In recent years, the use of the real estate sector for money laundering has increased significantly. Real estate money laundering supports criminal activities, and produces negative impacts on countries’ real estate markets and overall economies. Only a small number of countries presently require the real estate sector to comply with anti-money laundering laws, and best practices for both preventing and identifying money laundering through the real estate sector have been slow in coming. This is surprising, given studies on the subject by both international and national anti-money laundering organizations. The large number of money laundering real estate related suspicious transactions filed, legal cases involving real estate, and media attention. There are a number of reasons for this.
The real estate business differs from country-to-country. Specifically, the ways in which real estate transactions are conducted worldwide differ significantly. Business practices differ. Regulations at the national and local level differ. Different cultural habits and values also play a role in real estate transactions. The size of the market also differs. Finally, technology has made real estate markets global through the use of the Internet. All these factors make it difficult to adopt uniform best practices. AML/CFT regulation of the real estate profession, much like other designated non-financial businesses and professions, has taken a back seat to the more central focus of financial intelligence units in banks and a few other entities like money services businesses. Another reason is that real estate professionals and lawyers in many countries are fighting implementation of regulations, claiming the regulations are not necessary and would be unreasonably burdensome.
The large number of real estate transactions and perceived difficulty in identifying suspicious characteristics in real estate transactions may create the biggest obstacle. The answer to this obstacle is a risk-based approach. What would persuade countries to do more? Do we need to share more information about money laundering in the real estate sector, including the negative impacts, suspicious characteristics and AML/CFT best practices? Real progress is being made in a small number of countries which are providing information that can help in developing a risk-based approach.
Impacts of Money Laundering Through Real Estate on Markets and the Overall Economy
Money launderers often invest their proceeds of crime into real estate or other sterile assets such as high-value luxury items. A study in Australia of money laundering in real estate revealed a significant impact on Australia’s economy. The Australians calculated that $4.5 billion is laundered in the country and 23 percent of this is invested in real estate. Unfortunately, this amount, almost $1 billion, is reallocated from other sectors to consumption of dollars from victims and drug users and not put to use in the economy. Economists have concluded that this kind of ownership of dwellings yields the lowest economic benefit for each dollar invested. This is supported by the economic multiplier effect of this reallocation in terms of changes to economic output, income demands and employment. The study estimated that when $1 million is reallocated to real estate, there is an average net loss to the economy of $1.43 million in output, $576,000 in income and 20 jobs. By investing in real estate, money launderers also cause significant inflation in the real estate sector.
Africa, more than other parts of the world, may be experiencing greater increase in the use of real estate as a money laundering technique. During a recent assignment to Kenya, I was able to hear firsthand how money laundering is adversely impacting Kenya’s real estate sector.
In Kenya, Somali pirates are taking proceeds from hijackings and laundering them in the real-estate markets of Nairobi and Mombasa. Because war-torn Somalia has been without a cohesive government for over a decade, conditions are poor and the country offers few opportunities for these criminals to launder money. Somalia investors have created an artificially inflated market in real estate in Nairobi, where buildings are going up everywhere and house prices and rents have doubled. In suburbs in Nairobi, a four-bedroom home which sold for $200,000 five years ago sells for $500,000 today. Somalians now own estates that Kenya’s middle class used to occupy. The area of Nairobi where most of the money laundering takes place is Little Mogadishu, named for Somalia’s capital city. Implementation of Kenya’s anti-money laundering law has been slow. It has been only recently that the government has taken steps to make the financial intelligence unit operational. Like most countries with recent enactment of money laundering laws, real estate money laundering takes a back seat to money laundering in the banking sector. Perhaps regulating the real estate sector for money laundering should become a priority in Kenya.
Approaches to Detecting and Deterring Money Laundering through Real Estate
In developing regulations to detect and deter money laundering, countries should adopt regulations which fit the real estate market and existing regulatory framework in their country. Realtors are in the best position to utilize best practices for detecting and deterring money laundering because they are more knowledgeable of the buyers and sellers. Given the number of real estate transactions, it is essential that a risk-based approach be adopted that limits the amount of information required and focuses on the specific suspicious characteristics of money laundering through real estate.
Providing useful information of selected suspicious characteristics is a first step. Other African countries have recognized this need. In 2009, a group of West African countries belonging to the Inter- Governmental Action Group Against Money Laundering in West Africa participated in a comprehensive study of money laundering through real state. The study “Typologies of Money Laundering through the Real Estate Sector” focused on the operations of real estate agencies and agents and included interviews with financial intelligence unit staff, real estate professionals and police. Among the most significant results was a list of 26 characteristics of transactions that could be indicative of money laundering.
In South Africa, both media and court reports describe the role of criminals in carrying out fraud schemes and of drug traffickers buying up or developing property. The South African approach uses information from both government agencies and realtors. The Financial Intelligence Centre Act required real estate agents to conduct due diligence, maintain records and file reports when appropriate. Specifically, real estate agents must maintain the following information for five years:
- The identity of the client, client’s agent, and client’s client,
- The manner in which the identity was established
- The nature of the business relationship or transaction
- The parties to the business transaction and the amount involved-
- All accounts involved
- The name of the person who obtained the information
- Copies of documents obtained by the institution.
South Africa’s Estate Agency Affairs Board (EAAB) has been working with agents on compliance and raising awareness. Most important, the EAAB reassures agents of the confidentiality of filing suspicious transaction reports.
Providing useful information of selected suspicious characteristics is a first step
Efforts to develop a risk-based approach for both the real estate industry and government regulators are frustrated by both the large number of transactions and the number of suspicious characteristics. Researchers in the Netherlands have completed a study, the results of which have provided some assistance in this problem area. In the 2011 book, Money Laundering through the Real Estate Sector. Authors Brigitte Unger and Joras Ferwerda identify a total of 25 characteristics that render a property conspicuous (suspicious) and possibly being used for money laundering. One of the goals of the project was to differentiate conspicuous real estate transactions from all the ordinary ones. The study found the more conspicuous these properties are, the more likely there is to be money laundering involved. Characteristics that weigh heavier include (1) ownership by foreigners, (2) newly established companies and (3) properties with unusual price fluctuations. The more characteristics, the greater the susceptibility. The study was a collaboration between economists and criminologists who examined real estate transactions in two cities: Utrecht and Maastricht, Netherlands. For those countries which desire to trace money laundering patterns in selected cities, this model can be replicated in other countries.
In the development of a risk- based approach to money laundering through real estate, countries must study the roles of government regulators, real estate agents and other parties to the transactions. They must determine if agencies other than financial intelligence units such as registration agencies and real estate boards have the regulatory authority to perform some of the AML/CFT functions. They must determine what typologies of money laundering through real estate exist within the country. Finally, they must determine what regulations should be placed on the real estate industry that is both effective and the least burdensome.
Negative impacts from money laundering through real estate include support of crime, inflation in the real estate market and reduced activity in the overall economy. There is sufficient information available for countries to develop a risk-based approach uniquely suited to their country to deter and detect money laundering. More countries should undertake studies to determine the kinds of money laundering techniques that are unique to their country, in order to develop best practices for deterring and detecting money laundering in the real estate sector.