AML 101: 3 REAL ESTATE – OLDEST KNOWN WAYS TO LAUNDER ILL-GOTTEN MONEY

The large amounts paid for real estate make it an attractive option for laundering proceeds of crime. For example, by paying a mortgage down with illegitimate funds, criminals try to turn illegal proceeds into legitimate equity in real estate. Or, by paying real estate lease payments with cash from the proceeds of crime, the cash can become legitimate.

The three typical stages of ML, how it works in Real estate:

Placement: Introducing the proceeds from criminal activity into a legitimate financial system. This can happen through the purchase or sale of real estate.

Layering: Transferring proceeds from criminal activity into another form, using multiple financial transactions (i.e. layers) to create a complex audit trail of the source or ownership of the funds. These financial transactions can include buying and selling real estate.

Integration: The blending of the proceeds from criminal activity back into the economy through re-financing or re-mortgaging property or reinvesting the money after the sale of property.

Read in detail about basics of money laundering here.

Red flags for ML through Real Estate:

• Offering to pay large cash payments and beyond the market rates for any residential property as a part of lease to own it
• Keep the property vacant, with no business operating at the property
• To close the transaction with a private mortgage

Real life scenario – this goes on large scale as well as small scale

1. Government officials in Malaysia have invested millions of dollars in real estate along with holding over 400 companies in more than 25 countries. One of the previous Malaysian prime ministers was investigated by U.S. authorities for buying over US$1 million in property through various shell companies.
2. Criminal X applies for a 25-year, US$10 million loan with ABC bank to buy a luxury property. After a few monthly instalments, X reaches ABC to settle the mortgage in full without considering any additional charges, service fees or penalties will be paid to the bank. Take note that taking a mortgage to buy a property is not a red flag, but settling a large, newly-obtained mortgage is a major red flag!

As an established money laundering method, criminals are likely to continue to use real estate to launder illicit funds. Money laundering through real estate may be identified where transactions intersect with the regulated AML/CTF sector.