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How is money laundering concealed in real estate?

Nabil Hassoumi
Nabil Hassoumi
Risk Proposition Sales Enablement Director, Refinitiv

In the UK and Europe, criminals are concealing their money laundering activities in the real estate market. How does the EU’s 5th Anti-Money Laundering Directive make it more difficult for criminals to hide their illicit funds in property?

  1. Property can be purchased via anonymous companies and trusts, making it difficult to identify who the true owners are and if they pose any money laundering risk.
  2. Estate agents could play a key role in early detection of property transactions being used as a conduit for illicit funds.
  3. Real estate companies need to fully comply with the upgraded anti-money laundering (AML) legislation, including the EU’s 5th Anti-Money Laundering Directive.

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Dirty money must be cleaned before it can be enjoyed, and the property market is just one of the many avenues used by criminals and corrupt individuals around the world to launder their illicit funds.

This opportunity arises because property can be purchased via anonymous companies and trusts, obfuscating ownership, making it difficult to identify who the true owners are and if they pose any money laundering risk.

Listen to the webinar — The 5th Anti-Money Laundering Directive: Are you fully compliant?

UK real estate a sector of concern

A UK Parliament publication on economic crime, the National Risk Assessment of Money Laundering and Terrorist Financing 2017, identified property as a sector that poses a risk of economic crime.

Duncan Hames, of Transparency International UK, noted that according to the analysis they had carried out “we found in fewer than 200 properties, at least £4.4bn (US$5.5bn)-worth of investment in UK real estate from foreign, politically exposed persons in high-corruption-risk jurisdictions.”

In the financial sector, know your customer (KYC) due diligence for AML and Combating the Financing of Terrorism (CFT) risk is mandatory, and has gradually been introduced across other sectors in some countries through revised legislation.

The real estate sector has been identified as one that exposes the financial system to money laundering risk. It is interesting to note that estate agents are only filing 0.1 per cent of suspicious activity reports (SARs) out of 621,000 SARs each year in the United Kingdom.

Estate agents could play a key role in early detection of a property transaction being used as a conduit for illicit funds. A certain amount of simple due diligence can raise red flags that there may be a risk involved.

In most cases, the conveyancing team would be involved in the KYC and source of funds checks. However, it was suggested in National Risk Assessment of Money Laundering and Terrorist Financing 2017 that from an AML perspective, each part of the transaction chain has a role in reporting, or preventing, a transaction that may be used for money laundering.

Why is Europe also vulnerable to money laundering?

Ninety percent of the money raised by Portugal’s ‘Golden Visa’ program reportedly comes from real estate investment.

A scandal which allegedly involved the purchase of property in one of Portugal’s most iconic modern buildings raised a red flag and concerns that due diligence checks were not being carried out. According to the 2018 U.S. State Department’s International Narcotics Control Strategy, which deals with money laundering and financial crimes, it was alleged that suspect funds from certain countries were being used to purchase Portuguese businesses and real estate.

Elsewhere, Cyprus’s citizenship by investment program has been caught up in the storm with the Cyprus Papers Leaks.

Reports referring to the Cyprus Papers Leaks included allegations that illicit funds, obtained through fraud and corruption, may have been used to purchase so-called ‘golden passports’ from 2017-2019.

The investment criteria required from applicants in the program is at least €2.15m ($2.5m) into the Cypriot economy, and this is most often done by buying real estate.

What AML measures can be adopted?

What concrete measures can make it significantly more difficult for the corrupt to hide their dirty money in property?

The EU’s 5th Anti-Money Laundering Directive (5 AMLD) is part of the solution.

The 5 AMLD came into force on 10 January 2020. The legislation’s regulatory controls have been extended to include real estate firms, real estate brokers, estate agents and rental intermediaries.

Watch: What’s new in the EU Fifth AML Directive and how Refinitiv can help

It has been important for all real estate companies, that provide real estate services on the residential and commercial side, to fully comply with the amended AML Directive. Failure to do so can result in severe penalties and even a criminal prosecution being taken against them.

Real estate companies must implement procedures to prevent money laundering by confirming the identity and/or identities of all vendors, buyers, leaseholders, lessors and people with significant control (PSC) of companies on residential and commercial property transactions.

The types of transaction include:

  1. Selling a property
  2. Buying a property
  3. Leasing a property with a value from €10,000 / £8,500 per calendar month.

For those in the UK real estate sector and across Europe in order to to be compliant with 5 AMLD, the most important changes to make and procedures to have in place are:

  • Letting agents must take appropriate steps to identify and assess the risks of money laundering and terrorist financing. To do this, an up-to-date risk assessment and policy on managing risk must be established and maintained.
  • Each business requires a nominated money laundering reporting officer (MLRO), who is responsible for the letting agency business’ compliance with the money laundering regulations.
  • Regular training sessions on how to recognize and deal with transactions that may be related to money laundering and terrorist financing must be provided to all employees.
  • Retain copies of customer due diligence and supporting records for up to five years.
  • If you have reasonable grounds to suspect suspicious activity, you should notify the nominated officer immediately through a written internal report. The letting agency must then complete a Suspicious Activity Report (SAR), and in the UK send it to the National Crime Agency, or elsewhere to the applicable agency.

The EU produced some information material about preventing money laundering, including How does it work in Practice? and How to carry out risk assessment, in order to identify and respond to risks affecting the EU internal market.

Of course, more can be done by introducing additional measures to curb the sector being used to launder money, including assets declarations and central registries online showing who owns what property.

Watch: Beneficial ownership screening with Refinitiv World-Check One

Promoting accountability and transparency within the real estate sector should go some way to making it more difficult for those intent on laundering their money through the sector to do so.

Listen to the webinar — The 5th Anti-Money Laundering Directive: Are you fully compliant?

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