How Do AML Checks Help Real Estate Agents?

The real estate market is exposed to financial crimes due to its high value and complex nature, and criminals conceal their illicit funds without getting noticed, making it easy for them to layer mechanisms.

GI created a database that tracked the 100 money laundering cases in the UK. US, Canada, and $2.3 billion in money laundering were reported through US real estate per the Global Financial Integrity (GFI) report between 2015 and 2020.

This alarming figure emphasizes how necessary AML checks are for estate agents to prevent financial crimes such as money laundering and compliance with AML regulations.

Why Are AML Risks Increasing in the Real Estate Sector?

AML risks are increasing in the real estate field due to the following reasons:

Real Estate Attracts Money Launderers

Criminals find ways to invest their laundered money in stable assets that can be transferred easily;  this makes real estate an attractive and safe place to invest and conceal illicit funds.

Money launderers prefer markets where the possibility of obtaining profits is higher and there is a low risk of being supervised, such as real estate.

Gaps in Real Estate Supervision

Real estate transactions are often not supervised strictly, unlike other financial transactions. Proper AML measures are not conducted as are recommended for other financial transactions.

Thus making it attractive to money launders to exploit the real estate sector for illicit activities. AML estate agents must be mindful to adopt the best practices for robust AML compliance.

Dubai’s real estate sector has been exposed to money laundering involving PEPs and RCAs. It has weak AML checks for estate agents, such as failing to conduct due diligence properly and having weak supervision enforcement bodies.

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AML Complexities in Cross-Border Real Estate Transactions

Buyers, investors, and sellers from different countries deal in real estate transactions, making it complex to identify the funds’ origin and flow; thus, detecting money laundering-related activities is challenging.

Tax Evasion Through Cash Payments

Criminals invest in real estate by paying a significant amount to purchase or renovate property. Cash payment benefits sellers and launderers in terms of tax evasion.

One doesn’t get reported about the deal for not paying tax. High-value transactions allow money launderers to hide illicit funds.

Higher Profits Through Discounted Property Sales

Service providers such as constructors or renovators give discounts to money launderers by accepting the payments in cash to avoid taxes, which must be paid through bank transactions.

Thus, money launderers gain higher profits by selling property purchased from service providers than by buying from legitimate real estate investors.

Challenges in the Identification of Beneficial Owners

Money launderers use other individuals as business owners to make identification of beneficial owners difficult; thus, the risk of detecting the actual beneficial owner is reduced.

Financial criminals blend illicit money with legitimate funds in real estate dealings. Therefore, lack of transparency opens doors for money laundering.

These factors emphasize the need for strict regulatory oversight, such as including anti-money laundering checks for estate agents similar to other financial institutions to bring transparency in the real estate industry for combating financial crimes such as money laundering.

How can real estate agents manage the risks through AML checks? Learn below.

What Are AML Checks for Estate Agents?

The Financial Action Task Force (FATF) published “Guidance for a Risk-Based Approach to the Real Estate Sector” in July 2022.

This Guidance applies to all real estate types: “residential, commercial, agricultural, industrial, rural, and others”.

Following is a brief explanation of AML check:

Customer Due Diligence (CDD)

• Recommendation 22 of the guideline explains that, like other financial institutions, Customer Due Diligence is integral to AML compliance for estate regents and will apply to all DNFBPs.
• REAs must collect all the information about sellers, investors, and buyers to evaluate the risk of financial crimes such as money laundering or terrorism financing.
• Clients that might pose high risks, such as politically exposed persons (PEPs), need a higher level of CDD.
• REAs identify their clients, the risk they pose, the source of the money, and other characteristics through CDD.
• ID cards, vehicle licenses, home addresses, birthday certificates, and other reliable sources verify the identity of clients.
• Enhanced due diligence (EDD) is applied to PEPs or clients who may pose higher risks.

Enhanced Due Diligence (EDD)

• Real estate agents must conduct Enhanced Due Diligence (EDD) when there is the possibility of higher risks of financial crimes.
• EDD is required in estate agent’s AML processes when higher-risk entities such as PEPs and higher-risk countries are involved and sanctioned due to breaching AML regulations or being banned from trading by the UN.
• EDD is needed in certain situations, such as when clients like PEPs and RCAs hide their ownership or deliver insufficient data about sources of funds.
• Moreover, if clients use virtual assets without declaring the source of funds, EDD checks must apply.
• During the transaction process, risks can be reduced by performing EDD, as most real estate transactions do not go through ongoing monitoring.

Risk Assessment

• A Risk-based approach is a significant component of an estate agent’s AML processes to evaluate the potential AML risks of financial crimes such as money laundering and terrorism financing associated with their business.
• AML compliance for estate agents is evaluated based on risk assessment and whether it’s robust.
• Risk assessment is conducted based on specific factors, such as considering risks associated with business, clients, and countries.
• If risks are higher, there is a need to imply stricter AML/CFT regulations, such as dealing with PEP, which needs more scrutiny.

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Reporting Suspicious Transactions (STR)

• REAs are obliged to report any transaction that might seem suspicious or suspected to be linked with illicit activities such as money laundering or terrorist financing to the relative authorities as per FATF Recommendation 23.
• When investigating the transactions, it’s important to alert the officials about possible illicit activities.
• Any transactions that fail to comply with AML regulations or want to escape the AML checks for estate agents must be reported.
• The failure to report suspicious transactions leads to severe sanctions.
• It can be a red flag when real estate transactions exceed a specific threshold, such as $10,000 in many countries. Report these transactions to comply with AML regulations.

Record-Keeping

• Keeping a record of all the transactions and CDD-related data is a must part of the AML responsibilities of an estate agent.
• Law enforcement agencies and regulatory bodies can examine and review this paper log and evaluate its performance, which they can use in audits.
• Authorities investigate past transactions to track down the flow of funds for money laundering and the clients involved in illicit activities.
• REAs must keep copies of all internal data related to the transaction, risk assessment, and customer identification processes for at least five years after the deal has been ended or the transaction has been completed according to recommendation 22 of FATF.

Beneficial Ownership

• According to FATF’s recommendation 24, AML checks for estate agents should be performed to understand who owns and controls the company or real estate deal when involving a legal entity.
• According to AML/CFT guidelines that fulfill the AML responsibilities of an estate agent, the required data for verification of beneficial owners must be evaluated.
• Keep a record of all additional measures and procedures taken to identify the ultimate beneficial owner; moreover, keep a record of the challenges experienced while verifying.
• Conduct thorough research about already publicly available data about beneficial owners of financial institutions or DNFBPs.
• If REAs fail to apply CDD checks on beneficial owners, then train the team (real easter agents and MLROs) to detect and report suspicious transactions related to money laundering to authorities.

AML/CFT Policies and Compliance Officer

• Real estate agencies must have an internal AML/CFT framework based on the risk level, including AML policies and procedures to combat financial crimes such as money laundering and terrorist financing.
• Appoint a Money Laundering Reporting Officer (MLRO) to supervise the AML responsibilities of an estate agent, such as “implementing the firm’s AML measures, overseeing employee training, monitoring transactions, and ensuring that the company complies with AML laws.”
• A compliance officer confirms that the estate agent’s AML processes comply with AML/CFT guidelines and laws by conducting risk assessments, monitoring STR, and preserving the integrity of the AML framework within the real estate sector.

Training and Awareness

• Conduct an Evaluation Screening Process for real estate experts during and before employment to assess the skills and required training for achieving robust AML/CFT compliance.
• AML/CFT training is compulsory to cope with amendments in AML practices to evaluate and manage the risks related to financial crimes.
• According to business AML requirements, the size of the firm, the level of risks, and training are conducted.
• Experts like MLROs should know updated AML/CFT guidelines and trends to report suspicious transactions efficiently.
• Participate in AML-related events to understand and maintain best practices.
• Collaborate with other real estate experts and share data to strengthen AML/CFT compliance.

How does Money Laundering Affect the Real Estate Market?

A financial system that fails to conduct proper AML checks for estate agents puts pressure on financial regulators to manage funds.

Following are examples of connections between Estate Agents and Money Laundering per the Financial Crime Academy report.

• In 2018,  illegal funds of Over £4 billion entered the UK real estate sector.
• Germany experienced funds of about  $30 billion without knowing the origin source of their property market in 2017.
• Failed anti-money laundering checks for estate agents in Canada led to an inflow of $46.7 billion in the real estate sector in 2018

Severe Penalties for Non-Compliance

• Penalties for estate agents differ from country to country based on the severity of breaching AML regulations.
• Failure to fulfill the AML responsibilities of an estate agent in Canada leads to the following penalties:
  • Fine up to CAD $5,000,000.
  • 10 years of jail time
• Penalties can be avoided by being aware of AML regulations and adopting robust AML compliance for estate agents.
• Conduct thorough customer due diligence and report suspicious transactions with AML laws in the real estate transactions.
• AML regulatory bodies and enforcement agencies know the importance of anti-money laundering checks for estate agents and enforce them by promoting collaboration  between officials and estate agents,
• Thus, it avoids penalties for estate agents in the country and ensures robust AML compliance.

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