Money laundering risks on the rise in real estate

| Article by James George, Compliance Manager, Compli-Serve SA

Property practitioners in South Africa have been identified as potentially vulnerable to money-laundering and terrorist financing (TF) activities. This was revealed by the FIC (Financial Intelligence Centre) in their recent Assessment of the inherent money-laundering and terrorist financing risks impacting the real estate sector report.

While further consulting within the real estate sector will still take place, the report rounds up the risks to be aware of for real estate agents and those working in the sector. The FIC has stressed the urgency in taking effective anti-money laundering (AML) measures in real estate, wherever possible.

How criminals creep into property transactions

Property investment is typically a stable asset and because of this, it can attract criminals as well as reputable buyers. The FIC says that laundering money through property transactions easily integrates illicit funds into the legal economy, while providing a safe investment, making it all the more popular. It can even open opportunities for criminals to enjoy an income from an illicit property investment, where the reason they came to own the property is not common knowledge (or just plain dodgy).

Locally property transactions tend to come with a paper trail including banks, estate agencies and attorneys through conveyancing. This process often excludes estate agents from receiving the funds or registering the property themselves and this can also mean that some due diligence on the origin of funds falls by the wayside. 

Unfortunate trends include criminals using opaque financing or cash in a property purchase, using false documentation, or working with suspicious companies that make it difficult to ascertain who the true owner is in a transaction. Criminals may even pay higher rent for a property intended for illegal activities (potentially unknown by the owner). The distance between the location of the property and the prospective buyer or tenant can also play a role, particularly in international property transactions, where jurisdiction might mean more relaxed regulations or controls exist on AML efforts.

The overvaluing or undervaluing of property prices is another concern. Money laundering can effectively create distortions in property prices within a suburb or area because of criminals being willing to pay more than market value to quickly finalise a transaction.

Interestingly, most reports of suspicious activity in the sector from 2016-2021 were in the form of cash threshold reports (CTRs). This indicates that many rentals are still being paid for in physical cash. It’s important that the purpose of renting be clarified, and estate agents are advised by the FIC to always assess the method of payment and deal size. If a property is of high-value or overpriced and is paid for in cash, it may warrant a second look at the origin of the funds, to be sure that the transaction is legitimate.

Signs to watch out for

If a client tries to conceal their identity or becomes agitated by due diligence documentation requests, the warning signs are clear but there are other, less obvious inconsistencies to watch out for. An example is when a transaction doesn’t make sense, such as suspicion around the purchase price and the stated income or occupation of a client. Deposits paid by third parties or purchases made in the name of third parties should be screened.

Paying rent upfront but then requesting a refund is another cause for concern, as is the customer who makes substantial cash down payments but is then financed by third-party or unknown lenders. If a customer doesn’t want their name on the agreement or seems rushed, these are bad signs.

When countries are subject to travel bans, this can also be important to be aware of when dealing with certain buyers, as well as if buyers come from countries that are seen as a high-risk for money-laundering, such as those regarded as tax havens.

Even working with non-profit organisations warrants a second look. The funds used and properties involved need to match the mission of the non-profit, as another example of due diligence.

The FIC says that to determine the existence of the risk of money laundering, estate agencies need to conduct a thorough assessment of property transactions based on customer profiles. If red flags are raised in assessment, estate agencies must submit regulatory reports as required by the FIC Act, which will in turn, raise the issue at the FIC on the potential criminal activities taking place.