Financial Crime Spotlight: Money Laundering Controls in the Real Estate Sector

Key risks

The money laundering and terrorism financing risks concerning real estate are well-documented. As the Financial Action Task Force’s (FATF) July 2022 Guide on the risk-based approach to the real estate sector notes, real property as an asset creates the ideal conditions for the movement of large amounts of funds between intermediaries and entities, spanning multiple jurisdictions. The scope for real property to appreciate is also a desirable trait for criminal actors laundering the proceeds of crime. 

Jurisdictions such as the UK impose anti-money laundering and combating the financing of terrorism (AML/CFT) requirements on the real estate sector and professionals. The impetus to do so arose from the various risks real estate transactions present to the UK economy, including:

• Customer Risks: typically, this risk manifests from criminal actors attempting to obscure their identity using complex corporate and trust structures to purchase and sell real estate.  Challenges typically arise from the failure to identify and verify customers of a real estate transaction, including any beneficial ownership if the customer is a corporate entity. 
• Transactional Risks: this may include manipulation of the property appraisal or valuation to overvalue or undervalue the property. Other transactional based risks arise from overstated construction and renovation costs to property or the use of complex loan and credit financial arrangements, to fund and finance property related expenses. The use of “professional enablers” notably other “designated non-financial business professionals” also pose another layer of risk where such professions act as intermediaries in transactions involving the sale or purchase of real estate.
• Geographical risks: such risks relate not only to where the real property asset is located (for example, this may be a jurisdiction where real estate yields high investment returns, such as London or New York), but includes the location of the buyer or seller, especially if they the reside or are domiciled in a high-risk jurisdiction.  The UK Economic Crime (Transparency and Enforcement) Act 2022 “Register of Overseas Entities” was adopted to respond to the increased risk of foreign actors’ beneficial ownership of UK property.
  
   

Key guidance

The UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) set out what relevant businesses must do to prevent their services being used for money laundering and impose AML/CFT obligations on:

• “Estate Agents”: the definition of an “Estate Agent” is broad - a firm or sole practitioner, who or whose employees carry out Estate Agency work (within the meaning given by section 1 of the Estate Agents Act 1979) - and includes but is not limited to those dealing with overseas property or if the estate agent engages in business with UK customers abroad.
• “Letting Agents”: the definition of a “Letting Agent” includes but is not limited to those acting on behalf of a landlord to arrange the lease of land or property to a prospective tenant.
  
  Firms operating as “Estate Agents” or “Letting Agents” must adopt and implement into their businesses AML/CFT systems and controls, including appropriate customer due diligence, risk assessments tailored to the firm’s risk, adequate record keeping practices and proper oversight by senior management. To assist with this, there are a number of  resources available to guide firms on navigating the risks posed by criminal actors exploiting the real estate sector, including:
  • Estate and letting agency business guidance for money laundering supervision.
  • HMRC Guidance risk assess your business for money laundering supervision.
  • The national risk assessment for money laundering and terrorist financing 2020.
  • The FATF Risk Based Approach Guidance for the Real Estate Sector.
    
     
    
    
     

Key takeaways

Noting the legal and regulatory requirements, firm’s operating in the real estate sector should continue to maintain adequate and robust AML/CFT controls. An October 2022 Decision Notice issued by the Financial Conduct Authority against a bank offering services which primarily focused on real estate highlighted several key AML/CFT compliance takeaways relevant for firms operating in the real estate sector: 

1. Robust Customer Due Diligence Program: customer due diligence is a cornerstone requirement of AML/CFT compliance. It must go beyond identifying merely the customer itself and include those with a “beneficial interest” in the customer. Where required, “enhanced customer due diligence” measures should also be in place, where high risk jurisdictions or persons from those jurisdictions such as foreign politically exposed persons are involved in a real property transaction. 
2. Internal Controls and Resources: this will ultimately depend on the size, nature and complexity of the firm and its services in relation to real estate.  The firm must ensure those controls are properly resourced. Depending on the type of criminal activity, firms should ensure their risk assessments adopt a combination of financial and criminal risk indicators to conduct further monitoring and identify if a suspicious activity report should be submitted to the National Crime Agency. Testing auditing and adequate record keeping practices should also not be overlooked. 
3. Day to Day supervision: in the case, major AML/CFT pitfalls arose through the lack of scrutiny towards customs transactions, particularly with respect to source of wealth and source of funds. Merely stating the requirements to screen for source of wealth and source of funds is not enough. Relevant processes and examples must guide front of house personnel and other stakeholders on how to carry out the requirements of an AML/CFT program. 

If you have any questions in relation to the AML/CFT risks impacting the real estate sector, including implementing policies and procedures to assist legal and regulatory compliance requirements, please contact either of the authors.