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.
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.