Which Is Why We have Brief Overview
To know why KYC in real estate is essential for AML Compliance, let’s ask first why it is required in the banking and financial sector. A simple answer to this question is, the financial sector has to comply with Know Your Customer requirements to make sure that the ultimate beneficial owner of financial transactions is not a criminal, fraudster, a terrorist, or any sanctioned entity.
The same is the purpose behind KYC requirements and anti-money laundering regulations for real estate transactions.
The real estate sector across the world offers lucrative investment opportunities. Very often, the trend in the property market in a particular area indicates the overall economic growth potential; no wonder why some of the major financial and business centers across the globe boast about the bustling economic activity through skylines and dynamic construction activities for residential and commercial purposes.
For investors, it is safe to park their money in the real estate sector considering the usual rise in property prices in the future. On the flipside, there is a risk of dirty hands clean money meaning hidden in the boom of the real estate market.
Need for KYC in Real Estate Due to Its Vulnerability to Money Laundering
Buying houses, commercial buildings, and even plots through shell companies, provides money launderers with an efficient way to integrate their dirty money into the system.
The very fact that the banking sector is regulated and bound to run KYC/AML checks makes the real estate sector, a target of money launderers, who can bypass checks of traditional financial sectors while dealing in cash transactions with real estate agents.
The real estate sector is used to re-inject illicit money into the system, both in developed as well as developing countries.
For corrupt government officials, sanction evaders, drug dealers, tax evaders, and criminals, buying property seems the best way to clean up their dirty money. According to a report by GFI (Global Financial Integrity), $2.3 billion was laundered through the United States real estate between (2015 to 2020).
In 2021, the Chairman EFCC (Economic and Financial Crime Commission) of Nigeria reported that 90% of money laundering in the country is done through the real estate sector.
Every now and then criminals make headlines for buying millions of dollars worth of real estate through their ill-gotten money.
According to AUSTRAC estimates, China-linked criminals laundered $1 billion worth of money through the real estate sector in Australia.
Apart from Europe, the USA, and England, Dubai real estate has also been notorious for being a safe investment haven for criminals. A few years back Washington-based Center of Advanced Defence studies used leaked data to identify $100 million in suspicious purchases of apartments and villas across the city of skyscrapers in the United Arab Emirates. According to the report, Syrian President Bashar Al Assad’s cousin Mekhlouf had properties in UAE’s Palm Jumeirah. Mekhlouf, one of the wealthiest businessmen in Syria, was also on the United State’s sanctions list. The report also identified Lebanese, Iranians, and Mexicans who were sanctioned by the US for their activities linked to drug trafficking and terrorism.
The State of Regulations in the KYC/AML Sector
Generally, there is a concept that the real estate sector has lax regulations when it comes to Anti Money Laundering compliance, hence it is a favorite hub of criminals looking for the means to whiten their black money; this is partially true.
Real estate transactions conducted through financial institutions automatically come under the scrutiny of AML regulations. Banks that strongly comply with KYC AML rules do monitor whether these transactions are conducted using funds from legitimate sources or not.
However, the real estate sector becomes a haven for financial criminals in case of cash transactions and the involvement of shell companies.
Usually, real estate companies are not big enough to implement solutions to combat money laundering. Therefore, they can’t always monitor or perform extensive procedures like enhanced due diligence of the customers who conduct cash transactions.
In the case of properties bought by shell companies housed in offshore destinations famous for their lenient ownership disclosure rules, even banks find it difficult to find out who is an ultimate beneficial owner of a real estate transaction. In fact, Shell companies are often the best answers for those looking for how to find real estate anonymously.
AML Regulations for Estate Agents in Different Countries
Recently, there has been a massive focus on issuing Anti-money laundering directives to combat the legitimization of illicit funds through the real estate sector.
In the United States, AML regulations under the bank secrecy law do cover real estate businesses that conduct transactions through financial institutions.
Cash transactions that don’t involve any financial institution still have a major share in the United States real estate market. They present a huge risk of money laundering due to a potential lack of monitoring and tracking of the beneficial owner.
To tackle this problem, FinCEN (Financial Crime Enforcement Network) is authorized to issue GTO (Geographic Targeting Order) in high-risk jurisdictions. GTOs require the United States insurance companies to perform due diligence and identify the persons behind the entities that make real estate purchases through cash transactions.
GTOs are effective in deterring money laundering through the property market up to a certain extent. This regulation extends beyond the simple requirement of KYC in real estate and binds businesses to report suspicious activity, like transactions passing a certain threshold.
Another development in this regard is by the Financial Crimes Enforcement Network (FinCEN) which launched an Advance Notice of Proposed Rulemaking (ANPRM) in December 2021 to solicit public comment on potential requirements under the BSA for entities involved in real estate transactions. This implies that financial crime control authorities in the United States are looking to tighten their grip on the real estate sector.
In the last couple of months, as an aftermath of the Russia-Ukraine war, western countries in particular are focusing more on AML regulations for estate agents to ensure that sanctions against Russia are not violated in any form.
One of the recent notable regulations in the US, in this regard, is KLEPTO Bill introduced in April 2022, which if passed would have bound the real estate professionals to report any suspicious activity to the United States Department of Treasury and perform enhanced due diligence of the entities that make purchases in cash.
Sixth Anti Money Laundering Directive in the European Union requires real estate businesses to comply with KYC AML checks to know the ultimate beneficial owner.
The United Kingdom has been one of the most active countries in introducing AML curbs on the real estate sector after the Russia and Ukraine war. As a part of its Economic Crime Transparency Bill, the country came up with a property registers regulation that binds every foreign company buying property in the UK to disclose the name of the beneficial owner. Failure to comply with the fine comes up with £2500 per day fine.
The UK also froze the assets of Russian oligarchs including some prominent business figures like Roman Abramovich.
KYC in real estate is already being practiced in the UK up to a certain extent.
Recently, UAE’s Ministry of Economy and Ministry of Justice announced anti-money laundering regulations for real estate transactions.
According to these rules, Real estate agents will have to report single or multiple payments made above or equal to AED 55,000, they will also have to report the payments made through virtual assets, and products derived through virtual assets will also have to be reported.
Challenges Faced by Real Estate in AML Implementation
AML in property services has similar challenges as AML in financial services. The prerequisite to scan customers to comply with anti-money laundering regulations, often makes businesses choose for de-risking leaving a massive number of customers unattended. Countries that face the problem of low rates of financial inclusion particularly suffer from this.
In a similar manner, real estate investment is often encouraged at the state level for its potential for economic growth. Therefore, a high-level real estate scanner approach in the initial stage of customer onboarding can complicate the process for legitimate customers and even for property agents.
Furthermore, real estate service providers that operate on a small scale don’t often have enough resources for implementing risk assessment solutions and hence they are more likely to end up catering to criminals.
Using A Risk Based Approach in Real Estate Sector
The Financial Action Task Force July 2022 issued a Risk-Based Approach Guidance for Real Estate Sector. As part of these guidelines, FATF recommends countries extend their AML CFT regime to different sectors including real estate.
In part 22. C of these guidelines, FATF suggests following customer due diligence measures.
Identification of Client:
This includes using some basic KYC in real estate to identify the customer and to know the ultimate beneficial owner from a respective property’s sale and purchase. The task may be tedious but any regtech solution that comes up with a real estate scanner to check against AML watchlists particular to this sector can be of great help.
Understanding the Business
Knowing your customer is not enough, getting to know the very nature of the business they are conducting is more important when it comes to running all property services checks. Real estate agents whose customers are offshore shell companies, need to exercise more vigilance in this regard. Knowing your business also means that an agent must investigate what kind of products and services are on a portfolio of a business to make sure that they are not facilitating the buying and selling of property for money laundering, drug dealing, or terrorist financing.
Very often when there is a certain level of risk associated with a particular business and person then real estate agents must choose for on-going monitoring. In case of any suspicion in the future agents can report the suspicious activity to their respective law enforcement bodies.
Knowing the source of funds
This is the most important thing a real estate business must do to make sure that it doesn’t end up becoming a money laundering office space. The need to know an investigation into the source of funds becomes more essential when transactions through cash are involved. It is highly likely that a person who chooses to buy an expensive property through a cash transaction is actually looking to whiten the black money or trying to use funds from illegitimate resources.
What Is A Resource Effective Solution to Fight AML/CFT in Real Estate Sector?
As mentioned earlier, resource constraints make the implementation of AML regulations for real estate agents tough. Here the implementation of RegTechs or using some AML watchlist scanner that uses machine learning to assess risk is the best option; this not only saves time but also the cost of management overheads. It is established that later or sooner real estate sector is going to come under tough scrutiny even in jurisdictions that have relaxed rules for now. Therefore, it is better for even small-scale property dealers to start implementing essential KYC in real estate checks to ensure that their operations are aligned with AML/CFT requirements.
Table of Contents
- Which Is Why We have Brief Overview
- Need for KYC in Real Estate Due to Its Vulnerability to Money Laundering
- The State of Regulations in the KYC/AML Sector
- AML Regulations for Estate Agents in Different Countries
- Challenges Faced by Real Estate in AML Implementation
- Using A Risk Based Approach in Real Estate Sector
- What Is A Resource Effective Solution to Fight AML/CFT in Real Estate Sector?