The U.S. Department of Treasury published an update to the National Strategy for Combating Terrorist and Other Illicit Financing, developed from three risk assessments, including one specifically focused on money laundering threats to the U.S. financial system.The purpose of the strategy is to help public and private sectors understand terrorist financing, proliferation financing, and money laundering methods used in the U.S., the threat actors behind these methods, and the vulnerabilities exploited. As a result, government agencies should better comprehend, mitigate, and combat the risks posed by these activities to aid in protection of the U.S. financial system and assist national security efforts.
The 2018 National Money Laundering Risk Assessment focuses on threats, vulnerabilities, and risks to the U.S. financial system including in the real estate sector. The Department of Justice is cracking down on specific real estate threats, in part due to an increase in complicit professionals, and the report helps to identify recent trends in this area.
- The report identifies the most significant money laundering risks in the U.S. as misuse of cash, complicit individuals (i.e. real estate agents and attorneys) and financial services employees, and lax compliance at financial institutions.
- The increase in cybercrime (phishing, malware attacks, business email compromise, etc.) has also contributed to the rise of global money laundering.
- Anonymity, such as through virtual currency transfers and shell companies, further facilitates money laundering by organized crime organizations on a global scale, especially when unregulated or without proper oversight.
Treasury identifies real estate as an effective vehicle for laundering money, especially when shell companies are involved that conceal the true ownership of potential criminals, and when there is no financing involved (i.e. all cash transactions). Real estate professionals’ knowledge of the market has been used to help commit fraud and facilitate anti-money laundering (AML), both knowingly and unwittingly. While mortgage lenders – banks and non-banks – have AML requirements, real estate professionals do not have any customer due diligence reporting, which is why the industry must be proactive in the fight against AML.
The report recognizes how real estate professionals are not managing funds to complete the sale other than minimal deposit earnest money, but includes criticism of the lack of information gathering to identify whose dollars are being used to acquire the property – the salient question in AML investigations to determine who will benefit from the placement of funds in the U.S. market. According to Treasury, “such an inquiry about the source of funds in an all cash real estate transaction is not made by real estate professionals in the normal course of business, particularly those whose economic interests align with a smooth transaction and a good reputation among potential foreign investors.” Therefore, real estate professionals could face bank-like regulations in the future unless careful consideration of business practices and proactive steps to prevent money laundering are in place. Visit the additional resources listed below for more information.
Misuse of illegal entities – such as bad actors using shell companies to disguise criminal proceeds – have proven difficult to track in the United States. Law enforcement agencies lack any systematic way to obtain information on the beneficial owners of the legal entities as states vary on the level of information required to form a company (which can be done legally under a corporate registered agent). Such anonymous shell companies are often used to purchase real estate, which is why NAR supports disclosure of beneficial owners, subject to adequate privacy protections, to catch bad actors before engagement in a real estate sales transaction.
- One real estate agent plead guilty to conspiracy to commit bank fraud and money laundering after using straw buyers to purchase real estate through short sales and falsifying documents to aid in the purchases.
- Another real estate agent was guilty of helping a convicted drug trafficker launder money by using drug profits to aid in the purchase of residential and commercial properties and concealing the criminals’ ownership in the transactions.
Because settlements vary by state, attorneys, escrow/title agents, and mortgage brokers are also well positioned to facilitate criminal activity in the real estate sector (i.e. falsifying loan documents). Other prominent money laundering threats include health care fraud, bank fraud, tax refund fraud, drug trafficking, human trafficking, and public corruption.
Updates like the Treasury report are essential to educating the real estate industry on how to identify, combat, and report bad actors, to ensure illegal financing does not infiltrate the real estate sector. NAR will continue to engage with Treasury and FinCEN to support the fight against money laundering/terrorist financing and defend against any unnecessary or duplicative regulation on the industry.
To learn more about anti-money laundering and FinCEN’s efforts, see NAR’s Window to the Law: New Effort to Combat Money Laundering.
For background on real estate professionals’ responsibilities under the law, check out NAR's Anti-Money Laundering Guidelines for Real Estate Professionals developed in collaboration with FinCEN.
For information on money laundering risks for real estate transactions and how to detect and report these transactions see FinCEN’s Advisory to Financial Institutions and Real Estate Firms and Professionals.
For help recognizing suspicious money laundering activities, see this video created by NAR in partnership with U.S. Treasury Department.