Best of 2016: Money Laundering Schemes in Real Estate

Posted on December 27, 2016 at September 8, 2017 by Ahmed Taimour 2089 0

As 2016 draws to a close, we’re taking a look back at some of the most valuable insights our authors have shared. In case you missed it, this is one of the articles our readers couldn’t get enough of this year.

Real estate is an established method of money laundering internationally; the Financial Action Task Force (FATF) has recognized that the real estate sector is a high-risk sector for money laundering, and it frequently attracts criminals who want to launder their dirty money. So why it is easier to launder money through real estate than the banks?

It’s simpler to launder money through real estate than other avenues because the related governance regulations are not robust in many jurisdictions. Here are 3 main examples of significant regulatory weaknesses in three major countries:

United States: Real estate brokers and agents are exempted from performing due diligence over the buyers.
Australia: There are no reporting requirements over the real estate brokers and lawyers.
United Kingdom: Any foreign company can buy property in the UK without having an in-country presence.

Compared to other methods, money laundering through real estate – both residential and commercial – can be relatively uncomplicated, requiring little planning or expertise. Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.

How big of a problem is this in the real estate sector?

The Global Illicit Financial Flows Report estimates that China, Russia and India are the top three countries receiving ill-gotten money moving out of the U.S. Chinese nationals are on the top of foreign buyers of the Australian real estate, with nearly $6 billion in 2013. Indians and Russians are among the largest non-Arab investors of real estate in Dubai. Between 2012 to 2014, Indians only invested more than 44 billion dirhams in the Dubai real estate market (more than US$12 billion).

How does the ill-gotten money seep into the real estate sector?

There are various methods and schemes launderers use to clean up money through real estate. Let’s summarize the most important methods:

Cash deposits. The easiest and most common way, used by amateur money launderers.
Meaning: to use cash to buy the property.
Example: Criminal X will buy a property costing US$1 million using banknotes or a check. To add sophistication, X may arrange for numerous small payments from various bank accounts in order to avoid hitting any regulatory reporting threshold.
Renovation and selling as high-end property.
Meaning: to add some value to the property and buy it with a higher price.
Example: Criminal Y is in a relation with the criminal X, who buys a property costing $250,000. X spends renovation and decoration expenses of $50,000. Then X sells it for $700,000 to Y after renovation.
In direct payment.
Meaning: to use a third party to buy the real estate on behalf of the money launderer.
Example: X gives the cash to Y, who buys a property under the Y’s name, although the ultimate owner will be X.
Using a Loan or Mortgage. This is one of money launderers’ preferred “safe” methods.
Meaning: to apply for a mortgage to buy the property, then settling the mortgage in full after a short time.
Example: Criminal X applies for a 25-year, US$10 million loan with ABC bank to buy a luxury property. After a few monthly installments, X reaches ABC to settle the mortgage in full without considering any additional charges, service fees or penalties will be paid to the bank. Take note that taking a mortgage to buy a property is not a red flag, but settling a large, newly-obtained mortgage is a major red flag!
Under valuation.
Meaning: to record the property value on a contract of sale that is less than the actual market price. The difference between the contract price of the property and its true worth is paid secretly by the purchaser to the vendor using illicit funds.
Example: Innocent person A wants to buy a property with a maximum budget of $200,000. Criminal X reaches out to A and convinces him that he will sell him a property with a market value of $350,000. The difference of $150,000 will be paid secretly by X to A.
Successive selling / Parking the property.
Successive selling meaning: to sell the property many times to confuse the audit trail.
Example: Criminal X buys a property at $500,000. X sells it to criminal Y for $550,000. Y sells it to criminal Z for $650,000, etc.
Parking the property meaning: to buy a property and keep it for some time, then sell it with a higher value.
Example: Criminal X bought a property for $250,000. He is asking a selling price of $600,000, although the market price is lower and the economy is going down, pulling the real estate sector with it.
Leasing.
Meaning: to rent properties to generate rental income. In an effort to legitimize illicit funds, they provide the tenant with illicit funds to cover rent payments, either partially or in full.
Example: Criminal X rents his property to A for $10,000 per month. Criminal X agrees with A that X will give secretly A the $10,000 to be paid on a monthly basis.
Oversees ownership. This is the method most commonly used by corrupt public figures, tycoons and organized crime mafias.
Meaning: to establish shell companies in a weak-regulated / highly-corrupted country, and then use this shell firm to buy a property in another country that doesn’t require the presence of the buyer within its national borders.
Real life examples: Government officials in Malaysia have invested millions of dollars in real estate along with holding over 400 companies in more than 25 countries. One of the previous Malaysian prime ministers was investigated by U.S. authorities for buying over US$1 million in property through various shell companies.

I’ll cover red flags in a forthcoming article.

Conclusion

Criminals are likely to continue to use real estate to launder illicit funds due to the lack of regulatory reporting requirements in the industry. However, many governments (especially UK and Australia) are moving toward strengthening their regulatory reporting requirements and ensuring better governance over the real estate monitoring system.