The real estate sector is an attractive target for money launderers. It helps to hide the proceeds of crime. It allows large quantities of cash to be laundered in a single transaction. There are no regulators for monitoring the flow of money in this sector. There are no obligations that require real estate agents and companies to carry out more detailed due diligence on customers.
Anti Money Laundering Regulations don’t cover the Real Estate Sector Directly, it covers the transactions in financial institutions. Investments in Real Estate properties, Joint Ventures, and Financing deals take place through financial institutions covered by the AML Regime.
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Real Estate is a conduit for laundering criminal proceeds. Corruption proceeds largely go into the land and real estate sector. The unstructured growth of this sector has not only affected economic life but has created environmental problems in various cities across the world.
Since constructing the buildings require no skills besides networking with vendors, all the major politically exposed persons have interests in real estate.
PEP Nexus with Real Estate Sector
Politicians and criminals often employ a common strategy to launder money and conceal their illicit activities by investing in real estate within cities where property values are high. To ensure anonymity, these individuals conduct these transactions through shell companies or trusted business associates, obscuring their true ownership. In many cases, these individuals prefer to make cash purchases to further obscure the origin of the funds.
Once the real estate is acquired, these shell companies may choose to rent out the properties or renovate them using illegally obtained funds. The aim is to maximize the value of the property and generate profits upon resale. In India, this practice is known as a “Benami Transaction,” where properties are held in the name of someone other than the actual owner.
Recognizing the need to combat such financial crimes, the Financial Crimes Enforcement Network (FinCEN), a bureau under the United States Department of the Treasury, plays a crucial role. FinCEN collects and analyzes information related to financial transactions to identify and prevent money laundering, terrorist financing, and other financial crimes both domestically and internationally.
In January 2016, FinCEN implemented an important amendment aimed at increasing transparency in the real estate sector. The amendment required owners of Limited Liability Companies (LLCs) purchasing luxury real estate to disclose their identities. This significant regulatory change has had a substantial impact, with cash purchases in the luxury real estate market experiencing a significant decline of 70 percent.
By mandating the disclosure of LLC owners, the amendment introduced a crucial layer of transparency and accountability. It is now more challenging for individuals engaged in money laundering or illicit activities to hide behind the anonymity provided by shell companies when making high-value real estate purchases. This regulatory change has significantly curtailed the use of cash transactions, making it more difficult for criminals and corrupt politicians to exploit real estate sector for money laundering purposes.
The efforts of FinCEN to combat money laundering and financial crimes demonstrate the importance of regulatory measures in safeguarding the integrity of the financial system. By enhancing transparency and accountability, governments can deter and detect illicit activities, ensuring a fair and secure real estate market.
Real Estate Sector Laundering Technique
Money laundering in the real estate sector often involves a specific process that starts with the purchase of property using cash. This method is particularly prevalent in emerging countries such as India, where cash transactions are common in real estate deals. In many instances, a significant portion of the property’s purchase price is paid in cash, allowing individuals to obscure the true origin of their funds.
Once the property is acquired through a cash transaction, a crucial element of the money laundering process begins. After a period of three years, the property is then sold to a new buyer who makes the payment using a cheque or other traceable means. By utilizing a legitimate payment method, the money’s illicit origins become less apparent, and the funds appear to have undergone a legitimate transformation.
The three-year timeframe plays a crucial role in this money laundering scheme. During this period, the ownership of the property is typically held by the individual or entity involved in the illicit activities. This gives them time to distance themselves from the initial cash investment and create a facade of legitimate ownership. When the property is eventually sold, the funds obtained from the sale are perceived as legal proceeds.
By transitioning from a cash purchase to a cheque payment, the money effectively “changes color” within the span of three years. The initial cash, which may have originated from illegal activities, is transformed into seemingly legitimate funds through the sale of the property to a buyer using traceable payment methods.
This process allows individuals engaged in money laundering to legitimize their illicit funds and integrate them into the formal economy. The real estate sector’s inherent characteristics, such as the prevalence of cash transactions, create opportunities for money launderers to exploit the system and obscure the true origin of their funds.
Real Estate Sector Laundering through Phantom Tenants
Phantom tenants refer to fictitious individuals or entities created solely for the purpose of legitimizing illicit funds through the rental income channel. Criminals engage in this deceptive practice by fabricating tenancy agreements, rental receipts, and related documentation to create the illusion of genuine rental income. These fraudulent documents are then presented to financial institutions, giving the appearance that the funds deposited in the associated bank accounts are legitimate earnings from property rentals.
The process begins with the criminals generating a series of false tenancy agreements, often using fake names and addresses. These agreements are carefully designed to mimic legitimate rental contracts, complete with fictitious rental amounts and payment terms. To bolster the deception, the criminals may also create counterfeit rental receipts, bank statements, and other supporting documents.
Once the fraudulent tenancy agreements and related documentation are prepared, the criminals proceed to open bank accounts in the names of the phantom tenants. The illicit funds acquired through financial crimes, such as fraud, corruption, or drug trafficking, are then systematically funneled into these bank accounts, disguised as rental payments. By commingling these illicit funds with legitimate rental income, the criminals obscure the source of the money and legitimize their ill-gotten gains.
This technique of laundering money through phantom tenants enables criminals to channel significant amounts of illicit funds into the real estate sector. The funds can be used for various purposes, including purchasing properties, financing property developments, or simply parking the money to conceal its origin. In some cases, criminals may also engage in the sale and purchase of properties among fictitious entities or individuals, further complicating the money trail and making it challenging for authorities to trace the illicit funds.
