2.2.2 Features of the Real Estate Sector that Increase Risk

Effective from 16/6/2021

Certain features of the real estate sector in different jurisdictions can increase the attractiveness of the sector to illicit actors. Although these features are not in themselves negative or undesirable, they have the effect of increasing the ease with which illicit actors can use the sector to launder funds.

	•	Varying regulation and supervision of real estate professionals. Real estate agents and brokers are well placed both to detect and to collude in suspicious transactions. Agents and brokers are able to observe suspicious client behaviour, as well as aspects of a transaction that do not have a reasonable explanation. Conversely, complicit real estate professionals may advise a client on how to avoid scrutiny from LFIs and government authorities. This risk is increased in jurisdictions where agents handle client funds, such as in escrow or trust accounts.
		Because of the special role played by real estate professionals, the FATF Recommendations require that many such professionals be regulated and supervised, with AML/CFT obligations like those imposed on financial institutions. Where these obligations are not imposed and enforced, and where real estate professionals are not monitored for their compliance, the sector may be higher risk.
	•	Widespread use of cash. In certain jurisdictions, real estate transactions are frequently executed entirely or partially in cash. This allows a transaction to take place without involving the formal financial system. In addition, criminal activities often produce high volumes of cash, and placement of cash derived through illegal activities is often the first step in the money laundering process. Even if a particular transaction is executed through bank cheque or other similar means, if the property was purchased for cash in the recent past it can be difficult or impossible to fully understand the chain of ownership and thus to identify whether a transaction is part of the money laundering process (e.g., the property was purchased in cash by A, sold to B to launder the original purchase funds, and is now being re-sold to A).
	•	Lack of transparency on beneficial owners. As discussed above, illicit actors, like many purchasers of real estate, often engage in transactions using shell companies, and engage intermediaries such as law firms to represent them and obscure their interest in a property transaction. Where a jurisdiction does not collect beneficial ownership information for such companies or for real property in general, and permits foreign companies to own real estate, it increases the likelihood that law enforcement and LFIs will not be able to identify the individuals behind a purchase or sale.
	•	Openness to foreign purchasers. A real estate sector that is entirely open to non-residents and non-citizens is likely to be more liquid than a closed sector. In addition, an open sector is exposed to illicit funds generated all over the world. Jurisdictions that offer residency or citizenship rights to foreign purchasers of domestic real estate may be particularly attractive to foreign illicit actors.
	•	High liquidity and rising prices. Illicit actors, like licit investors, want assurance that they will be able to sell an investment property for an amount that recoups their investment or offers a profit. Although they may be willing to tolerate a modest loss on the investment as the cost of money laundering, they may be more likely than most purchasers to seek to ‘flip' properties, buying and selling them in quick succession. A highly liquid market facilitates flipping and increases the likelihood that the sale price will meet or exceed the purchase price. In addition, rising prices and a ‘hot' market make it easier to disguise certain typologies, such as making small renovations to a property and then reselling it to an associate for a steeply increased price. The difference between the purchase price and the market value is then secretly refunded to the buyer in cash.