Financial Action Task Force Groupe d'action …

1 Financial Action Task Force Groupe d' Action financi re MONEY LAUNDERING & TERRORIST FINANCING THROUGH THE REAL ESTATE SECTOR 29 June 2007 2 FATF/OECD 2008 All rights reserved. No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications for permission to reproduce all or part of this publication should be made to: FATF Secretariat, OECD, 2 rue Andr Pascal 75775 Paris Cedex 16, France TABLE OF CONTENTS EXECUTIVE SUMMARY .. 4 INTRODUCTION: NATURE OF THE REAL-ESTATE SECTOR .. 5 BASIC TECHNIQUES .. 7 Typology 1: Complex Loans and Credit Finance .. 7 Loan-Back Schemes .. 7 Back-to-Back Loan Schemes .. 8 Typology 2: The Role of Non- Financial Professionals .. 9 Obtaining Access to Financial Institutions Through Gatekeepers .. 9 Assistance in the Purchase or Sale of Property .. 10 Trust Accounts .. 11 Management or Administration of Companies .. 11 Typology 3: Corporate Vehicles.

2 12 Offshore Companies .. 12 Legal Arrangements .. 13 Shell Companies .. 14 Property Management Companies .. 15 Non-trading real estate investment companies .. 16 Typology 4: Manipulation of the Appraisal or Valuation of a 17 Over-valuation or Under-valuation .. 17 Successive Sales and Purchases .. 17 Typology 5: Monetary Instruments .. 18 Cash .. 18 Cheques and Wire Transfers .. 20 Typology 6: Mortgage Schemes .. 21 Illegal Funds in Mortgage Loans and Interest Payments .. 21 Under-valuation of Real Estate .. 21 Over-valuation of Real Estate .. 24 Typology 7: Investment Schemes and Financial Institutions .. 25 Typology 8: Concealing Money Generated by Illegal Activities .. 27 Investment in Hotel Complexes, Restaurants and Similar Developments .. 27 RED FLAG INDICATORS .. 28 ISSUES FOR CONSIDERATION .. 29 Emerging markets .. 29 Wire transfers .. 30 Notaries, registrars and similar figures .. 31 ANNEX A - TERMINOLOGY .. 32 ANNEX B - RED FLAG INDICATORS .. 34 ANNEX C COMPLETE CASE STUDIES FOR TYPOLOGIES 1 AND 6.

3 38 BIBLIOGRAPHY .. 41 3 EXECUTIVE SUMMARY 1. Various reports produced by the FATF over the last few years have made reference to the fact that the real-estate sector may be one of the many vehicles used by criminal organisations to launder their illicitly obtained The general objective of this report is to develop more information on this issue and present a clearer picture of the way that real estate activity can be used for money laundering or terrorist financing. 2. The study aims to accomplish two primary goals: First, it explores the means by which illicit money is channelled through the real-estate sector to be integrated into the legal economy. Second, it identifies some of the control points that could assist in combating this phenomenon. One of the most effective ways to understand how the sector is abused is to examine concrete case studies; therefore, the report is based primarily on information provided by participating FATF and non-FATF members.

4 3. Several characteristics of the real estate sector make it attractive for potential misuse by money launderers or terrorist financiers. The report outlines the reasons for this. From the case examples provided during the research for this project, several basic techniques were identified, such as the use of complex loans or credit finance, the use of non- Financial professionals, the use of corporate vehicles and so on. The report briefly describes these techniques, followed by one or more most striking case examples. To reach out to the private sector, part of the research has been to develop a basic list of risk indicators from the case examples. These indicators may assist Financial institutions and others involved in certain types of real estate activities in customer due diligence and in performing a risk analyses on new and existing clients. 4. The project identified three areas that seem especially vulnerable for misuse in money laundering schemes involving real estate and thus suitable for further consideration.

5 In almost all case examples provided, wire transfers to channel the money have been involved at some stage. Also emerging markets seem to be more vulnerable to misuse of the real estate sector. Due to the worldwide market growth of real estate-backed securities and the development of property investment funds, the range of options for real estate investments has also grown. This effect has not gone without notice in emerging markets. Money laundering transactions can be easily camouflaged in genuine commercial transactions among the huge number of real estate transactions taking place. Complicating matter is the fact that often these less developed economies do not have an average market price for real estate, but rather prices varying across sectors and districts. To complete real estate transactions in some stage of the process involvement of legal expert is inevitable. The case examples have shown this category, when not covered by AML/CFT obligations, often becomes the weakest link in the process.

6 1 This report is the product of research carried out by a project team operating under the umbrella of the FATF typologies initiative. The FATF project team was led by Spain and the Netherlands with the participation of Australia, Belgium, Canada, Japan, Lebanon, Luxembourg, Mexico, Myanmar, Norway, Pakistan, Portugal, South Africa, South Korea, Sweden, Ukraine, the United Kingdom, the United States, Interpol, the European Central Bank, and the OECD. 4 INTRODUCTION: NATURE OF THE REAL-ESTATE SECTOR 5. The real estate sector merits closer consideration given the large scope of monetary transactions, its significant social impact, and because of the number of cases in which money laundering, and in limited circumstances terrorist financing and tax fraud schemes, have been Abuse in this sector also has the undesirable effect of political, institutional and economic destabilisation.

7 Moreover, due to the international nature of the real-estate market, it is often extremely difficult to identify real estate transactions associated with money laundering or terrorist financing. 6. Given that the purchase or sale of a property is one of the largest Financial transactions a family or individual may undertake, changes in property prices have a substantial impact on the considerations taken into account by potential buyers and sellers of properties. Fluctuations in property prices have an impact on decisions about where to live and work in addition to affecting an owner s net worth. Moreover, to the extent that property values influence rents, the effect is manifested in the distribution of wealth between landlords and tenants. Finally, property prices significantly influence the building industry. Taken together, these factors all suggest that fluctuations in property prices may influence economic activity and price stability by affecting aggregate supply and demand, the distribution of income, and the debt decisions undertaken by 7.

8 Nevertheless, it is difficult to monitor and explain variations in property prices due to a lack of reliable and uniform information. Property markets are geographically segmented and numerous factors shape the local price of real-estate. Understanding the factors that underlie pricing in the property market is therefore essential. 8. Historically there exists a commercial and residential real-estate market, and the property in both types of market may be bought and sold, managed and/or developed. More recently, new investment vehicles have emerged, including property investment funds (PIF) and real estate investment trusts (REIT). Such instruments allow average citizens to invest in markets historically only available to the very wealthy in order to create a diversified portfolio. 9. Investment in the real-estate sector offers advantages both for law-abiding citizens and for those who would misuse the sector for criminal purposes.

9 Real property has historically appreciated in value, and many countries offer incentives to buyers, including government subsidies and tax reduction. Most importantly for misuse by criminals, however, is the facility the sector may provide for obscuring the true source of the funds and the identity of the (ultimate) beneficial owner of the real asset, which are two key elements of the money laundering process. 10. The real-estate sector is therefore of extraordinary importance to the economy in general and the Financial system in particular. The widespread use of mechanisms allowing households to access the property market, the elimination of personal limitations on property ownership, the economic development and growth of tourism in many regions have all led to exponential growth in the number 2 It is important to note as is mention by the OECD (Sub-group on Tax Crimes and Money Laundering) in its real estate report that in many countries, their tax authorities investigate these cases in partnership with other law enforcement agencies.

10 In some instances, parallel investigations for tax fraud and money laundering may be pursued. The OECD examined tax fraud and money laundering involving the real estate sector, along with identity theft and identity fraud. It also developed a training manual to assist tax auditors in detecting and reporting cases of suspected money laundering and/or terrorist financing. The confidential report contains: the scope and nature of the issue, how cases are successfully detected and investigated, a list of red flag indicators (catalogue), the benefits of multi-agency co-operation (including effective exchange of information), compliance results and risk prevention strategies and an inventory of relevant case studies. 3 European Central Bank (2006). 5 of Financial transactions linked to real-estate. The extraordinary range of possibilities for misusing these processes also allows suspected criminals to integrate and enjoy illegally obtained funds.