Efren Marquez Alba is an Engagement Director with Treliant. His areas of expertise include a range of AML, sanctions, and other financial crime domains, including regulatory program and program management, risk identification and measurement, suspicious activity investigations, Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD), systems and technology administration…
The laundering of illicit funds is on the rise. Global Financial Integrity analyzed major money laundering cases and estimated that a minimum of $2.3 billion was laundered via U.S. real estate transactions from 2015 through 2020, largely involving PEPs, use of anonymous shell companies, and complex corporate structures. Similarly, in the UK, a 2015 study by Transparency International identified high concentrations of foreign wealth held in London luxury real estate by entities registered in the British Virgin Islands, Guernsey, Isle of Man, Bahamas, Panama, and Curaçao.
Simultaneously, recent rulemaking and enforcement actions have solidified the requirement that persons involved in real estate closings and settlements, including real estate brokers, escrow agents, title insurers, and other real estate professionals, should voluntarily report suspicious activity under the Bank Secrecy Act’s safe harbor provision.
In February 2021, the U.S. National Association of Realtors (NAR) issued related “Anti-Money Laundering Voluntary Guidelines for Real Estate Professionals” that highlighted the vulnerability of the U.S. real estate market to money laundering. “Many non-financial businesses and professions are also vulnerable to potential money laundering schemes,” the NAR stated. “Real estate is believed to be used in money laundering schemes, making real estate professionals likely to encounter money laundering activities in the course of their business.”
The voluntary guidelines cover the definition of money laundering, role of real estate agents, identification of beneficial owners in shell companies, detection of “Know Your AML” red flags, and mitigation of risk. They are intended to help real estate agents be effective partners with law enforcement agencies in detecting and addressing the use of real estate in illegal financing activities.
More recently, in December 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) regarding implementation of an effective system to collect and permit authorized uses of information concerning potential money laundering associated with non-financed transactions in the U.S. real estate market. FinCEN added that some areas of the real estate market, such as commercial real estate and certain real estate purchases by natural persons, could also be subject to regulatory coverage.
Public comments were solicited by February 2022. The U.S. Treasury Department will include consideration of these comments in developing proposed regulations to address the misuse of real estate and mitigate illicit funds entering the U.S. real estate market. The department is expected to finalize rules addressing non-financed real estate transactions by 2024.
Clearly, the susceptibility of real estate transactions to serve as a means for laundering illicit proceeds is elevating regulatory requirements and law enforcement scrutiny. This, in turn, presents the need for enhanced anti-money laundering (AML) controls for financial institutions as well as those participating in the real estate industry who have never been required to implement AML compliance programs.
The U.S. Treasury’s May 2022 report, “National Strategy for Combating Terrorist and Other Illicit Financing,” highlighted that criminals with widely divergent levels of financial sophistication use real estate at all price ranges to store, launder, or benefit from illicit funds. The report identified one of six key vulnerabilities as “weak or non-existent reporting and disclosure requirements for company formation and non-financed real estate transactions.”
Bad actors seek to launder illicit proceeds with the placement and layering of funds through real estate in robust markets located in jurisdictions with strong private property protections but a lack of government scrutiny of transactions. Robust real estate markets minimize potential losses from market instability and fluctuating exchange rates. “Real estate also offers secondary benefits for criminals and corrupt politically exposed persons (PEPs), such as helping with attempts to secure residency and/or citizenship and conveying social respectability,” the Financial Action Task Force (FATF) noted in July 2022, in its “Risk Based Approach (RBA) Guidance for the Real Estate Sector.”
Mitigating New Regulatory Risk
In order to mitigate the increased regulatory scrutiny and hence risk posed by clients active in the Real Estate Industry, financial institutions should take the following:
- Risk assessment: Incorporate the risk presented by real estate into your overall risk assessment, taking into consideration your client base, products, and jurisdiction under FinCEN’s Real Estate Geographic Targeting Order (GTO) Program. FinCEN implemented the program in January 2016 and has subsequently expanded and renewed coverage of markets and payment instrument types, while also reducing the reporting threshold to $300,000. The GTO program requires U.S. title insurance companies to file reports (IRS Form 8300) and to maintain records concerning all-cash purchases of residential real estate above a certain threshold in select metropolitan areas of the United States (for example, using the American Land Title Association’s FinCEN Information Collection Form). Required information includes details about the transaction including the price and address of the real estate purchased and beneficial ownership information (such as name, social security number, and ID number and type, for the beneficial owners of certain legal entities purchasing property in covered transactions). Current GTOs include: San Diego, Los Angeles, San Francisco, Santa Clara, and San Mateo Counties in California; Miami-Dade, Broward, and Palm Beach Counties in Florida; the City and County of Honolulu in Hawaii; Cook County in Illinois; Suffolk and Middlesex Counties in Massachusetts; Clark County in Nevada; Bexar, Tarrant, and Dallas Counties in Texas; the Boroughs of Brooklyn, Queens, Bronx, Manhattan, and Staten Island in New York; and King County in Washington. Per a General Accounting Office 2019 report, 23,659 GTO reports were filed by title insurance agents from 2016 to 2019. The program continues to be assessed for its value as a potential deterrent as well as for information collection in relation to suspicious activity report (SAR) filings, with certain stakeholders advocating for reporting of purchase/sale transactions conducted in all U.S. real estate markets.
- Screening: Enhance your name screening processes—for both applicable sanctions regimes as well as adverse news—to incorporate the complex legal structures prevalent in real estate transactions and effectively identify the ultimate beneficial owners.
- Due diligence: Ensure your customer due diligence programs are sufficiently robust to identify participants in the real estate industry who may present a heightened AML risk. Financial institutions should review customers incorporated in so-called secrecy jurisdictions (Delaware, Nevada, and Wyoming) identified as disguising of beneficial ownership to ensure that beneficial ownership information is up-to-date and complete.
- Risk rating: Revise your customer risk rating to include said clients and ensure they are subject to commensurate enhanced due diligence and suspicious activity monitoring.
- Enhanced due diligence: This should be scheduled with sufficient frequency and include an understanding and review of the controls maintained by real estate transaction gatekeepers or transaction parties, property management companies, title insurance agents, and escrow companies, among others, to ensure that customer funds do not involve funds derived from illicit sources.
- Suspicious activity monitoring: Fine-tune your suspicious activity monitoring systems to include rules and parameters capable of detecting the red flags associated with potentially suspicious real estate transactions. Substantive red flags include onshore acquisitions through offshore companies and/or through a complex structure of ownership, unreported acquisition of properties overseas, and use of nominees. Vehicle red flags include nominee shareholders, shell companies, other investment vehicles, purchases by companies registered by mass formation agents, and all-cash purchases by newly incorporated companies or those registered in secrecy jurisdictions. Transactional red flags include all-cash purchases/sales (i.e., not financed by a covered financial institution, using virtual assets, or involving gatekeepers). According to estimates from the National Association of Realtors, 22% of existing home transactions were all-cash sales in September 2022, down from 24% in August 2022 and 23% in September 2021. Another 9.5% of new home sales were all-cash.
- Staffing: Equip your financial intelligence units with personnel trained to understand the intricacies of real estate and effectively review and disposition alerts and investigations of potentially suspicious activity.
- Risk mitigation: Undertake any additional risk mitigation efforts required by your risk assessment.
Even before the new rules come into play, regulators have set expectations and are actively enforcing the misuse of real estate transactions to launder illicit proceeds under statutes already on the books.
The latest noteworthy example involves the arrest of a Russian oligarch’s UK-based property manager in October for wire transfer payments totaling $1.05 million from a bank account in Russia held in the name of a UK PLC. The money went to bank accounts held by the property management company in New York to pay for various expenses associated with properties in New York and Washington DC, including staff salaries, property taxes, and maintenance. Concurrently, the Justice Department announced an indictment of the oligarch and his associates for sanctions evasion and obstruction of justice. Other recent examples include numerous other Russian oligarchs, an African PEP, and a Malaysian PEP.
Treliant recommends taking proactive steps to “know” and understand your client’s role in the real estate industry, effectively screen their Ultimate Beneficial Owners and Controlling Persons and monitor their activities using a risk-based approach in order to mitigate risk and ward off regulatory scrutiny and potential penalties.
Treliant’s Global Financial Crimes Compliance practice is uniquely positioned to assist financial institutions in enhancing their AML and sanctions compliance programs and evaluating the applicability of recent guidance to their business model, risk profile, and AML sanctions compliance operations. Treliant’s seasoned AML and sanctions professionals can provide you with the subject matter expertise and operational experience to assist you in ensuring your institution is well equipped to mitigate against any deficiencies in your program that could expose you to regulatory scrutiny.