Over the last five years, most financial institutions have sufficiently strengthened their Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs, making it more difficult to launder money the “old fashioned” way. As a result, “bad guys” have had to become more and more creative in their quest to launder money. Over the past few years, concern with money laundering through real estate transactions has been on the rise. To understand this increasing concern, all you need to do is follow the Financial Crimes Enforcement Network’s (FinCEN’s) Geographic Targeting Order (GTO) activity.
In January 2016, FinCEN issued a GTO to title insurance companies with respect to cash transactions for high-end real estate located in Manhattan, New York and Miami-Dade County in Southern Florida. Since that time, FinCEN has continued to renew and enhance this GTO by issuing extensions and revisions to coverage. Currently, the most recent GTO issued covers several other metropolitan areas in Texas, California, Hawaii, Nevada, Washington, Massachusetts and Illinois. Dollar amounts have decreased from $3,000,000 (Manhattan)/$1,000,000 (Miami-Dade) to $300,000 for any of the currently identified metropolitan areas. Additional forms of payment have also been identified, including business checks, personal checks, funds transfers and virtual currency. This GTO is effective through May 15, 2019 and will almost certainly be extended.
However, financial institutions should not view these GTOs with a false sense of security. These GTOs are very targeted and only apply to title insurance companies. They simply require the filing of a currency transaction report (CTR) when a purchase is made without a bank loan or similar form of external financing, subject to other conditions. U.S. real estate brokers and agents and lawyers are still exempted from any due diligence regarding real estate buyers. Consequently, banks and other financial institutions should recognize the increased concern from FinCEN, review current controls and procedures, and make program adjustments, as necessary. Alvarez & Marsal’s (A&M) experts have taken this opportunity to highlight some of the more common methods of money laundering through real estate transactions and some best practices that financial institutions can follow.
Use of Shell Companies or Third Parties to Purchase Property
Criminals are always looking for ways to shield their identities. Creating a shell company is often used to accomplish this. When a shell company is established in jurisdictions with weak reporting or other requirements (e.g. Caribbean and South Pacific jurisdictions), it can be very difficult to determine the true buyer of the property. Such criminals will also use third parties such as family members or friends to pose as the buyer, further obscuring the identity of the true buyer.
Purchasing the Property and Using Cash for Renovations
Under this scenario, the criminal acts like a house flipper. The property is purchased, through cash or other means, and pays for improvements and other renovations with cash. After renovations are completed, the criminal sells the property, thereby laundering the money.
Manipulation of Property Values and Quick Mortgage Payoff
Criminals can manipulate property values through either over-valuation or under-valuation. In the case over-valuation, criminals rapidly buy and sell the same property typically through related parties to drive up the price of the property. Through under-valuation, the criminal purchases the property from the seller at a discounted price. After closing the transaction, the criminal makes a cash payment to the seller for the amount discounted. Later, the criminal can sell the property for fair market value.
Another technique is rapid loan payoff. Criminals will obtain a mortgage to purchase the property, then quickly pay off the loan without considering service fees, penalties or additional charges in doing so. Such charges are simply treated as the cost of laundering the money.
Best Practices for Financial Institutions
Mitigating the money laundering risk associated with real estate transactions, especially in the higher risk areas designated by FinCEN, requires additional controls and processes. To help mitigate the risks, financial institutions should consider the following:
- Strengthening customer due diligence and enhanced due diligence analyses: Organizations based in high-risk jurisdictions should be vetted thoroughly. Is the organization known as a real estate investor? What online presence exists for the organization? Is it difficult to obtain financial or other information about the organization? If the organization is a shell company, a financial institution should carefully consider whether it makes sense to continue with the transaction.
- Beneficial ownership: Ensure more detailed controls and procedures are utilized for obtaining beneficial ownership information. Beneficial ownership should be thoroughly scrutinized for foreign organizations.
- Increased scrutiny of title insurance companies: Ensure the title insurance companies you do business with are taking applicable GTOs seriously. Review their procedures to comply with the GTOs.
The bottom line is: banks must remain vigilant in their efforts to identify and report suspicious activity. Money laundering through real estate transactions may appear as innocent as the sale of a “fixer-upper” to a byzantine web of nominee buyers and shell corporations.
If your institution does business in any of the areas identified through the GTOs, you should establish enhanced controls and procedures for transactions in these areas. Ask yourself, can I demonstrate to my regulator sound enhanced controls and procedures for real estate transactions exhibiting heightened risk for money laundering?
The A&M team is highly skilled, and includes both former regulators and financial sector professionals, who understand the implications of regulatory change and heightened regulator expectations. Our professionals can deliver program reviews, file reviews, due diligence reports, special investigations and provide on-the-ground intelligence experts to assist in ownership determination and tracing of assets.
We are here to help your institution navigate ever-changing regulatory expectations. Please do not hesitate to contact one of our professionals for additional information.