Real Estate and Money Laundering

In February 2022, the International Transparency Agency stated that Russians associated with the Kremlin had invested £1.5 billion in the UK real estate market. The results showed that the U.K. is a “global center for money laundering. However, criminal investments in the real estate market have been taking place for decades and have penetrated every corner of the world.

The link between real estate and money laundering is a global phenomenon and is considered one of the oldest methods of illegal money laundering. Real estate investing can lend a veil of legitimacy and normalcy to the unjustified profits made by criminals.

Profitability is also attractive, such as the appreciation of homes over time, resale value after repairs, and income generating rents. This interest extends not only to homes, but also to other types of real estate, such as vineyards and factories.

According to a recent Global Financial Integration (GFI) report, more than $2.3 billion has been laundered in U.S. real estate in the past five years. The International Transparency Agency noted that at least £4.4 billion of UK real estate investments came from politically exposed persons (PEPS) in jurisdictions with a high risk of corruption. Europol also found that 68% of criminal gangs in the EU used the real estate market to justify illicit gains.

Countless opportunities around the world, the use of golden visas, vulnerable regulatory oversight and the possibility of large investments make real estate an ideal target for money laundering.

How do criminals use real estate to launder money?

Criminals can use various methods to launder money through real estate. The use of shell companies and front companies set up in countries with lax regulation is often used to conceal the real identity of the person buying the real estate. These can be individuals in important positions, such as politicians or PEPs, who are accused of corruption or other crimes and want to avoid sanctions.

Gatekeepers also play a big role in helping fraudsters. Associate attorneys, notaries, lawyers and real estate agents are used by criminals to facilitate the purchase of real estate. In exchange for money, they can turn down a foundation organization or the person behind it.

There are many other tricks that people who break the law can use to clear dirty funds. These include selling real estate between conspiring criminals, buying a house to resell at a higher price, lending money to a colleague who is paying off a “foreclosure loan” with the necessary paperwork (the loan-back method), or buying an undervalued property to sell at market value price.

What are the laws behind real estate?

The 40 Financial Action Task Force (FATF) Recommendations on Money Laundering and nine Special Recommendations on Terrorist Financing are considered international standards for combating money laundering and terrorist financing. FATF Recommendation 22 refers to real estate and classifies it as a designated non-financial company and professional (DNFBP) subject to AML supervision. Therefore, member states should use customer due diligence procedures and AML investigations to screen companies trading in the real estate market.

In the EU, the reference to real estate first appeared in the Fourth Money Laundering Order of 2015, which required real estate agents to comply with European anti-money laundering requirements, such as customer due diligence and suspicious transaction reporting. The concept was further extended to all real estate companies under the 6th Anti-Money Laundering Directive in 2018.

To counter the flow of dirty money into their real estate market, the UK established the Unexplained Wealth Medal in 2018. The bill states that if a person cannot explain the source of their funds, their assets can be confiscated by a court without the need for an investigation. The UWO supplements the 2017 UK Money Laundering, Terrorist Financing and Transfer of Funds (Payer Information) Regulations, which require real estate professionals to meet AML standards.

The American Patriot Act of the United States states that real estate companies and agents must comply with anti-money laundering rules. As with the EU and the FATF, this means conducting due diligence on all clients. Under the Bank Secrecy Act (BSA), real estate transactions are also subject to AML scrutiny and must be audited.
The real estate department and KYC know their clients.

However, this does not apply to “all-cash” transactions, which means that real estate professionals do not need to identify clients, track transactions, and report suspicious behavior using cash to buy real estate. In December 2021, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed a “Proposed Advance Notice of Rulemaking (ANPRM)” to address this gap.