Buying into AML Risks in Real Estate

Kevin Gulledge, CAMS
April 10, 2019
Read Time: min

The real estate market is enticing to more than just new homeowners or investors. Financial criminals have been using the industry to clean their illicit funds for years. The limited amount of regulation around the real estate industry has made it especially easy for these bad actors to cycle their dirty money into the financial system using this avenue. Few changes have been made in the regulatory environment in almost 20 years. Ever since 2002, when real estate professionals were granted an exemption from anti-money laundering (AML) requirements, it has been an ongoing struggle to get more AML regulations applied to the real estate sector. That changed in2016 when the Panama Papers exposed an international network of offshore entities involved in tax evasion, fraud, and sanction evasion; some of which included real estate holdings. 

There are real AML risks involved in real estate, and it is part of a Bank Secrecy Act (BSA) professional’s job to help identify and prevent them 

Why real estate?  

Real estate is a proven, traditional, and well-established marketplace. People buy and sell real estate all the time using large dollar transactions, so the movement of large dollar funds is not unusual. Also, consider that real estate values generally appreciate over time, so it is an easy way to protect your fraudulent funds from an unstable market or wild exchange rate changes. 

The Association of Real Estate License Law Officials estimates that there are around 2 million active real estate licensees in the United States. Including rental and leasing licensees, the industry comprises approximately 13% of the United States’ GDP, with estimates ranging in amounts from $1.8 to $2.2 trillion. In 2017, over 5.51 million existing homes and 612,000 new construction homes were sold.According to the 2012 Economic Census, there were more than 86,000 real estate brokerage firms in the United States. These statistics show how vitally important the industry is to the United States’ economy and why it is so lucrative to financial criminals looking for a new place to wash their illicit gains.  

Reporting 

Since the real estate industry was exempted from AML requirements in 2002, the onus has been on the financial institutions in identifying and reporting suspicious or fraudulent activity. The institutions are the ones shouldering the costs of compliance, examinations, and fines.  

There are no mandatory SAR requirements for the non-financial parties involved in a real estate transaction, nor are there any beneficial ownership reporting requirements, so the use of shell corporations is still prevalent in these transactions. Think about a situation where someone uses a corporation to purchase real estate in cash. Since there are no requirements on the parties involved to report anything suspicious witnessed during that transaction, and since no bank was involved, if there were any suspicious activity, it would go unreported. 

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AML Changes 

Things have started to change, albeit very slowly. In 2012, FinCEN issued requirements for non-bank residential mortgage lenders and originators to establish an AML program and file SARs. Then, in January 2016, FinCEN issued the first “Geographic Targeting Order” related to real estate, a few months before the release of the Panama Papers. In the GTO, FinCEN began requiring U.S. title insurance companies and their affiliates to identify the persons behind companies used to pay all cash for high-end residential real estate transactions in Manhattan ($3 million and up) and Miami-Dade County ($1 million and up).  The GTOs were renewed in August 2016 and were expanded to include the following areas: 
  • All boroughs of New York City, NY  
  • Miami-Dade, Broward and Palm Beach Counties, FL 
  • Los Angeles, San Francisco, San Mateo, San Diego, and Santa Clara Counties, CA 
  • Bexar County, TX 
FinCEN would ultimately renew the GTO again in February 2017, August 2017, March 2018 and November 2018. In February 2017, FinCEN revealed that 30% of the transactions covered by the GTOs involved a beneficial owner or purchaser rep that was also the subject of a previously filed SAR. In August 2017, FinCEN expanded the GTO to include the city and county of Honolulu and also revised the GTO to capture a broader range of transactions (including wire transfers). In November 2018, the GTO was renewed and expanded to include any purchases made with cryptocurrencies. It also simplified the reporting amounts for each location to $300,000. 

What can financial institutions do? 

Ensure your BSA/AML monitoring system is capturing large spikes in activity, potential unusual or large wire transfers and rapid movement of funds (cash to wire or vice versa). Institutions need to ensure that proper due diligence is being performed and recorded on real estate-related customers and transactions. If you have address-based risk rating functionality, you can always provide higher risk to those zip codes included within a GTO. Institutions should stay up to date on any regulatory changes, such as the previously mentioned GTOs, so that you can be better prepared. Most importantly, stay vigilant!  Additional red flags to pay attention to regarding loans for real estate purchases include 
  • CDs used as collateral 
  • Sudden or unexpected payment to pay down or off a large loan 
  • The stated purpose of a loan is ambiguous or unclear 
  • Inconsistent or inappropriate use of loan proceeds  
  • Overnight loans 
  • Loan payments by third parties 
  • Loan proceeds used to purchase property in the name of a third party 
  • Permanent mortgage financing with an unusually short maturity  
  • Structured down payments or escrow money transactions 
  • Attempt to sever the paper trail 
  • Wire transfer of loan proceeds 
  • Disbursement of loan proceeds by multiple bank checks 
  • Loans to companies outside the U.S.
  • Financial statement of the business differs significantly from similar businesses
The world of real estate is always changing, and as new payment and financing methods evolve, financial institutions will need to change and evolve as well. Abrigo can help institutions of all shapes and sizes to monitor, track, and report suspicious real estate-related activity. Please contact the experts  at Abrigo for more information!
About the Author

Kevin Gulledge, CAMS

Kevin Gulledge brings over a decade of retail banking experience to Abrigo, having worked with mid-sized and large international institutions in a variety of roles, including retail, operations, compliance, and BSA/AML. Since 2014, Kevin has served Abrigo customers as a Senior Risk Management Consultant, working with domestic and international institutions on functionality and best BSA/AML practices as well as calibrating and analyzing risk-based systems and working with BSA officers and regulators on internal and external projects. These projects included staffing assessments, suspicious activity monitoring program reviews, data validation reviews, procedure drafting, staff augmentation, and risk assessments. He is a certified BAM professional, certified anti-money laundering specialist (CAMS), and a member of the national and local chapters of the Association of Certified Anti-Money Laundering Specialists. Kevin earned his bachelor’s degree in history from the University of Texas at Austin.

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