AML Solutions for Real Estate Brokers and Agents

Criminals may attempt to launder funds by paying for property at a higher or lower value than the true property value, indicating that the property may not be intended for legitimate use and that the transaction is designed to hide illicit activity or gains. Moreover, infusion of large amounts of laundered money to purchase real estate with little regard to its actual cost can significantly increase housing costs, creating hardships for genuine buyers seeking affordable housing. This is a crucial AML compliance challenge for real estate professionals, especially when criminals purchase high-value properties using multiple types of financing, which could complicate efforts to identify the source of funds.

Criminals may also seek to falsify information such as asset holdings, falsified or stolen identities, and income information to obtain a loan from bank or other lenders, and in some instances criminals may have no intention of using the funds to acquire a property and may seek to use real estate loan to disguise the origin of funds, allowing criminals to place ill-gotten gains into financial system.

Real Estate professionals need to identify and verify the natural persons operating behind legal entities or legal arrangement customers. However, the lack of clarity around regulatory requirements to collect UBO information and the lack of transparency into beneficial ownership information leads to difficulty in identifying the natural persons orchestrating the transaction or business relationship behind the guise of legal entity or legal arrangement, such as through shell companies and trusts, which aid them in obfuscating their involvement in ML/FT activities.

CDD and Beneficial ownership challenges within the real estate sector are often associated with the specific functions performed by real estate professionals and their potential incompatibility with the process associated with collecting CDD information. The type of transaction, time constraints and ad hoc nature of transactions are other mounting factors. The use of cash in some markets to purchase real estate further complicates compliance efforts, especially with specific CDD requirements associated with customer onboarding.

Sales of property typically take place as occasional transactions rather than business relationships that result in the routine transfer of funds. Most buyers seek only one or two properties in their lifetime and consequently do not enter into an ongoing relationship with the agent. This makes ongoing monitoring a less relevant means of identifying suspicious transactions. More focus should be placed on understanding the purpose of occasional transactions and the source of funds. In response to the identified risk, real estate professionals face a critical AML compliance challenge when identifying transactions that are one-off, unique, and do not need to be subject to ongoing monitoring.

The fragmentation of the real estate market and change in ownership of real property have been identified as significant challenges to the real estate sector’s ability to mitigate ML/FT risks. The growing prevalence of private investors and accompanying corporate and legal entities used to facilitate their investment activities often makes it difficult for real estate agents to form an accurate picture of the parties seeking to purchase or sell real estate.

Transactions across jurisdictions to purchase real estate carry elevated risks, especially when the buyer is based in high-risk jurisdictions. This may include instances where the purpose of the transaction is questionable, i.e. not for residence, or when the value associated with the transaction is abnormal for the buyer or the market. Criminals could also rely on complicit bankers and lending professionals to help them obtain a mortgage and ultimately avoid detection. This poses a critical AML compliance challenge, especially when criminals seek out straw buyers or nominees to obtain a mortgage to ensure anonymity and hide true ownership.

In some countries, the investment real estate sector offers benefits, such as securing residency and/or citizenship, conveying social respectability, and providing an immediate material benefit that may appreciate in value. This situation is taken advantage of by criminals and corrupt PEPs. Some PEPs misuse their position for personal enrichment, which presents a high ML risk to the real estate sector. Criminal networks and drug traffickers have purchased real estate for their supply houses, or as a location to grow, manufacture, or distribute illicit narcotics. The AML compliance challenge lies in unveiling the true ownership through the shield provided by legal entities or arrangements, while recognising that certain individuals could have legitimate reasons to use these vehicles to purchase real estate, such as to ensure privacy or for tax planning purposes.

If screening is not effective and real estate professionals do not continuously update the databases, the AML program of real estate brokers and agents could fail and expose them to severe financial crime risks. The few reasons behind the ineffective screening process include reliance on manual screening processes due to a lack of resources, legacy systems, and the occurrence of false positives due to poorly configured systems or assuming the name screening process as a one-off thing, making the process ineffective.

The real estate sector continues to face a shortage of professionals with the right expertise in AML compliance. Many small and medium–sized agencies do not have dedicated compliance officers and often rely on general administrative staff or external advisors who may not be fully trained in current regulations. This lack of in-house expertise makes it difficult to properly implement and monitor AML procedures, leaving firms exposed to regulatory and reputational risks.

When real estate brokers and agents rely on legacy AML compliance software which are not scalable and cannot be attuned to keep pace with the evolving regulatory landscape, emerging ML/FT typologies, red flags, updated sanctions, and terrorist watchlists, AML compliance becomes ineffective. Legacy systems do not make the most of fuzzy matching and AI. Customer data security and data privacy are at risk when using legacy systems.

When real estate brokers and agents rely on manual or legacy systems, which are ineffective in handling a large volume of customer data across multiple sanction lists, they are prone to missing out on timely reporting of suspicious transactions and activities to their FIUs. This may lead to a breach of AML reporting requirements applicable in their jurisdiction.

A persistent challenge to ensure compliance with global standards and regulations is a lower level of understanding of the risks that the sector presents. In many countries, real estate professionals may have less stringent obligations around filing suspicious transaction reports despite accepting large amounts of funds, including cash from sources originating from high-risk jurisdictions or business relationships. Supervisors or other competent authorities may not have the capacity to monitor individual or aggregate transactions involving the real estate professionals, which can pose a serious AML compliance challenge.

Implementing a risk-based approach (RBA) requires that real estate professionals have a sound understanding of the risks and can exercise sound judgment. This requires developing expertise through training, recruiting, or taking professional advice. Attempting to pursue a risk-based approach without sufficient expertise may lead to flawed judgements. Real estate professionals may over-estimate risk, which could lead to wasteful use of resources, or they may under-estimate risk, thereby creating vulnerabilities.