Enhanced Money Laundering Risks In The Real Estate Sector
The Role of Real Estate Agents in Money Laundering (ML)
Money laundering is a crime that has been in the business environment for a very long time now. However, the scope and intensity of the crime have grown dramatically in the last few years. Needless to say, it is expected to grow more disastrously in the coming years. In this article, let’s look at Money-Laundering Risks in the Real Estate Sector.
Dealing with Money Laundering Risks in real-estate business
Generally, the ML risk of a real estate agent is substantially mitigated with the help of the majority of real estate transactions, which involve both banks and non-bank mortgage companies.
However, whenever an unusual transaction happens or a situation where the client belongs to a high-risk profile, the chances of encountering a possible money laundering scheme elevate exponentially. Therefore, you must be prepared to take mitigative actions.
Being a real estate professional, you must possess the knowledge of how to undertake real estate transactions and the ability to identify, evaluate, and mitigate the risks involved with money laundering.
In addition, it requires agents and brokers to be aware of how real estate transactions might be used in illegal financing schemes, along with what steps should be taken in order to detect and deter such activities.
Types of risk in real-estate business
As a real estate agent or broker, If you are familiar with the signs of money laundering activities in the market of real estate, then it can help you in.
- Identifying the potential money laundering activities
- Take required preventive steps in order to mitigate the risks involved with money laundering
- If required, communicate with the dedicated authorities to help deter and mitigate the potential use of real estate in money laundering schemes.
Financial experts and law enforcement have identified a few warning signs about money laundering related to real estate. Therefore, in order to minimize and mitigate that risk, several jurisdictions have issued a few guidelines.
Every broker or a real estate agent should be aware of the primary characteristics of a real estate transaction that may indicate illegal financial activities. Being a real estate broker or an agent, you are well versed in the fundamental processes of your industry.
Hence, it becomes effortless for you to identify any unusual or suspicious activities. Regulators, The International Community, and Law Enforcement have identified a few money laundering activities or risk factors. These risk factors or red flags can be categorized into three groups: transaction risk, geographic location, and the nature or profile of the customer.
1. Geographic Risk
The geographic risk might come into the picture because the customers or the source of customer’s funds are geographically located in a jurisdiction that has a weak AML compliance regime, supports or gathers funds for the terrorist groups, or does belong to high-risk individuals under the influence of political powers, leaders, or parties.
2. Customer Risk
Sometimes the risks are associated with the customer’s point of view as well. These might include the following.
- The difference between the property and the buyer’s buying capacity
- Unusual involvement of third parties
- Titling a residential plot in the name of the third party like a friend, business associate, lawyer, or a relative
- High-ranking political foreign officials or the members of their family are parties to a real estate transaction
3. Transactional Risks
Here are a few transactional risks in the real estate sector.
- Over or undervalued properties
- Use of hefty and unexplained amount of money
- Buying property with inconsistent or unexplained income or occupation
- Immediate resale of the purchased property
- Excessive speed of transactions without a valid explanation
- Unusual sources of funding
- Buying a property without having any interest in the core characteristics of a property
- Any other activity that might account for suspicion
Actions Need To Be Taken In Order To Mitigate The Risk in Real-Estate Sector
There could be only a single risk factor or even multiple risk factors that can be present in the ecosystem. The role of a real estate agent is to be aware of such risk factors and practice sound judgment on the basis of their knowledge of the real estate industry. One should also be prepared to take necessary mitigative actions when the red flags are thoroughly identified. Here are a few actions that you should take in order to mitigate the AML risks in the real estate sector.
1. Know Your Customer (KYC) And Customer Due Diligence
Knowing your customer is one of the most critical elements of the various roles of a real estate agent or a broker. It can help you in identifying and combating any sort of money laundering activities.
Assessing the risks associated with Money Laundering is one of the most traditional ways for real estate agents or brokers in order to lay a foundation of trust in their respective clients.
In situations where the red flags are identified, the real estate agent should seek help from Customer Due Diligence (CDD) protocols. The process of CDD includes the following aspects.
- Ask for additional information and documents supporting that information, like an Emirates ID, driver’s license, or a passport. It is essential for you to ask for the papers that clearly and legally establish the customer’s true identity.
- If there is the involvement of a legal entity, ask for additional information that clearly states the ownership and its rights. It is commonly referred to as beneficial ownership information.
- Ask for additional information that can help you understand the circumstances and the nature of the client’s business.
In addition to that, depending upon the company’s size, it would be ideal for the agent to notify and discuss the scenario of the high-risk clients with the senior-level management. This is important in order to identify the red flags and monitor the relationship between them if found any.
2. Report The Suspicious Activities
The real estate agent should report in case if he or she encounters any type of suspicious activity. For example, these suspicious activities in the real estate industry might include the following.
- When the price is either over or under-quoted for a particular property as per the market valuations.
- If the payments are made with the bank accounts from the high-risk associate geographies or politically exposed personnel (PEPs).
- Unusual transactions or the history of accounts/ account holders.
About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.
