AML for the real estate sector: Risks and best practices

Criminals aren’t the only ones aware of how easily real estate can be exploited for money-laundering purposes. So are regulators. The Financial Action Task Force (FATF), the intergovernmental organization that creates standards for AML regulations and practices, updated its guidance for using a risk-based approach to AML in the real estate sector in 2022. And in 2023, the U.S. is exploring the expansion of AML regulations to include more real estate professionals.

Why real estate attracts money launderers

Money laundering is a three-step process used by bad actors to introduce money connected to criminal activity into the financial system (placement), hide the source of the funds (layering), and move the “cleaned” money into legitimate bank accounts (integration). Real estate can play a role in all three stages, but integration factors significantly in the purchase and use of property. 

Real estate is particularly attractive for money launderers because:

• Criminals can purchase property in countries that have less-stringent AML laws or regulations. In some cases, this can also protect assets from seizure by their home country’s law enforcement.
• In some regions, including the U.S., real estate has less oversight and fewer AML requirements than other financial transactions. 
• Property tends to maintain or increase in value over time, making real estate a good long-term investment. The gains from buying and selling real estate, even in the short term, typically raise few questions. 
• Criminals can use real estate to create sudden new cash flows, such as rental income, that can also appear legitimate. 

Real estate is also filled with above-the-board transactions that share characteristics with how money launderers operate. 

For example, certain home buyers have valid reasons for keeping their identity a secret and paying in cash — consider a celebrity who creates an LLC to buy a home to ensure their personal address remains private. Similarly, criminals use shell companies and professional services providers, and pay with cash to obscure their identity and the source of their funds. 

How AML regulations affect the real estate sector

The U.S. was one of the first countries to create AML regulations with the passage of the Bank Secrecy Act (BSA) in 1970. The law remains the basis for the AML framework, although subsequent laws, regulations, rules, and guidance enhanced the regulatory system. The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, is the primary administrator and enforcer of the BSA. 

The BSA’s definition of financial institutions, a broad category of people and organizations covered by AML laws, was amended in 1988 to include “persons involved in real estate closings and settlements.” However, this group is still exempt from the requirement to establish AML programs. 

Furthermore, many professionals within the real estate sector are exempt from AML requirements to maintain a customer identification program (CIP) or file suspicious activity reports (SARs) and currency transaction reports (CTRs). Those exempt include attorneys, brokers, agents, appraisers, and inspectors working on real estate deals. 

However, the following AML regulations and voluntary guidelines can apply to real estate transactions: 

• AML program requirements for financial institutions: The BSA’s AML program requirements apply to bank and non-bank mortgage lenders and originations. 
• Form 8300 filings: To report payments over $10,000 in cash as well as certain monetary instruments such as cashier’s checks or money orders. 
• Currency and monetary instrument report (CMIR) or Form 105 filings: To report the movement of over $10,000 in cash as well as certain monetary instruments across the border. 
• Geographic targeting orders (GTOs): U.S. title insurance companies must submit CTRs for certain legal entities and their beneficial owners (people who own at least 25% of an entity, either directly or indirectly) who purchase residential real estate without financing in specific areas, such as New York, NY; San Francisco, CA; and Cook County, IL. These reports are generally only required if the property is worth at least $300,000. 
• Beneficial ownership rules: New beneficial ownership rules go into effect on January 1, 2024, and could affect entities and individuals that purchase real estate. They require domestic and foreign business entities (such as corporations and LLCs) that are registered to do business in the U.S. to register with FinCEN and provide identity information for the entity’s beneficial owners. 
• Voluntary guidelines for realtors: FinCEN and the National Association of Realtors (NAR) have worked together to create voluntary guidelines for real estate professionals. These help inform agents about money laundering and potential red flags, and encourage agents to file a SAR if they suspect suspicious activity.

FinCEN also released an advanced notice of proposed rulemaking in December 2021 to gather comments on potentially implementing additional BSA requirements within the real estate sector. The next step, a comment period for the notice of proposed rulemaking, wraps up in October 2023. 

Globally, AML requirements and compliance looks very different. In an August 2021 report titled Acres of Money Laundering, the Financial Transparency Coalition outlines how AML regulations have developed within the G7 — Canada, France, Germany, Italy, Japan, UK, U.S., and EU. The report highlights that the U.S. is the only member that doesn’t have AML requirements for the real estate sector. 

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Money laundering red flags in real estate

Real estate agents and related industry professionals can help detect and prevent money laundering by looking for and reporting suspicious activity. According to FinCEN and NAR guidelines, red flags can broadly fit into three categories, each with its own red flags. 

Geographic risk

• The real estate deal takes place in one of the GTO areas.
• The deal involves a person or entity subject to Office of Foreign Assets Control (OFAC) sanctions, such as people and entities from Cuba, Iran, and Syria. 

Customer risk

• The buyer doesn’t live or work near the property.
• There are unusual third parties involved in the transaction, such as a residential property title that is transferred to another party rather than the buyer.
• High-ranking government officials and their family members are investing. 

Transaction risk

• The sale price is significantly higher or lower than the property’s value, especially if the parties don’t try to negotiate. 
• The buyer pays with cash or doesn’t take out a mortgage, and it’s unclear how they can afford the property.
• The buyer’s income or job doesn’t align with the property’s value.
• The property is quickly resold, especially with a big change in price that the seller cannot explain. 
• The transaction is rushed. 
• The buyer doesn’t ask about the property or seem interested in details.
• The buyer wants to pay with cryptocurrency or has unusual funding sources, such as third-party funding from someone who isn’t a relative. 
• The buyer is in a marijuana or marijuana-adjacent business. 

How AML programs help prevent money laundering

Although AML program requirements still generally don’t apply to organizations or professionals within the real estate sector in the U.S., it is important to understand how they can detect and deter money laundering. 

AML programs typically identify individuals and businesses when they first open an account or start a transaction — and, to a lesser degree, during ongoing customer transaction monitoring, for example, via identity reverification. Within real estate, the transaction monitoring stage can include the SAR, Form 8300, and Report of International Transportation of Currency or Monetary Instruments (CMIR) reports. 

The initial identification process can include various due diligence checks that happen when taking on a new client or closing a deal. Broadly, these fall under the umbrella of Know Your Customer (KYC) programs for individuals or Know Your Business (KYB) programs for entities, and may include: 

• Customer identification program (CIP): A CIP allows a company to form a reasonable belief about the identities of its client base. This may involve requesting and verifying a customer’s name, date of birth, address, and Social Security number, or similar identifying information from a business entity. 
• Customer due diligence (CDD): A CDD process allows organizations to make risk-based assessments about customers and then conduct an appropriate amount of due diligence. In low-risk cases, a simplified due diligence process may be enough. However, an enhanced due diligence process may be more appropriate for high-risk individuals or transactions. 
• Enhanced due diligence (EDD): EDD can add additional checks and verifications, such as Office of Foreign Assets Control (OFAC) and other government watchlist checks, adverse media screenings, and politically exposed person (PEP) screenings. Although these might not be required within most real estate transactions, a Global Financial Integrity report found that over 50% of reported money laundering real estate cases in the U.S. involved PEPs. ‍
• Source of funds and wealth checks: Verifying the source of funds or wealth can also expose individuals who are attempting to launder money. These checks include asking for verification documents, such as statements, tax records, and employment contracts. 

Getting AML right

Know your customer and AML compliance can be complex, but good AML programs play an important role in detecting and preventing money laundering. In turn, this can help reduce funding for other types of crime and prevent price distortions in local real estate markets. 

Whether you’re required to have an AML program today or you’re doing your research in anticipation of needing to create one, here are resources that can help:

• How to implement the five pillars of AML compliance
• AML tools: What to look for in AML software
• Buyer’s guide to identity verification solutions

You can also contact us to learn more about how Persona’s automated and customer-friendly approach to identity verification and AML can help.