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AML/CFT

Buying into AML risks in real estate

Kevin Gulledge, CAMS
May 22, 2023
Read Time: 0 min

Key Takeaways

  1. Real estate markets are vulnerable to money laundering and fraud because of their transaction size and appreciation over time.
  2. Regulations such as Geographic Targeting Order updates help identify AML risks by requiring identification for certain real estate purchases. 
  3. Institutions should stay current on any regulatory changes, including GTO updates, and train staff to recognize red flags.

The real estate market is enticing to more than just new homeowners or investors. Financial criminals have used the industry to clean their illicit funds for years. The limited 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, there has been an ongoing struggle to apply more AML regulations to the real estate sector. In 2016 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, regulations began to change.

Even today with more regulations, 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 market AML risks

Real estate is a proven, traditional, and well-established marketplace. People frequently buy and sell real estate using large dollar transactions, so the movement of large dollar funds is not unusual. Also, 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 more than 3 million active real estate licensees in the United States. Including rental and leasing licensees, as of 2021, the industry comprises approximately 16.7% of the United States GDP, with estimates exceeding $3.9 trillion. In 2017, over 5.51 million existing homes and 612,000 new construction homes were sold. According to the National Association of Realtors, there were more than 106,000 real estate brokerage firms in the United States. These statistics show how vital 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 financial institutions to identify and report 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, so shell corporations are 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. 

Staying on top of suspicious activity is more than a full-time job. Our team of experts can help.

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AML changes

FinCEN actions in the real estate sector

Things have started to change, albeit 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 (GTO) 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 Geographic Targeting Orders have been updated several times since then to add more areas, capture a broader range of transactions, and simplify reporting amounts with a $300,000 threshold.

New York City and Miami were the original targets under the first order in 2016. Subsequent orders expanded the metropolitan watch areas, and this latest order includes Litchfield County in Connecticut and Adams, Arapahoe, Clear Creek, Denver, Douglas, Eagle, Elbert, El Paso, Fremont, Jefferson, Mesa, Pitkin, Pueblo, and Summit counties in Colorado. Other targeted areas include:

  • Boston 
  • Chicago
  • Dallas-Fort Worth 
  • Houston
  • Laredo
  • Honolulu, Maui, Hawaii, and Kauai 
  • Las Vegas 
  • Los Angeles
  • Miami 
  • New York City 
  • San Antonio 
  • San Diego 
  • San Francisco 
  • Seattle  
  • District of Columbia 
  • Northern Virginia
  • Maryland (DMV) 
  • City and county of Baltimore 
  • County of Fairfield, Connecticut  

Taking action

What can financial institutions do?

Ensure your BSA/AML monitoring system captures large spikes in activity, potential unusual or large wire transfers, and rapid movement of funds (cash to wire or vice versa). Institutions must ensure that proper due diligence is 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 current on any regulatory changes, such as the previously mentioned GTOs so that they can be better prepared. Most importantly, stay vigilant. Additional red flags to pay attention to regarding loans for real estate purchases include the following:  

  • CDs used as collateral 
  • Sudden or unexpected payment to pay down or off a large loan 
  • Transactions occurring in cryptocurrency
  • The stated purpose of a loan is ambiguous or unclear 
  • Inconsistent or inappropriate use of loan proceeds
  • Large amounts of cash used in the purchase  
  • 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 
  • Involvement of high-ranking political officials or their family members
  • 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 constantly 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.

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About the Author

Kevin Gulledge, CAMS

Senior Risk Management Consultant
Kevin Gulledge has over sixteen years’ experience in the retail banking sector, 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

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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