Money Laundering Risks in the U.S. Real Estate Sector
Three customer identification
gaps facilitate money launderers in re-investing their illicit proceeds in the
U.S. real estate sector, allowing them to remain anonymous. First, the criteria
to decide which real estate transactions must undergo data collection and
reporting requirements are too lax. Second, when a real estate agency is
involved in a real estate transaction, identification requirements apply only
to the client of the real estate agency, leaving the other party uncovered. Third,
in case a legal professional advises a buyer on how to conclude a transaction,
no customer identification measures are required at all.
The first customer
identification gap is left by the most recent Geographic Targeting Order (GTO)
in identifying the transactions subject to reporting requirements. The GTO
imposes customer identification requirements only for those who buy residential
real properties located in 14 specific counties of the United States (see annex).
Thus, every non-residential property and the residential properties which are
not located in those specific counties are not covered, leaving an excessive
room of maneuver to money launderers. In fact, their goal – integrating their
illicit proceeds in the legal economic system – can be achieved through the
acquisition of any real estate property.
The second gap regards
those transactions involving a real estate agency. The current anti- money
laundering legislation imposes customer due diligence and identification
requirements only for the real estate agency’s clients and after the
transaction has taken place. However, clients usually address agencies to sell
legally owned properties. Instead, money laundering mostly involves real estate
acquisitions, because money launderers aim at converting the proceeds of their
illicit activities into licit assets. Real estate buyers do not necessarily
need the assistance of real estate agencies to finalize their purchases, thus they
can dodge due diligence measures when buying a property.
The third regulatory
gap is that when a legal professional advises real estate buyers on how to
finalize a transaction, no customer identification and due diligence
requirements are envisaged for the buyers. For this reason, real estate buyers
rely on the advice of specialized enablers, for example attorneys and notaries to
avoid identification. The World Bank’s Reference Guide to Anti-Money Laundering
and Combating the Financing of Terrorism envisions Know-Your-Customer measures
and due diligence for those legal entities relying on a legal professional to
“prepare or carry out transactions.” This language excludes the case in which a
legal professional advises a real estate buyer on how to finalize an
acquisition. The implication is that legal professionals enable money launderers
to invest in the real estate sector without being subject to the proper
identification and due diligence measures.
As the identification
of buyers is fundamental in preventing money laundering in the real estate
sector, a series of measures is needed to mitigate the abovementioned risks.
Firstly, identification requirements and background checks must be imposed on
every real estate transaction above a certain financial threshold where the
buyer has not received a bank loan. This must happen regardless of the use and
the location of the real estate property. The next Geographic Targeting Order should
be drafted taking this recommendation into account. Secondly, data collection
and reporting requirements must be extended to every party taking place in a
transaction above a certain financial threshold that involves a real estate
agency, as opposed to the agency’s customer only. Thirdly, regarding the role
of enablers, designing countermeasures is more difficult because advice can be
given and compensated also at the informal level, and their activities are legal.
However, the implementation of the first two measures is going to mitigate also
this risk.
The three regulatory
gaps mentioned in this note indicate the need of stricter controls on the real
estate sector, which is the most common target of money launderers. Indeed,
these measures will increase the amount of data that must be processed to
identify money laundering activities. Should the proper law enforcement
institutions lack the resources to manage big-data sets, the government should upgrade
the data-processing and analytical tools at its disposal. Notably, these data
can be stored in government databases, retrieved for future investigations and
analyzed to identify statistical trends, providing law enforcement with an
additional instrument.
ANNEX
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