The real estate sector is an attractive target for money launderers due to the large sums of money involved in property transactions, as well as the perceived anonymity that the sector can offer. As a result, the real estate industry has become increasingly susceptible to money laundering, with criminals using the sector to launder illicit funds, finance terrorist activities, and evade taxes. In recent years, regulators and governments around the world have recognized the growing anti-money laundering (AML) risks in the real estate sector and have implemented new regulations and guidelines to combat the issue. In this blog post, we'll explore the reasons behind the increased AML risks in the real estate sector.
Why Are AML Risks Increasing in the Real Estate Sector?
There are several reasons why AML risks are increasing in the real estate sector. Some of these reasons include:
- Real estate is an attractive investment for criminals: Criminals often seek to launder their money by investing in assets that have stable value and are easy to transfer. Real estate is an ideal asset for this purpose as it can be easily bought and sold and has the potential for significant appreciation in value.
- High-value transactions: Real estate transactions involve large sums of money, making them an attractive target for money launderers. Criminals can use real estate purchases to mix their illicit funds with legitimate funds, making it difficult for law enforcement agencies to trace the origin of the funds.
- Lack of transparency: The real estate sector is known for its lack of transparency, which makes it difficult to identify the ultimate beneficiaries of real estate transactions. This lack of transparency makes it easier for criminals to launder money through the purchase of the real estate.
- Limited regulatory oversight: Real estate transactions are often subject to limited regulatory oversight compared to other financial transactions. This lack of oversight makes it easier for criminals to exploit the real estate sector for money laundering purposes.
- Cross-border transactions: Real estate transactions can involve buyers and sellers from different countries, making it difficult to trace the flow of funds and identify potential money laundering activities.
Overall, these factors contribute to the increasing AML risks in the real estate sector, highlighting the need for greater transparency and regulatory oversight to combat money laundering in the industry.
AML Risk in Real Estate Sector
The anti-money laundering tools that constantly monitors by means of indicators of anomaly, which business activities considered fragile for possible criminal infiltration, can be subjected to a risk of instrumental use of cash and money to carry out conducts of abnormal transfer or placement in the internal and external market of illicit proceeds, not only also, but also to the avoidance or evasion of taxes and fees provided by the States, for the purchase of a house. In fact, with the purchase of a home, the contract of sale provides that the seller will sell the property, and the buyer will pay a certain amount previously agreed. The professional, the real estate agent, in addition to dealing with the practices inherent in the transfer of the property, performs as a recipient of anti-money laundering obligations, a whole series of operations governed by domestic and international AML regulations such as verification regarding the identification of the holders of the transaction/transfer, the existence of the object of transfer, ascertains the purpose of the sale and purchase and proves the lawful origin of the amount paid by the buyer.
The real estate agent is not the only one and the only subject required to AML obligations; in fact, during a real estate sale, other subjects are also responsible for the fulfillment of anti-money laundering procedures, for example, the professional category of notaries. This bank employee authorizes the transfer. When proceeding with the checks, the real estate agent must also take into account what may be relevant, for example, to know the will of the buyer after the sale, make sure not only the correct procedure of the transfer of the sum of money but also take into account the possibility that the buyer may not only pay with money from illicit but that the property may be resold at a later time to a new buyer, to "clean up" and conceal the money previously used for the purchase of the previous property.
Equally serious, if it occurs, is the fact that the property is purchased without paying the tax and fiscal obligations connected with the transfer of the property from the seller to the buyer. In some jurisdictions, to counter this practice, to ensure the actual payment of taxes, the tax authorities declare real estate agents as tax substitutes, i.e., subjects delegated by the State to collect a fixed percentage of the total amount generated on their behalf by the sale. The quantity will then be paid to the Treasury, so the real estate agent replaces the taxpayer.
There is also the initiative, which has been dominating the international market scenarios for some time now, to be able to buy a house with the Blockchain electronic money transfer system, specifically using cryptocurrencies in Bitcoin. The first case dates back to purchasing a property in 2017 in Essex in the UK. After this fact, this practice has gradually become more widespread.
There is no specific article of law that, in commercial or contractual matters, peremptorily denies or declares the impossibility of selling and buying an asset in bitcoin, but rather the current legislative indications refer to the necessary presence, under penalty of nullity, of a bilateral contractual agreement prior consent of the parties in favor of the transfer. The financial nature of the two objects of exchange is very different, with very different principles and investment methods. The house is an asset of refuge, stability, and protection; it clashes with the dizzying rhythms, ups, and downs that we have recently seen on Bitcoin. However, the interests and issues surrounding the combination of Bitcoin and home are expanding. The current financial risks related to the "high unpredictability" do not allow, however, to generate a collective interest; this is due precisely to a lack and deep knowledge of the use of the guarantees produced by Cryptocurrencies such as Bitcoin.
Measures to Prevent AML Risks in the Real Estate Sector
There are several measures that can be taken to prevent AML (anti-money laundering) risks in the real estate sector. Some of these measures include:
- Enhanced Due Diligence (EDD): Real estate professionals should conduct enhanced due diligence on buyers and sellers to identify potential AML risks. This includes verifying the identity of the buyer or seller, as well as the source of their funds.
- Know Your Customer (KYC): Real estate professionals should implement a KYC program to identify and verify the identity of their customers. This helps to prevent the use of fake identities in real estate transactions.
- Training and Awareness: Real estate professionals should be trained to recognize the signs of potential money laundering and to report any suspicious activity. They should also be made aware of the importance of AML compliance and the potential consequences of non-compliance.
- Risk Assessment: Real estate companies should conduct regular risk assessments to identify potential AML risks within their organization. This includes assessing the risk of money laundering in their customer base, as well as in their own operations.
- Transaction Monitoring: Real estate companies should monitor transactions for potential AML risks, such as large cash transactions, transactions involving high-risk countries, or transactions that deviate from normal patterns.
- Regulatory Compliance: Real estate companies should ensure that they comply with all applicable AML laws and regulations. This includes implementing an effective AML program, appointing a compliance officer, and conducting regular AML audits.