As I wrote in November 2018:
A longtime favorite vehicle for money launderers, real estate, as a means of hiding illicit proceeds, has gained the renewed attention of regulators and legislators throughout the world.
Real estate was an $8.5 trillion market in 2017, which warrants regulatory scrutiny and enhanced transparency for an industry exposed to the downstream risks of criminal activity.
The primary money laundering risk for the real estate industry is lack of transparency, specifically with regards to cash transactions and purchases by ever-problematic shell companies.
Residual effects of real property purchased with illegal funds include artificial real estate market inflation and higher costs of living, especially in dense urban areas. It seems that some governments are taking notice, and action, in some potentially meaningful ways:
- Starting in the United States, the world’s largest real estate market, the success of Geographic Targeting Orders in reducing the volume of cash-for-property transactions has led to FinCEN extending and expanding the program to nine major geographic areas in November 2018. Unsurprisingly, real estate-related SARS in the U.S. increased by over 300 percent from 2013 to 2017 and are on pace to increase again in 2018 due to enhanced regulatory focus.
- Moving north to Canada, multiple embarrassing money laundering incidents in British Columbia have moved provincial officials to set up a registry that will collect ownership information on new condominium developments and attempt to remediate past suspicious real estate transactions. The initiative, starting January 1, 2019, is aimed in part at curbing the costs of living in the province’s largest city, which ranks as the least affordable real estate market in North America. Many blame the post-2008 financial crisis influx of foreign, shell company and criminal proceeds purchases of commercial and residential properties for the over-inflated market, and this initial step towards transparency may provide relief long-term for the high cost of living for Vancouver area residents.
- Germany’s anti-money laundering authority has intimated that it will seek harsher penalties for banks and brokers that enable criminals to purchase property in the world’s fourth largest real estate market. The Financial Intelligence Unit is seeking increased transactional oversight, including real estate deals that are attempted but not completed.
- Singapore’s Parliament passed the Developers (Anti-Money Laundering and Terrorism Financing) Bill in November 2018. The bill will compel developers and related transactional parties to implement money laundering controls and produce relevant documentation for law enforcement investigations. It also limits the ability of real estate firms to make deals with shell and shelf entities that lack a reasonable source of funds or possess ambiguous beneficial owners.
- Finally, the United Kingdom may have made the most significant steps towards fighting laundering in real estate despite its reputation as a hub for illicit money. The Unexplained Wealth Order (UWO) was incorporated into UK law in January 2018 as part of the Criminal Finances Act 2017. It is a court order issued to compel someone to reveal the sources of their unexplained wealth related to assets that are worth more than £50,000. UWO provides regulators and law enforcement more tools to combat tax evasion, money laundering and terrorism financing. Parliament is also working on legislation that would create a public register of foreign entities that own property in the U.K. and would require listing details of beneficial ownership. This register would likely compliment the country’s registry of companies, Companies House, which completed its first successful prosecution for false company information in March 2018, a step in the right direction for transparency.
The basic AML principles of KYC, identifying legitimate business purpose, and conducting due diligence before the transaction don’t just apply to banks anymore.
As regulatory and legal initiatives grow to incorporate more facets of the financial crimes process, solid compliance programs will continue to become a critical concern for developers, realtors and facilitating companies.
Specifically, knowing your buyer will eventually mean more than some basic paperwork and the proverbial bag of cash.
In most new Manhattan luxury-condo buildings, buying through an LLC has become commonplace. At the midtown residential tower known as 220 Central Park South, more than 85% of all purchasers so far bought through entities ending with “LLC,” according to property records. That includes the most expensive home in the country: a $240 million unit bought by billionaire investor Ken Griffin, who bought it under the name “NYCP LLC,” property records show. There are about 61,000 1-to-four family properties owned by limited-liability companies in New York City, a Wall Street Journal analysis of city tax records found, including 12% of all condos and 5% of houses. About 30% of all condos built since 2008 are owned by LLCs. Co-ops aren’t covered under the new law.