In the fast-paced, high-value world of real estate, property can be seen by criminals as a reliable and profitable channel for money laundering. Understanding the vulnerabilities in real estate transactions and being able to recognise the real estate money laundering red flags is critical for all parties involved in property transactions – from real estate agents, lawyers and mortgage lenders.
In this article, we’ll explore some of the most common indicators of money laundering in real estate transactions, the risk areas, and the real estate typologies identified by the Financial Action Task Force (FATF). By familiarising yourself with these warning signs, the harder it will be for criminals to engage with your business.
Keep reading to learn more about how to spot potential money laundering schemes in the real estate world.
Why is the real estate industry a target for money laundering?
Money laundering in the real estate industry can involve complex transactions aimed at disguising the origin of funds. This in itself can make the real estate sales and purchases vulnerable to money laundering but it doesn’t stop there.
Other risk factors include:
- As a real estate agent, you naturally provide legitimacy, normality, and respectability to property transactions. This can be used as a shield for criminals to hide behind to conduct illegitimate activities.
- Large amounts of money are often part and parcel of property transactions. This can enable the movement of millions of dollars without raising suspicion.
- Trusts, nominees, and companies can often form part of a property purchase. Without proper due diligence to establish the beneficial owner, the source of wealth and funds can be hidden.
- Real estate is a speculative market where values can be difficult to assess, making it easy to under or over-value to enable money laundering.
- Real estate transactions provide access to various financial vehicles (such as loans) that can be used to launder funds.
- Property can provide legitimate income to mix with illicit proceeds.
- Offenders have a large choice of real estate professionals and they will seek out the agent or company they feel they can best exploit to meet their criminal intentions.
Criminals find ways to get ahead and so if there are vulnerabilities in your processes, they will exploit them. Financial services have often been seen as the biggest opportunity for money laundering, but wherever financial transactions take place, criminal elements can look for an opening to disguise the source of funds or hide the beneficial owner. This is why it is important to ‘know your customer’ and continue to do your due diligence each and every time.
Real estate red flag typologies
The Financial Action Task Force has identified key real estate typologies as part of its efforts to combat money laundering. These typologies serve as red flags for real estate transactions that may be associated with illegal activities.
Typologies include:
Use of complex loans or credit finance
It is very important that you understand if there are multiple loans attached to a property. They should be able to be seen on the property title, and the description will tell you whether or not it is incumbent on the debt.
If there is an unknown person incumbent onto a property you should consider this a red flag. While banks will likely carry out due diligence for large cash transactions being transferred across banks, they also probably deal with tens of thousands of transactions a day and the onus is on you to ensure funds are legitimate.
Use of properties to conceal money generated by illegal activities
While the property market can seem a long way away from the world of money laundering it is real risk which should be taken seriously. In June this year, a New Zealand real estate agent was given a formal warning by the DIA for failing to meet their AML/CFT obligations relating to the establishment, implementation, and maintenance of an AML/CFT programme.
The company was not considered to be involved in money laundering but like all real estate entities they do have an obligation to meet requirements under the New Zealand Anti-Money Laundering Act.
Mike Stone, Director AML/CFT DIA reiterated:
‘Real estate is used by criminals to launder money, domestically and internationally. Real estate agents must have robust processes in place to manage and mitigate the risk of being misused by criminals for money laundering.’
‘Non-compliance is unacceptable in New Zealand’s anti-money laundering system. As a supervisor, DIA has a responsibility to act on non-compliance to contribute to a robust AML/CFT system and ensure New Zealanders can trust the integrity of the real estate sector in Aotearoa.’
Another real estate money laundering example includes:
A provincial real estate agent who was issued with a formal warning for failing to have adequate policies, procedures, and controls for monitoring compliance. They were required to take immediate action to rectify all areas of non-compliance and received continued monitoring from DIA officials.
Conducting AML processes can at times seem like an arduous process and not relevant to your everyday business. However, the money laundering threat is real, and whether we like it or not real estate agents have an obligation to have robust processes in place to protect the handling of property transactions from misuse.
The DIA stated that ‘there is evidence that New Zealand real estate is used by criminals to launder large sums of illicit capital. For example, in the financial year ending June 2021, 100 properties totalling NZD 73.7 million were seized by NZ Police, which was an increase from the previous year where 51 properties totalling NZD 55.7 million were seized.’
Use of corporate vehicles
Commercial investment trusts, nominee companies and limited partnerships are common corporate vehicles. And, one of the most common is use of property to conceal money generated by illegal activities.
Knowing these vulnerabilities doesn’t mean we have to do enhanced due diligence on all vendors but knowing your vendor, understanding their occupation, what they do and how they might have accumulated their wealth is important. For example, if your vendor is on a very low income and has been for the last 20 years but owns a $1m dollar property and you don’t know how that came to fruition, it’s probably important to delve a little deeper to understand how that happened.
What are the red flags for money laundering in real estate?
There are a number of scenarios which may occur when dealing with property transactions which should raise red flags. Below is a summary of the most common suspicious indicators.
The client is linked to organised crime groups or is politically exposed person (PEP)
At tic company we run a PEP check every single time we run customer due diligence checks, even if a customer has onboarded with us before. This is a critical part of due diligence as it is important to understand when you’re exposed to a PEP, and PEP status can change at any time. For example, if a prime minister or other government official (domestic or international) sold a property, understanding how they obtained their wealth and funds is important to establish to ensure you are not facilitating money laundering or other illicit activity.
Buyers and sellers collude to create a legitimate transaction to hide the proceeds of crime
While it might not seem very likely you could encounter a situation where somebody comes in to buy a property and they are colluding with the seller. This is why you need to ‘know your client’ and understand the origin of funds.
The client works in an industry or occupation that has a high risk of ML/TF
Consider whether your client’s occupation could expose them to money laundering or provides them with the ability to acquire illicit funds. For example, imagine your client works with cryptocurrency and invests in bitcoin. While their use of bitcoin may be completely legitimate, as a worldwide transacting currency, bitcoin can be used without any boundaries so carries an additional jurisdictional risk which you should be aware of.
Also consider whether your client works in a cash intensive industry like bars with pokie machines, casinos, or any industry where the movement of cash can be fast and include large sums of money. This movement of cash can disguise the origin of funds, and offer a degree of anonymity which can be taken advantage of.
The client is a high-net worth individual
Often property sales can involve clients with a very high-net worth. Having great wealth is not in itself suspicious but remember large amounts of money can provide a gateway to bribery and corruption so should be considered a risk. Ensuring you understand why individuals are high-net worth, correctly identifying them, understanding why they are involved in the property transaction and what part they play is important. Are they the vendor themselves or are they in a beneficial ownership chain? If there is a large chain four or five layers deep and they’re at the end that tends to be high risk because they are effectively acting as nominees.
The legal structure of the client is frequently altered, including name changes and transfers of ownership
Making frequent name or ownership changes can help confuse and disguise the identity of the ultimate beneficial owner. If somebody goes to sell a property, and you are working to identify shareholders but your client prevaricates or says there is no need to carry out checks on a specific person as they are being replaced that should be considered a red flag. Compliance officers need to make a risk based decision on what the change of ownership means and if necessary, make further investigations. For example, your due diligence may need to capture both the retiring and new person coming on board.
The client makes it difficult to identify the true beneficial owner or individual with effective control
Understanding the beneficial owner is a key factor in the fight against money laundering. If you are interacting with a person who is acting on behalf of their client, the ultimate beneficiary is effectively hidden. It is important that you identify the person, or understand from the person acting on behalf who they’re acting on behalf of and why that situation has occurred.
A nominee is used by the client, and the beneficial owner is added to the sale and purchase agreement at the last minute
If you get a situation where you have a ‘live’ property listing and a beneficial owner is unexpectedly revealed after the sales and purchase agreement is completed it is important to conduct further customer due diligence (CDD). You might also want to consider whether it is necessary to submit a suspicious activity report (SAR) if your client cannot satisfactorily explain why the beneficial owner has suddenly been revealed.
The client shows interest in purchasing property without normal levels of interest in price, characteristics of the property, or other details
If your client doesn’t show the usual interest in the price of the property, offers an unusually high price, or demonstrates a lack of interest in getting a better price for a property, that should be considered a red flag. Currently, customer due diligence is carried out on the vendor but should an offer be made that is too good to be true, carrying out CDD is advisable as is submitting a SAR.
There is an unusual involvement of third parties
Third parties can often be used to help complete a transaction, but if nominees are unexpectedly being introduced, or you suddenly find out your client is working on behalf of somebody else that should raise a red flag. Ensure your due diligence is completed on all relevant individuals and you understand who individuals are working on behalf of.
There is sudden activity from a previously dormant client
Imagine somebody that was in the developer community, spent several years not doing anything and then suddenly wants to sell a whole bunch of properties again. That is unusual and could be considered a red flag in itself. It may seem unlikely but we have come across such a case, which when investigated through media checks showed the reason for the long quiet spell was ten years imprisonment and a declaration of bankruptcy.
Doing your checks and knowing your client will help you understand any risks and the actions, if any, you need to take.
The client/customer offers to pay extraordinary fees for services that would not ordinarily warrant such a premium
This is a situation to be careful of as it can not only indicate suspicious activity but if extraordinary fees are received it can also be seen as bribery being accepted. Raise this as a red flag and ensure there are legitimate reasons for the exorbitant payment.
Payments are received from un-associated or unknown third parties, and payments for fees are in cash where this would not be a typical method of payment
If you know you are about to get a deposit into your trust account from an individual but the deposit unexpectedly comes from a company that they’re not attached to or involved with at all then you should address this straight away. Review and decide whether it is something you need to log as suspicious activity.
Jurisdictional risk
Consider jurisdictional risk, not just from a regional aspect but also how the details of your property transactions might encompass countries with poor or insufficient AML or CFT measures.
The FATF has black and grey lists which they update three times a year to show the list of countries under increased monitoring. The high risk jurisdictions are on the “black list” and the FATF urges at a minimum that enhanced customer due diligence is completed for any individuals that have a connection to a country on the black list. In most circumstances we would suggest not dealing with that client as the ML/TF risks are very high. You can also use knowyourcountry.com or the Basel Index to help you identify countries with high risk profiles. And of course, if you’re a tic company client you can always ask us.
You should also look out for countries who:
- Have a high level of corruption or bribery.
- Are used for tax evasion, such as the Cayman Islands or the British Virgin Islands.
- Are associated with organised crime or terrorism financing.
- Include conflict zones (and their bordering countries).
- Are associated with the production and/or transactional shipment of illicit drugs or people trafficking.
- Are subject to sanctions and embargoes, i.e., Russia.
What to do if you find a red flag
If you see any red flags that cause concern try to gather as much information as possible. This will help you make a risk assessment and assist you if you decide to submit a suspicious activity report. Ensure you have details of the nature of the transaction, when it occurred, the people and entities involved. Record your client’s situation, for example, are they downsizing or upsizing, are they buying a family home, a bach or investment property, or are they living overseas?
If you do notice anything unusual escalate to your compliance officer who will be able to help decide if enhanced due diligence is required, or if a SAR needs to be filed. If you are the compliance officer and you are not sure what to do, reach out to your support network, or if you are a tic client talk to us and we can help you assess the risk.
Remember SARs need to be filed no later than three working days after reasonable grounds for suspicion is formed. Your report will need to focus on showing the nature of the client relationship, the due diligence that was undertaken, the information you have collected to date, and the reasons for submitting a report.
For more on SARs or for help with dealing with AML compliance speak to our team on 09 369 6867 or email us on info@ticcompany.com
Nicola Hankinson 
tic company 
