Real estate has long been used by money launderers. Take the case of Teodoro Nguema Obiang Mangue. The son of the Equatoguinean leader, apparently living an enchanted life, is said to visit his luxurious mansion on chic Avenue Foch in Paris.
Worth over 100 million euros, the building’s 101 rooms are said to have included a Turkish bath, nightclub and cinema, with gold and jewel encrusted light fixtures.
But in a blow to Obiang, French police seized the property in 2012 in connection with a corruption and money laundering case. Last year, after a decade of legal battles, France’s highest court of appeal upheld a guilty verdict for embezzlement and money laundering.
Obiang has always denied any wrongdoing and continues to do so. However, the case remains a stark example of how huge sums of money can be laundered in the real estate industry.
Every year, cash pours into luxurious penthouses and lavish mansions in major cities around the world, as well as commercial and other real estate markets, but often few questions are asked.
The thirst for a quick sale and a large commission can sometimes outweigh other considerations, including potential criminality.
The Financial Action Task Force (FATF) wants that to change.
Although real estate agents are expected to know who they are dealing with and review risky transactions, FATF reports show that globally many of them have no due diligence or reporting obligations to with regard to customers.
Even if they do, most don’t understand or follow them. It can’t be business as usual.
The real estate industry needs to critically assess its vulnerabilities to illicit finance and transform the way it manages risk.
For the past two months, the FATF has been organizing a public consultation on the risks of money laundering and terrorist financing in real estate.
A full report on the subject should be published this summer, but the key to solving the problem can already be summarized: those who work in real estate and who are part of the problem must be part of the solution.
What is happening is no secret. Criminal gangs, corrupt officials, drug dealers and kleptocrats use property to launder their ill-gotten gains, often through anonymous front companies.
By simply buying an apartment, criminals can appear to legitimize huge sums in a single transaction.
The combination of rising prices, investment opportunities, sometimes complex transactions and little oversight is an attractive mix. Dirty money enters property through various methods.
Launderers can filter the money through an all-cash transaction, mix illicit proceeds with a mortgage, use third parties, or simply buy and resell quickly.
Countries with large or attractive real estate markets, including FATF members, are often seen as good laundering destinations, in part due to the attraction of well-regulated financial systems and conniving or unwitting facilitators, including the real estate sector.
So what needs to be changed? First, real estate agents need to understand the risks. The FATF does not expect a zero tolerance approach, but it does expect a risk-based approach.
This means understanding how money launderers and other criminals can exploit the industry.
It is not good for a company’s reputation to be associated with criminals and money laundering.
Second, risk mitigation. Agents really need to know their customers.
Where do they work? Where do they come from? What is their source of income and wealth? If you are unable to obtain satisfactory answers or suspect criminality, do not be complicit in supporting serious crime and terrorism.
Some red flags include selling price higher or lower than expected, overemphasis on anonymity, reluctance to provide answers, buying from a distance without good reason, and using complex business structures and schemes to hide the real buyer.
Third, file suspicious transaction reports. At the moment, this is the exception rather than the norm. Rarely do estate agents act on suspicious behavior despite overwhelming evidence that the sector is used to launder illicit funds.
In fact, many countries do not require agents to file reports even if they are handling large sums, including cash, from high-risk jurisdictions. This, again, must change.
It is important to understand that filing a report is not the same as reporting a crime. There is no judgment on the person or the transaction.
It’s just about sharing information with your financial intelligence units and law enforcement, to enable them to make a decision on what’s really going on.
Since most real estate purchases are a one-time transaction, if the proper checks are not made and the red flags are missed, then it is less likely that the illicit nature of the transaction will be discovered.
Don’t assume that just because a payment goes through the banking system doesn’t mean it’s someone else’s responsibility to report it. We all operate within the framework of the global financial system, and it is only as strong as its weakest link.
Finally, don’t close your eyes. Money laundering fuels serious crime and terrorism, fosters corruption and undermines fair and balanced economic growth.
The role of real estate agents, as guardians of the financial system, is crucial. I urge countries and the sector to wake up to these very serious issues that have been overlooked or conveniently ignored for too long.
By working together, we can make a difference.