Why Real Estate Appeals to Money Launderers: A Closer Look

Why Real Estate Appeals to Money Launderers: A Closer Look

The Real Estate Sector is considered at significant risk for Money Laundering (ML), Financing of Terrorism (FT), and Proliferation Financing (PF). Such a ML/FT and PF risk to the real estate sector originates from various features of the real estate business itself. This infographic digs deep into finding out why real estate appeals to money launderers and has become a preferred conduit to disguise their illicit money.

The factors contributing criminals and money launderers to prefer real estate as a mode for money laundering are discussed as follows:

High-Value Transactions:

The subject matter of real estate business is property, be it housing or commercial which is a highly valuable asset whose value tends to appreciate. Due to the high-value nature of the real estate, it ends up supporting high-value transactions. This feature attracts money launderers as they can disguise large amounts of illegally derived funds through the purchase, rent, or sale of real estate, which provides an opportunity to place, layer, and integrate illicit funds into the financial system.

Real estate can also be bought or sold through cash, making it even more vulnerable to criminals who pump their cash and park or invest it in the form of property.   

Cross-Border Transactions:

Many Real Estate projects are undertaken on an international scale with the goal of attracting foreign investors and funding.

However, this feature of the real estate sector comes with its own set of risks. The risk here lies in facilitating payments and disbursements of funds across borders.

The cross-border transaction facility provided to investors often gets misused by money launderers outside the country to funnel their illicit funds from one country to another in the guise of a real estate transaction, thus helping with the layering and integration of illicit proceeds.

Even the most experienced bankers and transaction monitoring analysts face ambiguity while deciding whether the real estate transaction across borders is a genuine one or an illusion created by money launderers to launder illegal funds as both the genuine or ill-motivated cross border transaction exhibit similar features such as routine disbursements, routing of funds to and from different jurisdictions to pay for real estate, inward remittances from offshore accounts, etc.

Involvement of Intermediaries:

Real estate transactions and dealings do not require the parties to the transaction to appear in person to execute a real estate agreement or sale/purchase/mortgage/lease deed as this task can be delegated or assigned to intermediaries such as real estate agents or agencies specialising in facilitating real estate transactions for individuals or entities across the world. With the involvement of such intermediaries, it becomes difficult to identify the authenticity, legitimacy, and intent of the parties to real estate transactions, making it an easy target for money launderers.

To add to the vulnerability, the involvement of gatekeepers such as lawyers, accountants, and conveyancers as intermediaries adds to the difficulty in identifying the involvement of money launderers or criminals behind the transaction as gatekeepers create an image of authenticity.

Concealment of UBOs:

As real estate transactions involve legal entities entering transactions, it appears on paper and on surface that a legal entity or a legal arrangement is entering a real estate agreement and transaction through their authorised signatories.

However, the ML/FT and PF risk lies behind the identity of the actual puppeteer, i.e., the natural person possessing significant control or beneficial ownership (also known as ultimate beneficial owner -UBO) of such a legal entity or legal arrangement. It is possible that the beneficial owner or person with a controlling interest is a criminal who is getting business done through the mask of a legal entity or legal arrangement.

The purchase/sale/lease of real estate can be conducted by money launderers by hiding their true identities  through misuse of complex business structures such as shell companies, trusts, fronts, nominees or nonprofit organisation etc.

Anonymity and Privacy:

Many real estate transactions these days are executed by persons holding Power of Attorney (POA), which provides anonymity to the UBOs behind the transaction, also the use of virtual assets to execute real estate transactions makes it attractive for money launderers to further their money laundering motives as virtual asset transactions provide anonymity to the originator as well as the beneficiary of the virtual asset transaction.

Subjectivity around Valuation:

Launderers can buy/sell/lease real estate at any value (usually higher than market value), usually as a tool to commingle illegally gotten money with legitimate earnings or profits by exploiting the subjectivity around the valuation of a real estate property as its value inflation can be justified through renovations and refurbishments to manipulate property price that confuses or convinces the authorities that subject matter of transaction is indeed quoted justly, facilitating money laundering by exploiting subjectivity around valuation.

Conclusion

Real Estate businesses and aspirants such as buyers/sellers/lessors and lessees need to beware of the underlying ML/FT and PF risk to the real estate sector and must enter into business relationships by ensuring adequate due diligence.

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