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.