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U.S., other countries allowing ‘glaring loopholes’ to remain in real estate money laundering fight

Thursday, March 30, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
March 30, 2017

Four world powers, including the United States, must bolster compliance standards by covering every entity in the real estate sector and requiring them to scour for beneficial ownership details frequently hidden behind a maze of anonymous shell structures.

Those are just some of the recommendations and findings of a report released this week by global anti-corruption watchdog Transparency International (TI). The report brings to the fore the inconsistencies in the supposedly world-leading anti-money laundering (AML) frameworks of Australia, Canada, the United States and the United Kingdom, and their oversight and enforcement approaches to counter criminals and the corrupt elite from laundering money through the real estate sector.

The 40-page report highlights what TI considers the 10 most “glaring loopholes,” including spotty coverage of AML rules for the real estate sector directly – and related functionaries, such as attorneys, appraisers, title insurers and other gatekeepers - no requirements to capture beneficial ownership data, weak exams and few administrative or monetary penalties for failures.

The report, Doors Wide Open: Corruption and Real Estate in Key Markets, echoes many of the sentiments of civil society, public and private organizations and other groups championing corporate and financial transparency, which argue that  failing to capture and make public beneficial ownership information can stymie even the most strident of investigators.

Taken in a broader context, TI stated the report is clearly informed by the Panama Papers scandal last year, as well as high-profile criminal and state-sanctioned attacks against banks and other companies from criminals hiding their true identities behind convoluted ownership structures.  

“Governments must close the loopholes that allow corrupt politicians, civil servants and business executives to be able to hide stolen wealth through the purchase of expensive houses in London, New York, Sydney and Vancouver,” said José Ugaz, Chair of Transparency International, in a statement.

“The failure to deliver on their anti-corruption commitments feeds poverty and inequality while the corrupt enjoy lives of luxury,” Ugaz added.

Several cases over the past year, including the trial of Teodoro Obiang, son of the president of Equatorial Guinea; Malaysia’s 1MDB scandal; the Brazilian Car Wash Operation; and the Panama Papers’ revelations, “offer examples of how high-end property in key markets may have been used to launder money,” according to the report.  

“In many such cases, property is purchased through anonymous shell companies or trusts without undergoing proper due diligence by the professionals involved in the deal,” according to the report. 

“The ease with which such anonymous companies or trusts can acquire property and launder money is directly related to the insufficient rules and enforcement practices in attractive markets.”

TI revealed that despite promises to strengthen their fight against financial crime and improve coverage and oversight of real estate deals, “current rules and practices have failed to detect and prevent money laundering in the real estate sector,” according to the group.

So now that Transparency International has identified the extensive problems tied to anti-money laundering coverage and beneficial ownership obligations for entities tied to the real estate sector in the United States, United Kingdom, Canada and Australia, what should they do about it?

Here are the recommendations. Governments should require:

·         Middlemen to identify and keep records of the real, beneficial owners of legal entities, trusts and other legal arrangements in real estate sales.

·         Both domestic and foreign PEPs, their family members and close associates purchasing property should be automatically identified as high-risk clients. Additional preventive measures such as enhanced due diligence should be implemented.

·         Foreign companies should provide beneficial ownership information. This information should be kept in a central beneficial ownership registry and made available to competent authorities and the public in open data format.

·         Real estate agents should register with a designated public authority for AML supervision in order to operate in the real estate sector, and be tested to show they know the rules. They must also undergo mandatory training.

·         Ban lawyers, accountants and other professionals who are not registered with the relevant AML supervisor from engaging in real estate deals.

Uneven requirements to report suspicious activity

One area of particular concern was “insufficient rules” for countries tied to reporting suspicious activity by entities in real estate or that can act in a real estate capacity, such as attorneys.

In Australia and the US, professionals involved in real estate closings “are not required to submit suspicious transaction reports (STRs),” according to the report.

In Canada, real estate agents and developers, accountants and British Columbia notaries are required to submit an STR to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) if they have reasonable grounds to suspect that the transaction is related to a money laundering offense or a terrorist activity financing offense.

“But lawyers and Quebec notaries are not subject to this requirement,” according to TI. “In the UK, real estate agents, accountants and lawyers are required to submit an STR if they suspect money laundering.”

The findings are particularly galling for the United States.

In recent years, the U.S. has enacted a bevy of changes in this area, including subjecting non-bank residential mortgage lenders and originators to AML rules, finalizing a new rule requiring banks to capture certain beneficial ownership details and releasing and renewing geographic targeting orders (GTOs) primarily focusing on high-end real estate markets, including Florida, New York and California. 

Relying too heavily on banks for ownership onus

But those efforts, along with what the other countries in the report are doing, is not enough, according to TI.

“Strikingly, Australia, Canada and the US rely almost exclusively on banks to stop money laundering, even though a slew of middlemen including real estate agents, accountants, tax planners, lawyers and others participate in deal-making,” according to the report.

“This makes all-cash deals, which do not require the involvement of a bank and which represent a significant proportion of high-end sales made to overseas investors, especially difficult to track,” according to the analysis, adding that, according to the Financial Action Task Force (FATF), real estate accounted for up to 30 percent of criminal assets confiscated worldwide between 2011 and 2013.

Only the UK requires that checks are made on people selling real estate in order to identify suspicious activity and identify the real owners of the property, and the country has committed to establish a registry to collect and publish this information.

However, “the same checks by real estate agents are not required on the buyers – where the highest risk of money laundering exists – leaving a gaping hole in the sector’s defenses against corrupt money.”

But even if these countries made wide-ranging changes to laws to extend AML and beneficial ownership requirements to the various groups involved in real estate sales, these jurisdictions have little ability to examine them for compliance and have shown a general unwillingness to punish scofflaws in this arena.

“None of the countries analyzed have tests in place for professionals working in the real estate sector in order to assess whether they are aware of their anti-money laundering obligations,” according to TI.  “Very little information is published regarding any sanctions applied to real estate agents, lawyers, accountants and notaries for facilitating money laundering into the real estate sector.”

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