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In February of 2022, Transparency International revealed that Russians linked to the Kremlin or with corruption charges had invested £1.5 billion in the UK property market, mostly through companies held in Britain’s overseas territories and crown dependencies. The findings exposed Great Britain as “a global hub for money laundering.” However, criminal investments into real estate markets have been perpetrated for decades and have seeped into every corner of the world.
The link between real estate and money laundering is a global phenomenon and is considered one of the older methods of laundering illegal funds. Investments in property can allow criminals to add a veil of legitimacy and normality to their ill-gotten gains.
The sector is also attractive due to its profitability, including appreciation of housing over time, re-sale value after renovations, or income generated from rent. This interest doesn’t stop at homes but is also extended to other types of properties such as vineyards and factories.
According to a recent report by Global Financial Integrity (GFI), over $2.3 billion have been laundered in the U.S. real estate industry over a recent five-year period. Transparency International noted that at least £4.4 billion investments in UK real estate came from politically exposed persons (PEPs) in high-risk corruption jurisdictions. Europol also found that 68% of criminal organizations in the EU have used the property market to legitimize their illegal proceeds.
Myriads of opportunities worldwide, the use of golden visas, weak regulatory oversight, and the ability to invest large sums of money is what makes real estate a perfect target for money launderers.
How do criminals use real estate to launder money?
Criminals may use a variety of methods to launder money through real estate. The use of shell and front companies established in weakly regulated nations is a method often used to conceal the true identity of the person or persons purchasing a property. This may include individuals involved in criminal organizations or ones that hold an important position, such as politicians or PEPs, that have been charged of corruption or other crimes and are looking to evade sanctions.
Gatekeepers also play a big role in helping crooks. Complicit lawyers, notaries, attorneys, and real estate agents are used by criminals to facilitate the purchase of property. In exchange for money, they may turn a blind eye to the true nature of the funds or the person behind them.
There are a variety of other tricks that lawbreakers may use to clean their dirty funds. These include but are not limited to: sale of property between scheming criminals, purchase of a house to renovate to re-sell for a higher price, loan of money to an associate who pays back the “mortgage” with the necessary documentation (a method known as loan back), or the purchase of undervalued property to be sold at its market value price.
What are examples of money laundering and real estate?
There are countless examples of criminals using the property market for money laundering purposes. Below are four examples from recent years:
1
In 2018, Zamira Hajiyeva, the wife of Jahangir Hajiyev, Azerbaijani ex-chairman of the state-controlled International Bank of Azerbaijan from 2001 to 2015 and in jail for corruption, was found to have acquired a £22 million house in London, including a golf club Berkshire, using a series of offshore companies in the British Virgin Islands that belonged to her husband.
2
In 2009, the former president of Taiwan, Chen Shui-bian, was sentenced to 9 years in prison for bribery and money laundering charges. It was purported that a part of the money he had accepted as bribes was spent in a $2 million apartment in New York.
3
In 2016, an investigation by Europol and the Spanish police, known as Operation Usura, unmasked a Russian and Ukrainian criminal syndicate that had laundered €62 million in real estate across Spain.
4
Between 2006 and 2015, prominent Ukrainian oligarch Ihor Kolomoisky, together with his associates, had purchased 22 properties in the Midwest of the U.S. worth roughly $490 million. This was done through companies registered in Delaware despite Mr. Kolomoisky appearing in the U.S. sanctions list. At a certain point, he even became Cleveland’s largest commercial landlord.
Socio-economic Consequences
The involvement of crime in real estate can have serious socio-economic consequences. This may include the distortion of prices of housing, unfair competition, sector volatility, and corruption, amongst others. Donald Toon, Director of Criminal Investigation for the U.K.’s National Crime Agency, has stated in an interview with The Times that in London “prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.”
What is the legislation behind real estate?
The Financial Action Task Force’s (FATF) forty Recommendations on Money Laundering and nine Special Recommendations on Terrorism Financing are considered the international standard for anti-money laundering and counter terrorist financing rules. In Recommendation 22, the FATF mentions real estate and categorizes it as a Designated Non-Financial Businesses and Professions (DNFBP) subject to AML supervision. Thus, Member States are required to verify businesses dealing in the property market using customer due diligence and AML investigation processes. In July 2022, the FATF published the "Risk-based Approach Guidance for the Real Estate Sector" detailing risks associated to the real estate sector and how to counter them.
In the EU, the mention of real estate first appeared in 2015’s 4th AML Directive which required real estate agents to comply with European AML requirements such as customer verification and reporting of suspicious transactions. The notion was further expanded to all businesses dealing in property with 2018’s 6th AML Directive.
To counteract the flow of dirty money into their property market, the United Kingdom enacted in 2018 the Unexplained Wealth Order (UWO). This piece of legislation states that if a person cannot explain the source of their funds, their properties can be confiscated by a court without the need for an investigation. The UWO complements the U.K.’s 2017 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations which requires real estate professionals to comply with AML standards.
The United States’ USA Patriot Act states that businesses and agents dealing in real estate must comply with AML rules. Just like for the EU and the FATF, this means conducting due diligence on all customers. Under the Bank Secrecy Act (BSA), property transactions also fall under AML scrutiny and must be verified.
However, this does not apply to “all-cash” deals, meaning that real estate professionals are not required to identify customers, monitor transactions, and report suspicious behaviour where a property is bought using cash. This amounts to 22% of all real estate transactions in the U.S. In December 2021, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed an Advance Notice of Proposed Rulemaking (ANPRM) to deal with the gap.
The United States: A Money Laundering Hub?
Despite the current AML legislation, the U.S. is considered a hub for real estate money laundering, much like Great Britain. Shell companies registered anonymously in states like Delaware, Nevada, and Wyoming are often used to purchase property or land in the country. A study by Global Shell Games found that out of 60 countries, the U.S. is second only to Kenya in terms of how easy it is to set up a company with anonymous beneficial owners.
How can AML officers counter real estate money laundering?
Together with gatekeepers, compliance and AML officers in financial institutions are an important line of defence for countering this phenomenon. Below are a series of tips to help them identify red flags in relation to the real estate sector:
1
Shell companies and similar corporate vehicles: If a company, or another corporate vehicle, is buying property, make sure you understand the structure of the entity and who is behind it. Check in the Panama Papers database, or other databases for financial data leaks, if the company, or any of its beneficial owners, appear there. Be extremely wary of shell companies and have a non-acceptance policy towards them.
2
Cash: If applicable to the laws of your jurisdiction, be also wary of individuals looking to buy property using cash. Investigate where the funds come from. Is the person using their account as a funnel account? Did they receive the money from a third-party? These are all questions that need to be verified and that could trigger a suspicious activity report (SAR) towards your local FIU.
3
PEPs: A similar kind of investigation should be carried out on family members or close associates of PEPs looking to buy real estate. A PEP may use a third-party to buy property under someone else’s name when in fact they are the true but hidden owners. This can also happen with shell companies owned by PEPs.
4
Income vs property value: When an individual is acquiring a property, check if their income justifies the kind of real estate they are buying. If a person with a low salary is buying a luxury apartment, investigate further to understand the origin of the funds and send an SAR to your local FIU.
5
Geographic distance: If an individual or a company is acquiring real estate in a country or an area of the jurisdiction they reside in where they have no business or connections, this could be seen as a red flag.
It is only through the knowledge of risks and money laundering methods that AML professionals can help to counter the criminal use of the real estate industry.
Hello, very interesting piece, could you share the Europol study supporting the statement that: "Europol also found that 68% of criminal organizations in the EU have used the property market to legitimize their illegal proceeds."? The hyperlink provided does not work.
Thanks!
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Hello, very interesting piece, could you share the Europol study supporting the statement that: "Europol also found that 68% of criminal organizations in the EU have used the property market to legitimize their illegal proceeds."? The hyperlink provided does not work. Thanks!
Dear Laure, thanks for letting us know. The link has been updated. Have a great day!
Thanks for sharing us!