Avoiding Fines & Catching Baddies: All You Need to Know About Money Laundering in Real Estate
Peter Brooke, our Practice Lead for Compliance and Financial Crime, was recently a key speaker in a webinar hosted by First AML on the subject “Avoiding Fines & Catching Baddies: Everything You Need to Know About Money Laundering in Real Estate”. The discussion highlighted the nuances of the Money Laundering Regulations (MLRs), with real life accounts of attempts to launder money through the real estate system, and provided valuable practical guidance on how firms can avoid fines from auditing failures.
The following post summarises the key themes and takeaways from the discussion. A recording of the full webinar can be found here: Everything You Need To Know About AML In Real Estate
Real Estate as a Favoured Asset Class for Money Launders
Real estate transactions are one of the primary methods of laundering money. Such money is likely to end up in acquisitions of long term, hard assets like real estate that will hold value. This allows criminal actors to circumvent the heavier controls of the financial sector, such as the EU Anti-Money Laundering Directive (AMLD), and make dirty money appear ‘clean’ through the property market. Money launderers will target real estate agencies on the assumption that they will have significantly lower-level Anti-Money Laundering (AML) checks and resources, with Know Your Customer (KYC) and data collection at the front line sometimes conducted lethargically when dealing with high volume, high value amounts moving through a client’s trust account.
It is observable that a disconnect often manifests between compliance departments who strive for proper due diligence, and the front line who have large revenue targets to achieve. This disconnect has produced some real-life, hard-won lessons for those who have failed HM Revenue & Customs (HMRC) audits and been subject to fines – since 2017, estate agents have paid the second largest overall penalty sum of £1.6m compared to other sectors. Real estate trust accounts with high-volume transactions can make criminal detection almost impossible – this has resulted in an increasing trend for banks or insurance companies to audit agencies for their existing AML checks and monitoring framework. Insurers are increasingly wary of the risk of heavy fines carried over to them from complacent agencies, whose inadequate systems could face HMRC audit at any time.
Identifying Recurring Themes of Criminal Activity
While real estate agencies may have differing KYC onboarding operating models to bolster AML procedures, there are also four main red flags in property transactions to detect criminal activity:
Buying remotely / identity theft – buyer checks can now be strengthened through use of biometric data.
Complex buying structure – Russian money laundering cases have shown that real estate agencies may have low capacity to investigate the structure of complex legal entity buyers. This tactic is known as layering, a second stage of the money laundering process – funds gain layers of legitimacy through multiple actions, such as movement between accounts or banks, until the fund source becomes obscured.
Third party involvement – last minute changing of a buyer’s details is intentionally done towards the end of a transaction, when pressure to complete settlement is higher and compliance checks may be overlooked.
Unusual client behaviour – Tracking unusual client behaviour is relevant to identifying PEPs (politically exposed persons) for KYC purposes.
Implementation of Effective & Pragmatic Solutions
In light of these red flags, Peter Brooke discussed cost-effective methods for firms to integrate best practices, alongside better knowledge on Money Laundering (ML) key identifiers, without overhauling their entire compliance program. Companies can get bogged down by the perceived burden of data collection for checks when attention should primarily be paid to the overall risk assessment procedure. Agencies could then apply a risk-based approach to determine the appropriate level of controls for their business.
Participants of the real estate industry should consider a pragmatic methodology in finding out where the risks lie, to then implement controls based on the nuanced risk-based approach prescribed by the MLRs. This could involve either Simplified or Enhanced Due Diligence, depending on specific KYC needs. An enterprise may very well have overly robust risk assessment procedures, yet some will have virtually negligible risks of money laundering that do not require highly sophisticated compliance frameworks – the MLRs account for these differences through the risk- based approach, making AML checks a relatively simple exercise if there are low risks presented (e.g. not requiring Enhanced Due Diligence).
AML is indeed difficult and presents unique challenges. There are actionable takeaways to immediately improve safeguards, avoid penalties, and stay one step ahead of regulators. The importance of adequate checks must be explained by compliance teams to the front lines which would allow businesses to benefit from thorough and efficient checks. Competitors are in a race to do the same, so getting these checks in place will keep firms ahead of the AML curve, both financially and competitively. The key practical solution is for compliance departments to work together with front line to discern proportionate AML policies that will pass auditing.
Our Anti-Financial Crime practice comprises of seasoned practitioners with extensive global experience across a wide variety of jurisdictions. If you would value an exploratory conversation with us to discuss how real estate agencies can implement more effective solutions to manage risks associated with financial crime and money laundering please email Peter Brooke at pbrooke@new-linkconsulting.com.