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AML/CFT AML Training BSA Rules and Regulation Customer Due Diligence Financial Crime

Dirty deals: Uncovering real estate money laundering

Terri Luttrell, CAMS-Audit, CFCS
June 15, 2023
Read Time: 0 min

Protect the financial institution from money laundering through real estate

FinCrime professionals should be able to detect when real estate is being used for money laundering, especially given heightened Russian sanctions 

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Takeaway 1

Real estate money laundering is a serious issue, with an estimated $2.3 billion laundered between 2015 and 2020 through the U.S. real estate market alone.

Takeaway 2

Tightening the loopholes for lack of transparency in beneficial ownership will help detect money laundering, including through real estate.

Takeaway 3

Financial institutions can safeguard against money laundering via real estate by staying vigilant, raising awareness, and adopting a proactive approach. 

U.S. data

More than $2 billion laundered thru real estate

Real estate money laundering is a serious issue that has become increasingly prevalent in recent years. It is no secret that criminals use real estate to clean money derived from illegal proceeds; it’s one of the oldest forms of money laundering.  The subjective nature of real estate pricing makes for easily manipulated transactions that run through financial institutions.

In the Netflix series, Ozark, Ruth Langmore purchased a hotel to launder money

In the Netflix series, Ozark, Ruth Langmore purchased a hotel to launder drug money. Credit: Brian Koppel, Reel to Real Filming Locations blog

According to a Global Financial Integrity (GFI) study, an estimated $2.3 billion was laundered between 2015 and 2020 through the U.S. real estate market alone. With heightened Russian sanctions compliance expectations globally, it is more important than ever for FinCrime professionals in banks, credit unions, and non-bank financial institutions to understand the typologies associated with money laundering through real estate and be prepared to detect this activity in transactions at the financial institution.

Criminals use real estate, usually higher-end residential or commercial property, to hide and launder their illegally gained money by purchasing properties directly or through shell companies.  Once the illicit funds have been placed into a real estate purchase, money can be laundered in a variety of ways, such as:

  • Renovating a property and reselling, with exaggerated construction costs
  • Selling at a higher price from appreciated value over time
  • Renting a recently purchased property for a “clean” stream of income
  • Obtaining a loan against the real estate to have access to clean funds

Determining beneficial owners

Geographic Targeting Orders and real etsate

Many countries have enhanced laws to prevent real estate money laundering, also known as REML. However, the U.S. has lagged in passing laws and regulations preventing criminal proceeds from flowing into real estate. Since 2016, the Financial Crimes Enforcement Network (FinCEN), as authorized under the Bank Secrecy Act (BSA), has issued Geographic Targeting Orders (GTOs) to detect money laundering and other illicit activity through real estate purchases.

GTOs require U.S. title insurance companies, their subsidiaries, and agents to determine the beneficial owners (i.e., the individual human beings) behind certain entities involved in “covered” residential real estate transactions.

The GTOs cover numerous types of real estate transactions, including those using:

  • Cashier’s checks

  • Certified checks

  • Traveler’s checks

  • Personal checks

  • Business checks

  • Money orders

  • Funds transfers

  • Virtual currency

Previous GTOs have provided valuable information to law enforcement by following the funds used for various criminal activities, including foreign corruption, organized crime, and drug trafficking. However, GTOs have been insufficient in stopping these transactions from occurring.

At the end of 2021, the Biden administration announced they would pay closer attention to corruption in the real estate market, focusing on the all-cash transactions in commercial and residential real estate. The Treasury Department is working on a new rule to identify better who is behind all-cash real estate transactions and to see if those purchases are being used to shelter illegal profits. 

“The ability of illicit actors to launder criminal proceeds through the purchase of real estate,” Treasury said, “threatens U.S. national security and the integrity of the U.S. financial system.”

You might also like this Russian sanctions compliance checklist.

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Risk factors

Red flags for money laundering through real estate

In February 2022, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) for certain persons involved in real estate transactions to collect, report, and retain information. The comment period for the proposed rule, Anti-Money Laundering Regulations for Real Estate Transactions,  ended in February 2022, but a final rule has yet to be issued. FinCEN’s focus has been on the Corporate Transparency Act, and rightly so. Tightening the loopholes for lack of transparency in beneficial ownership will help detect money laundering, including money laundering through real estate.

FinCEN has also issued several red flags and SAR instructions to detect and report money laundering through commercial real estate properties. The January 2023 alert on FinCEN Russia sanctions to financial institutions, Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies, was a start to following up on Biden’s promise.  FinCEN highlighted some of the common risk factors associated with money laundering through real estate. These REML risk factors include:

  • Multiple real estate transactions in a short period
  • Obvious property over- or undervaluation
  • Cash purchases
  • Unknown source of funds for purchases
  • A large disparity between the buyer’s income and the value of the property
  • Owner has no known ties to property jurisdiction
  • Use of straw buyers and proxies
  • Use of front companies and complex corporate vehicles

AML compliance measures

Prevent and detect REML

REML can be complex, but financial institutions can implement several measures to help prevent and detect illicit activity and comply with anti-money laundering (AML) regulations:

  • AML Enhanced due diligence (EDD): Implement robust know-your-customer (KYC) procedures to verify the identities of buyers, sellers, and beneficial owners involved in real estate transactions. This includes obtaining detailed information, such as proof of identity and source of funds.
  • Transaction monitoring: Establish systems to monitor real estate transactions for suspicious activities. This can involve setting thresholds for reporting large cash transactions and tracking other unusual patterns using anti-money laundering software.
  • Training and awareness: Provide education and training programs for mortgage lenders and other front-line staff to raise awareness about money laundering risks, red flags, and reporting obligations. This will help them identify suspicious activities and comply with AML requirements.
  • Public-private partnerships: Foster collaboration between government agencies, law enforcement, and the private sector, including real estate industry professionals. Sharing expertise, information, and best practices can help create a united front against REML.

Real estate money laundering poses a significant threat to the integrity of financial systems and the stability of property markets. However, implementing robust EDD and monitoring programs can curb these illicit activities. By staying vigilant, raising awareness, and adopting a proactive approach, financial institutions can create a more transparent and secure real estate environment that safeguards against money laundering and upholds the integrity of the global financial system.

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About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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