Spotting The Signs Of Money Laundering in Property Transactions
Firms from across the real estate sector were fined £190,000+ in 2021 for failing to comply with money laundering regulations. In information publicly available from HMRC, with the highest fine a crippling £52,000.
With penalties being issued for failures in having the correct controls and procedures, internal controls, conducting due diligence and failing to apply for registration at the required time, the European Parliament warns of a number of ‘shortcomings in anti-money-laundering practices’ in the real estate sector.
As real estate continues to be an attractive avenue for money laundering criminals, we take a look at how real estate agents can spot some of the most common signs of financial crime in property transactions.
Is the Source of Funds Suspicious?
As part of many property transactions, lenders and conveyancers will request copies of bank statements to ensure a legitimate source of funds.
As part of Money Laundering Regulations, you must scrutinise these documents to ensure they are consistent with what you know about the client. Large deposits can be a warning sign of money laundering.
Of course, in some cases, these large deposits may be a gift from family, inheritance or from other legitimate sources which can be verified through further evidence to support this such as bank statements or other documents confirming its source.
In cases where cash is being used, identifying where these funds have come from becomes more difficult. Bank statements showing large amounts of withdrawals don’t provide sufficient information about its source. In any case where the source of funds is suspicious or can’t be vetted satisfactorily, ask yourself if you’re suspicious of money laundering or other financial criminal activity based on the evidence you have and what you know about the client.
If the answer is yes, firms are obligated to raise a Suspicious Activity Report (SAR) with the National Crime Agency to alert law enforcement to potential instances of money laundering or terrorist financing.
Is there a Reluctance to Provide Proof of a Legitimate Source of Funds?
Similarly, a reluctance to provide proof or further documentation to prove the legitimate source of funds should set alarm bells ringing. Legitimate clients should be able to supply a complete overview of the source of funds to prove its legitimacy.
A reticence to supply such evidence is suspicious and should be treated as a potential money laundering or financial crime risk. Once again, a SAR should be raised with the National Crime Agency to investigate further.
Is the Buyer Subject to Sanctions?
Recent events have placed a more rigorous spotlight on sanctions than ever before. The invasion in Ukraine has led to significant sanctions on Russia from governments across the globe.
With lists of individuals associated with Putin’s regime being targeted as part of the latest wave of Russian sanctions, real estate firms must be checking transactions and the parties involved against global sanctions lists to ensure an individual or company seeking to acquire real estate isn’t a risk to UK security or international peace, or a known proponent of terrorism.
The location of the buyer as well as the individuals themselves and their known associates must be verified against constantly changing sanctions lists and requirements.
These restrictive measures are put in place to fulfil a range of purposes. In the UK, these include complying with UN and other international obligations, supporting foreign policy and national security objectives, as well as maintaining international peace and security, and preventing terrorism.
Can you Identify all Ultimate Beneficial Owners?
In cases where companies are purchasing real estate, it is key that the Ultimate Beneficial Owner (or UBO) is identified and screened. A UBO is the individual (or individuals) who ultimately owns or benefits from a company. The UBO is not always directly known as the owner and may hold a significant % of shares or voting rights in the company (usually more than 25%).
Structuring businesses in this way is not illegal, but is often used for covert criminal activities and money laundering due to the complex networks of companies created to mask its true ownership.
Real estate companies and those involved in property transactions must identify the UBOs of each entity at the time they start a business relationship with them. Once identified, ID verification and further screening must be undertaken to ensure the legitimacy of each UBO.
Depending on the situation and associated risk at hand, checks may also assess each UBO’s individual risk profile including political exposure, adverse media coverage and legal enforcement measures that could contribute to risk.
Is the Client Politically Exposed?
While not always a certain indicator of money laundering activities, a Politically Exposed Person (PEP) is often at higher risk of involvement in money laundering and/or terrorist financing due to their position in the public domain.
MPs, Heads of State, Councillors and those appointed to prominent public functions are all considered to be politically exposed. This extends to their family and close business associates too.
As part of FCA guidance, if a buyer is identified to be a PEP, firms must “have in place appropriate risk-management systems and procedures to determine whether a customer or the beneficial owner of a customer is a PEP (or a family member or a known close associate of a PEP) and to manage the risks arising from the firm’s relationship with those customers.”