Calls for US real estate shake up to counter money laundering

Entitled Acres of Money Laundering: why US Real Estate is a Kleptocrat’s Dream, the study finds more than $2.3bn (€2.0 bn) of dirty money passed through US real estate between 2015 and 2020.

In addition to luxury private properties, the investments included a mental health centre, wind turbines, steel plants, supermarkets, office parks, luxury hotels, motels and condominium developments. 

Among recommendations from the report’s authors Lakshmi Kumar and Kaisa de Bel are gatekeeper reform by lifting the exemption in the Bank Secrecy Act, under the definition of financial institutions, given to estate agents and lawyers. 

Other recommendations include:

• estate agents should be required to identify a residential property’s beneficial owner, when title agents are not involved in the transaction;
• lawyers should be made the lead reporting entity for identifying money laundering risks in commercial real estate transactions;
• investment advisors should be required to carry out client due diligence on all prospective investors in private, real estate funds;
• the government should create robust AML/CFT processes targeted at the property sector, such as a risk-based approach identifying and verifying the source of funds and the client’s beneficial owner;
• the Financial Crimes Enforcement Network should issue guidance, red flag indicators, and create reporting requirements for real estate money laundering typologies related to commercial property transactions;
• the network should also issue guidance on the definition of politically exposed persons (PEPs) and an advisory highlighting the risk of foreign PEPs to real estate money laundering schemes; and
• reporting entities should be required to report when a foreign PEP purchases property.

On the question why criminals choose property as a preferred money laundering vehicle, Kumar and de Bel write: “First, the value of real estate is generally stable and appreciates over time. This allows criminals to accumulate wealth while erasing its nefarious origins.

“Second, real estate transactions, both commercial and residential, are subject to limited oversight. This makes it easy to hide ownership of these assets, while at the same time being able to flaunt in plain sight the evidence of ill-gotten wealth.

“Third, real estate can be used to turn an initially illicit investment into a legitimate income-generating enterprise, through rentals or property development.

“Fourth, increased scrutiny over the ownership and use of bank accounts has meant that criminals have to find new ways to hide their money.

“Fifth, and perhaps most pertinent of all, by safeguarding wealth in assets where ownership interests are hard to trace, criminals can protect their wealth from asset recovery efforts in their home jurisdiction, whether from legitimate authorities or the next usurper to grab power.”