person who had previously been reported to authorities for suspicious financial activities,” Reuters said.

How to spot trouble? Methods for detecting money laundered via real estate include those used in other industries, according to BizFilings.com. You can ask:

  • Do I really know this customer?
  • Do I really understand this transaction?
  • Is this the normal way things are done?
  • Are there records I should keep to protect myself?

The National Association of Realtors backs those precepts in its current anti-money laundering guidance. Agents should consider:

  • Aspects of a transaction which might indicate illegal financing
  • Geographic risk—some states are more prone than others
  • Customer risk—factors such as the location of the property in relation to the buyer, unusual involvement from third parties, and titling property in the name of a third party
  • Transaction risk: irregularly-valued properties, large amounts of actual cash, purchases inconsistent with a buyer’s income, immediate resale, unusual funding sources, and purchases made without viewing the property

Banking professionals and real estate agents can play a significant role in stopping laundering, says Barden. Now is the time to become educated about the issue and take steps to protect your institution from illegal transactions.

To join the conference or see a replay, order a DVD or transcript, or read more

Jeff Schmerker

Jeff has extensive professional experience writing on a variety of topics, from pharmaceutical research to environmental history. He has published more than a half-dozen books, and he has worked as a newspaper reporter, magazine editor and restaurant reviewer. He lives in Missoula, Montana with his wife and son.

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