Close the Sale: How to Run a Real Estate Business in a Compliant Way

On December 21, 2020, Zamira Hajiyeva, the wife of jailed Azerbaijani banker Jahangir Hajiyev, lost an appeal against a court ruling that will seize her sizable fortune. Now, Mrs. Hajiyeva will have to say goodbye to her London home and a golf club worth more than £22m ($31m) if she fails to explain the origins of her funds.

The British National Crime Agency has grounds to suspect that Mrs. Hajiyeva’s fortune was built through money laundering. When purchasing property, Mrs. Hajiyeva used front companies belonging to her husband, who’s in prison for corruption. Had the realtors determined who’s truly behind the companies, these shady deals could have been avoided.

Every year criminals launder $1.6 trillion through real estate. Voluntarily or not, realtors contribute to this problem. Today, we’ll dive into how dirty money gets washed through this sector and what Anti-Money Laundering (AML) measures businesses can adopt to prevent it.

Why the real estate sector attracts money laundering

If a criminal wants to legitimize their funds, purchasing a luxury mansion is a good option. Let’s dive deeper into why real estate is so attractive for money laundering:

• Ability to launder large sums. As real estate prices can get high, criminals can legitimize significant amounts in a single transaction. For instance, a corrupt official can launder millions of dollars simply by buying a flat.
• Subjective pricing. Properties can be purchased for much higher than market price. This would not raise suspicion, as many prestigious locations like Manhattan and West London have extremely high demand.
• Investment opportunity. Real estate is considered a stable investment; properties can be rented out or sold for a higher price in the future.
• Weak regulatory oversight. Non-financial sectors like art and real estate are subject to limited scrutiny, compared to financial businesses like banks.

All in all, regulatory loopholes, high (but subjective) prices, and lucrative investment opportunities make real estate an attractive money laundering instrument.

How money is laundered through real estate

Legitimizing assets through properties is fairly easy. All it takes is buying a house with illegal cash, selling it for the same price, and, voila, you’ve washed some dirty money. Here’s what a typical scheme looks like:

Money laundering methods

Criminals use a variety of techniques to launder money through real estate, including shell companies, shady financing schemes, and overvalued prices. Here’s our breakdown of the most popular methods, based on research from the European Parliament and guidance from the Australian Government.

• Family members. Purchasing property using the names of family members to avoid detection.
  
  Case study: In February 2021, the OCCRP, a consortium of journalists, released an investigation into Sergey Toni—a Russian man with no profitable businesses who owns real estate worth over €50m (around $59m).Toni’s fortune has likely come from his father, a prominent figure at Russian Railways, one of the largest transportation companies in the world. Several facts point to there being money laundering going on, including an opaque corporate structure and dubious connections to shell firms.
  
  
• Anonymous companies. Purchasing property through front companies to remain anonymous. It’s rather easy to do so as, in most countries—the US included—companies aren’t required to disclose their true owners.
  
  Case study: In 2018, a BBC investigation found that a Ukrainian criminal gang used offshore shell firms to move millions of pounds in the UK. The gangsters and their family members bought luxurious property in London, including a £12.5m ($17.4m) flat.
  
  
• Loans and mortgages. Borrowing money from a company to make the property purchase appear legitimate. In reality, the lender is under the purchaser’s control. The purchaser then “repays” the loan with their illegal funds.Mortgage schemes work in a similar way, whereby mortgages are taken out from a bank and repaid with smaller cash amounts, mixing in illegal and legitimate income.
  
  Case study: In 2018, the Singh family and their accomplices were sentenced to prison for their participation in a mortgage fraud scheme in California. They created over $9.3m worth of residential mortgage loans by submitting fraudulent loan applications, helping them generate income and launder illicit funds.
  
  
• Property value manipulation. Property values are under- or overestimated, with the collusion of real estate agents. For example, someone can propose to buy a flat for a higher price to obtain a larger loan from a bank (the bigger the loan, the more illicit funds can be laundered to repay the debt).Underestimation is buying the property for a lesser price than the actual one. This allows the criminal to claim that the amount disclosed in the contract is consistent with their legitimate financial means. The difference between the contract price and the actual worth of the estate is paid directly to the seller with illicit funds.
  
  Case study: In Australia, a major drug dealer purchased a house for more than AUD1 million. Official documents showed that the buyer acquired the home for below market value. In reality, the seller received the rest of the money in illegal cash.
  
  
• Renovation. Property renovation contracts can be written and paid for for the sole purpose of legitimizing illegal funds.
  
  Case study: In 2018, Las Vegas-based real estate agent, Luis Eduardo Rodriguez was arrested for laundering $250 million by renovating and reselling houses for higher prices—all in order to help a global drug syndicate legitimize its illegal revenues.

These are just a few examples of how money gets laundered through the real estate sector. To learn about all of the methods, check out the Australian Government’s guidance.

Why real estate businesses need to adopt AML procedures

Around the globe, anyone involved in the real estate business is obliged by law to comply with AML requirements. Therefore, companies as well as agents, brokers, and other professionals risk penalties—lawsuits, fines, and even imprisonment—if they are caught in a money-laundering scheme.

Let’s take a look at how major jurisdictions supervise real estate businesses. Click on each territory to learn more.

• Canada

  In 2018, C$5.3 billion ($4 billion) were legitimized through properties in British Columbia alone. FINTRAC, Canada’s financial regulator, found that many real-estate companies are violating AML requirements. In fact, some realtors have even voluntarily agreed to launder money for criminals.

  To combat this problem, the Canadian government updated its AML law in 2021. It made Politically Exposed Person (PEP) and beneficial ownership checks mandatory for all reporting businesses, including real estate firms and professionals. Non-compliance with these rules can cost up to С$2 million ($1,6m) and/or 5 years imprisonment.

• Europe

  In 2018, the 4th European AML Direction (4AMLD) brought real estate agents into its regulatory scope, obliging them to comply with all AML requirements, including customer verification.

  Under the latest rules, 6AMLD, sanctions for money laundering now apply to businesses, not just individual employees. For instance, if a single realtor colludes with criminals to overvalue a property’s price, their entire agency will face severe sanctions, such as confiscation of assets and even closure.

• The FATF

  The Financial Action Task Force (FATF), an inter-governmental body that fights money laundering and terrorist financing, comprises 37 member countries and two regional organizations. These include Australia, the EU, Russia, the UK, the US, and more.

  Under the FATF’s Recommendation 22, the real estate sector falls under the Designated Non-Financial Businesses and Professions (DNFBP) category. DNFBPs located in FATF member countries are required to conduct customer verification, among other AML requirements.

• The UK

  London is a foremost destination for criminals seeking to launder money. Although the UK’s primary AML regulation has long required real estate professionals to follow AML obligations, these measures don’t seem to be enough.

  To solve this problem, Britain enacted the Unexplained Wealth Order (UWO) in 2018. This means that, if a person cannot explain the source of their funds, all of their property can be seized by the court without an investigation. Mrs. Zamira Hajiyeva’s case, which we mention in the introduction, is an example of the UWO in action.

• The FATF

  Under the USA PATRIOT Act, real estate businesses and professionals must be AML-compliant. Although this sector was given a temporary exemption from verifying customers, it can still be prosecuted for engaging in money laundering.

  In 2015, a Phoenix real estate agent was jailed for 4 years for participating in a money-laundering scheme. She willfully accepted illegal funds, put property in her name, and rented property to criminals.

• The US

  London is a foremost destination for criminals seeking to launder money. Although the UK’s primary AML regulation has long required real estate professionals to follow AML obligations, these measures don’t seem to be enough.

  To solve this problem, Britain enacted the Unexplained Wealth Order (UWO) in 2018. This means that, if a person cannot explain the source of their funds, all of their property can be seized by the court without an investigation. Mrs. Zamira Hajiyeva’s case, which we mention in the introduction, is an example of the UWO in action.

Get some rest while Sumsub takes care of your compliance obligations. Talk to our team today.

How to comply

Customer verification is arguably the most important AML requirement, as it alone can reduce money laundering in the real estate sector. Let’s cover it first.

Customer verification

Regulators worldwide require real estate businesses to conduct KYC checks on their customers. When dealing with clients, businesses should take into account industry-specific laundering methods, such as the use of anonymous companies and third parties. Here are a few rules on how to do this:

• Checking beneficiaries. If the buyer is a company, agents should check its Ultimate Beneficial Ownership (UBO), as many criminals use shell firms to keep their names secret.To identify beneficiaries, agents can request that the company submits its UBO information to check it against beneficial ownership registers.
• Screening for Politically Exposed Persons (PEPs). Since many corrupt officials prefer to launder money through property, agents should check all of their clients against domestic and international PEP registries, in addition to performing adverse media checks.
• Verifying the origins of client funds. If a customer happens to be a PEP, the agent must check their sources of funds and wealth. This can be done by requesting that clients submit their bank statements and asset declarations. This information should match the actual amount that the client offers to pay.For instance, Igor Shuvalov, the former Deputy Prime Minister of Russia, bought two London apartments for more than £11.4m ($15.9m). His official salary is about $160,000 per year, which means it would take Shuvalov at least 76 years to pay for these properties.
• Performing sanctions screening. To conduct sanctions screening, agents can use the OFAC’s sanctions lists as well as the FATF’s grey and blocklists. Screening sellers and buyers for sanctions should be a priority, as there is a large number of sanctioned oligarchs and politicians trying to launder money abroad.

Luckily, there’s no need to build the whole KYC process from scratch. Customer verification can be entrusted to KYC providers that can run the checks in an efficient and compliant way.

Other AML demands

Other obligations for real estate businesses and professionals include adopting a risk-based approach, compiling an AML program, and more.

Here’s our short breakdown of the major procedures. Note that the exact list of requirements depends on jurisdiction.

• Risk-based approach. Real estate businesses must evaluate the specific money laundering risks they are exposed to and build their onboarding process accordingly.
• AML compliance program. This is a document that describes the company’s policies and safeguards for reducing money laundering risks.
• Record-keeping. Businesses must keep data on seller and buyer verification checks. This data can be presented during audits.
• Building an AML team. Businesses need a Money Laundering Reporting Officer (MLRO), who is responsible for reporting suspicious activity and overall compliance. Also, businesses must provide regular AML training sections for all employees.

If a business is new to the world of AML, it can reach out to a legal expert who can help evaluate their money laundering risks and create a suitable AML compliance program. Sumsub’s legal team is always happy to help.

How to detect money laundering

Real estate professionals play a major role in screening for money laundering, since they act as intermediaries in most transactions. Here are the red flags they can look out for to spot criminal activity:

Real estate money laundering red flags

• Anonymous buyers;
• Use of shell companies;
• Buyers or funds located in a country with a weak AML regime, high corruption, or known support for terrorism;
• Discrepancy between the buyer’s official income and the property value;
• Unexplained geographic distance between the buyer and the property;
• Under- or overpriced property value;
• Large amounts of cash used.

We’ve compiled a downloadable checklist with the main red flags. Feel free to save it to your device.

If an agent notices any of these red flags, they should file a Suspicious Activity Report (SAR) to a financial intelligence unit.

There are different requirements for reporting deadlines. For instance, the Bank Secrecy Act (BSA) in the US requires completing a SAR within 30 calendar days of the incident. Whereas, in Turkey, the filing window is 10 working days.

To submit a report, businesses can use web reporting systems.

What’s next

Read more from our series on money laundering:

Money Laundering Within the Art Trade and What Art Dealers Can Do About It (With the Checklist)

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