The need for Anti Money Laundering (AML) compliance is increasing for the real estate sector due to its international recognition and emerging investment trends. In this regard, the prime concern for property agents is to figure out loopholes that provide room to money launderers. Currently, the real-estate sector is facilitating most cases of money laundering as illicit transactions reached $2.3 billion in 2021.
Real estate firms become victims of crimes unless the agents are not a part of them. Concerning the rise in money laundering through property trading, dealers require efficient AML solutions. While embracing technology, risk of cybersecurity threats also increases. This blog covers how AML verification solutions save the real-estate sector from becoming a safe haven for criminals.
The Real-Estate Sector – a Prominent Target of Financial Criminals
Purchasing luxurious mansions, dumping money into high-value construction projects, and fast sales/purchases are some of the main attractions for criminals. While the profitability in real estate trading continues to increase, fraudsters see this sector as their golden ticket. Criminals easily invest and conceal high sums of money without having to validate their source of funds. Furthermore, inadequate AML compliance measures and regulatory scrutiny enable criminals to avail free money laundering passages.
As of April 2022, more than $300,000 was spent on illicit high-value real-estate purchases. Obscuring the sources of illicit funds and escaping AML compliance is relatively easier while making single or multiple expensive property purchases. Furthermore, entities belonging to high-risk jurisdictions invest internationally in the real estate market for not only concealing their identities but also proceeds of crimes.
Property trading provides tangible assets with a stable or profiting process that enables criminals to generate more capital. While the real estate sector has inefficient AML security measures, implementing regulatory protocols becomes challenging.
Russian Invasion of Ukraine
In February 2022, Russia invaded Ukraine in a major escalation of the war that started in 2014. This massive takeover by the former served as a catalyst for bringing the real estate sector under the spotlight. Due to this reason, many restrictions were put forth for entities belonging to Russia. In order to conceal their funds, sanctioned oligarchs started investing in international properties. Real estate firms experienced a noticeable surge in AML compliance failure after Russian risk-possessed entities started flowing their illicit funds.
Strict Regulatory Scrutiny Increases for The Real Estate Sector
Criminals often use hard money to make high-value investments as it helps them dodge AML monitoring checks. Nonetheless, fraudsters see cash payments as their pass to evade regulatory reporting thresholds. Moreover, they use multiple bank accounts to hide AML compliance and trials of money laundering. Fraudsters also use shell companies, third-party brokers, trusts, or insurance coverage firms to purchase properties.
Fraudsters either rent or auction properties which aids in creating an illusion of legitimacy. Considering this, regulatory bodies are taking strict actions by enforcing strict anti-money laundering regulations. More details regarding stringent AML security requirements are in the next section:
5th Anti Money Laundering Directive (5AMLD)
The real estate sector should ensure AML compliance in order to secure property trading and restrict criminal activities. Within its 5AMLD, the European Union (EU) set out several standards including Know Your Customer (KYC), business legitimacy verification, third-party payment authentication, and identification of Ultimate Beneficial Owners (UBOs).
Joe Biden’s administration overlooked real estate companies and identified inefficient AML systems. In the wake of this, it put forth a new anti-money laundering regime with stringent penalties and a direct focus on cash transactions.
Risk-Based Guidelines by Financial Crimes Enforcement Network (FinCEN)
FinCEN renewed its Geographic Targeting Orders (GTOs) in April 2022 as a response to increasing financial crimes within the real-estate sector. Since 2016, insurance companies, property trading firms, and other such organizations were required to validate owners behind shell companies. Similarly, real-estate agents were also obliged to authenticate cash payments. However, in its 12th renewal of the GTO, FinCEN extended AML compliance to international investment coming from outside of the US.
Automated AML Security Solutions – the Key to Prevent Real Estate Fraud
AI-powered AML solutions are emerging as game changers for real estate firms to counter fraud risks. While criminals make sophisticated attempts to conceal their illicit funds, automated digital onboarding mechanisms identify them in real time. By integrating biometrics, sanction screening, and background cross-verification, anti-money laundering solutions accelerate accuracy. Furthermore, dealers and property traders can ensure they are facilitating legitimate entities by authenticating their source of funds across global financial databases.
In a Nutshell
The regulatory landscape continues to evolve considering the increase in real estate money laundering. While criminals deploy sophisticated efforts to exploit property trading and launder high sums of money, AML solutions counter their intentions. With automated IDV processes in place, real estate firms also meet compliance challenges. Hence, AI-powered AML screening ensures secure property trading.