As we have repeatedly blogged, concerns about perceived anti-money laundering (“AML”) risks in the real estate industry are rising globally. Consistent with this concern, the Financial Action Task Force (“FATF”) has updated its AML guidance for the real estate sector in a document entitled “Guidance for a Risk-Based Approach: Real Estate Sector,” (“FATF Guidance” or “the Updated Guidance”). The FATF Guidance urges a variety of players in the real estate industry to adopt a risk-based approach (“RBA”) to mitigate AML risks and sets forth some high-level recommendations. The Updated Guidance notably coincides with FinCEN’s advanced notice of proposed rulemaking to impose reporting and perhaps other requirements under the Bank Secrecy Act (“BSA”) for persons involved in real estate transactions to collect, report, and retain information, and the recent extension of Geographic Targeting Orders for U.S. title insurance companies.
The FATF Guidance appears to be driven, at least in part, by FATF assessments showing that the real estate sector has high AML risks, which industry players often fail to appreciate and/or mitigate. The Updated Guidance explains how various industry players can use an RBA to mitigate those risks. It identifies sector-specific risks, sets forth strategies for assessing and managing those risks, and describes challenges the industry faces in doing so. The FATF also offers specific guidance for “private sector players” and “supervisors” (e.g., countries and self-regulatory boards) for going forward. The Updated Guidance includes tools, case studies, and examples of both private sector and supervisory practices to show real estate supervisors and practitioners how to implement FATF standards in an adequate, risk-based and effective manner.
The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). The FATF issued the Updated Guidance with input from the private sector, including from a public consultation with thirteen private-sector representatives (including from sector specific professional associations, the legal profession, FinTech providers, and non-profit organizations) in March and April 2022. This consultation urged FinCEN, among other things, to provide greater clarity in the Updated Guidance regarding its applicability to the real estate sector and related professions (such as lawyers, notaries, and financial institutions) and extend FATF recommendations to broader real estate activities (such as property development and leasing).
The FATF Guidance encourages players throughout the real estate industry to adopt an RBA to anti-money landering and combatting the financing of terrorism (“AML/CFT”). As described further below, this approach involves identifying, assessing, and managing ML/TF risks and taking AML/CFT measures commensurate to those risks
The FATF previously issued RBA Guidance for Real Estate Agents in 2008, in light of the growing threat of money laundering through real estate. The Updated Guidance captures changes made to FATF recommendations, industry best practices, and the FATF’s recommended RBA since the FATF issued the 2008 document. The Updated Guidance also targets real estate professionals beyond agents, including various private sector practitioners (such as lawyers, notaries, real estate developers, title insurers, and accountants), supervisors, regulators, and policy makers in the real estate industry.
The first step in the FATF’s RBA is identifying AML/CFT risks. As the Updated Guidance asserts in detail, AML/CFT risks in the real estate industry are high. Criminals can use real estate purchases to move large amounts of funds at once in a single transaction. They can obfuscate ownership by using legal entities or vehicles or make purchases. They can bypass highly-regulated financial institutions by paying for real estate in cash. And they can falsely seek and repay mortgages with illicit proceeds, with no intention of purchasing properties.
The FATF stresses that, to combat these risks, real estate professionals must be aware of these risks and risks indicators. The Updated Guidance accordingly identifies several activities that may be indicative, although not conclusive of money laundering through real estate, including the use of corporate vehicles, complex structures, or unexplained cash payments. The Updated Guidance also encourages all professions involved in real estate transactions—including lawyers, bankers, lenders, investment advisers, settlement companies, insurers, and others—to consult with each other to identify other risks and indicators.
The second step in the FATF’s RBA is assessing AML/CFT risks. The Updated Guidance urges real estate professionals to assess these risks holistically and with input from relevant stakeholders. The FATF specifically recommends conducting a National Risk Assessment (“NRA”) or a mechanism that allows real estate professionals to design and implement mitigation measures based on accurate and current information. Real estate professionals can complete this assessment in various ways, including by information sharing, reviewing money laundering and criminal cases, and/or consulting with sources or experts.
The FATF also encourages real estate professionals to develop guidelines specifying which issues in real estate transactions present a high risk. In so doing, the Updated Guidance acknowledges that certain professionals (like lawyers) are generally not required to report suspicious transactions if they learn about those transactions through privileged communications. The Updated Guidance provides that this privilege should be taken into account when assessing AML risks, but that such privilege should not apply to fraudulent transactions or criminal activity. In support, the Updated Guidance describes efforts that Germany has taken to impose reporting obligations on legal advisory professionals to ensure that privilege does not impede suspicious transaction reporting.
The final step in the FATF’s RBA is managing and mitigating AML/CFT risks. As noted above, the Updated Guidance urges real estate professionals to take mitigation measures commensurate with the assessed level of AML/CFT risk, including enhanced measures where ML/TF risks are higher and potentially less stringent measures in lower risk situations. The FATF encourages those looking to apply simplified measures to conduct an assessment to determine if certain categories of customers, clients or products present lower risks.
The Updated Guidance further provides that real estate players should retain professionals with AML/CFT knowledge or experience to implement and execute AML/CFT mitigation measures, use technology to facilitate those measures, and host (or outsource) AML/CFT training programs for all real estate professionals commensurate with their responsibilities.
Challenges to Implementing an RBA
The Updated Guidance also identifies challenges to implementing an RBA to AML/CFT in the real estate sector. The Updated Guidance suggests that the greatest challenge comes from low levels of customer due diligence (“CDD”) and beneficial ownership verification measures across the industry. The Updated Guidance urges that these measures are essential to thwarting criminals from obfuscating the identity of property owners, the source of funding for property, and/or the purpose of the real estate transaction.
Yet, as the Updated Guidance describes in detail, the nature of the real estate industry often seems incompatible with the CDD collection process. Property sales—which are often discrete, ad hoc, and/or quick—can inhibit collection efforts. In addition, real estate professionals may not be able to collect certain CDD information from clients, particularly those who use cash to purchase properties, foreign buyers, and/or others who may simply be hesitant to share personal information with them. Real estate professionals also may be hesitant to seek more information in cases where doing so could jeopardize the deal.
Factors like these make it difficult for the real estate industry to obtain CDD and beneficial ownership information, which are critical to identifying, assessing, and mitigating ML/TF risks. The FATF warns, however, that without such information, the real estate sector remains vulnerable to exploitation by politically-exposed persons, the purchase of luxury real estate, the use of virtual assets, the use of anonymous crime, and the use of gatekeepers as money laundering instruments.
The Guidance also identifies other challenges to implementing an RBA in the real estate sector. These include without limitation:
- Disparities in AML/CFT systems and suspicious transaction reporting across the globe. Different countries impose different AML/CFT obligations on real estate professionals. For instance, countries vary as to whether and which real estate professionals must submit suspicious transaction reports. Inconsistencies like these create legal loopholes that leave the industry susceptible to criminal activity.
- Low AML/CFT reporting. Real estate transactions also involve multiple players, many of whom are subject to different, low, or no AML/CFT obligations. These inconsistent (or non-existent) obligations lead to low ML/TF reporting across the industry, which makes it difficult for professionals throughout the industry to identify, assess, and manage potential AML/CFT risks.
Guidance for Private Sector Players and Supervisors
In light of these challenges, the FATF offers guidance for both private sector players and supervisors in the real estate industry to move forward with an RBA.
Private Sector Players
The Guidance specifically encourages private sector players involved in real estate transactions to take certain steps when implementing an RBA, including but not limited to:
- Considering the following risk categories when identifying potential AML/CFT risks:
- Geographical risks. Considerations include, without limitation, where the seller, buyer, and property are located and countries known to have high AML/CFT risks;
- Client risks. Considerations include, without limitation, the client’s background, whether the client comes from a high-risk area, whether the client is subject to sanctions, whether the client is using complex commercial structures, and/or whether the client expresses undue pressure or abnormal haste. The FATF Guidance notes that “lawyers may [also] consider evaluating clients using their services for real estate transactions where the involvement of a lawyer is not customary and may be seeking actual or perceived anonymity to purchase and sell real estate for nefarious purposes”; and
- Transaction risks. Considerations include, without limitation, the use of cash, third parties, overseas accounts, virtual assets, complex loans, or unexplained or abrupt financing changes. The FATF Guidance adds that banks and mortgage lenders (if applicable) may be best positioned to assess these risks;
- Assessing risks using a scalable approach, such as low risk, medium risk, and/or high risk, supported by a short explanation;
- Devising, implementing, and reviewing the following due diligence measures:
- Customer Due Diligence (“CDD”). These measures include, without limitation, verifying the identity of every customer and those purporting to act on their own behalf, determining the identity of the beneficial owner, fully understanding the client’s circumstances and business, and understanding the source of funds. The FATF Guidance adds that lawyers and notaries should consider applying specific checks on transaction settlement destinations, while banks and mortgage lenders should conduct CDD when onboarding clients, approving mortgages, and sending and receiving funds;
- Simplified Due Diligence (“SDD”): These measures are for lower ML/TF risk situations and include, without limitation, verifying the identity of the client and beneficial owner after establishing the business relationship but before completing the transaction, and adjusting the extent, quality, or source of information required for verification; and
- Enhanced Due Diligence (“EDD”): These measures are for high ML/TF risk situations and include, without limitation, scrutinizing the source of funds and purpose of the real estate transaction;
- Maintaining adequate, accurate and up-to-date beneficial ownership information;
- Adopting appropriate internal controls to promptly identify and mitigate ML/TF risks, such as implementing risk-based CDD policies and procedures and focusing resources on business operations with higher ML/TF risks;
- Establishing a corporate governance scheme that clearly defines and documents guidance for those with AML/CTF responsibilities, including without limitation Boards, Senior Management, and the Compliance function; and
- Developing and implementing routine AML/CFT trainings for all staff, tailored to their daily functions.
Guidance for Supervisors
The Guidance likewise encourages real estate supervisors (including countries and self-regulatory boards) to take certain steps when implementing an RBA to supervision, including the following:
- Adopting AML/CFT frameworks that account for all professions involved in the real estate industry – such as lawyers, notaries, accountants, investment advisors, mortgage lenders, bankers, and other financial intermediaries – and sanctioning non-compliance;
- Considering the following risk categories—in addition to geographic, client, and transactional risks—when identifying potential AML/CFT risks:
- Service and product risk. Considerations include, without limitation, the likelihood that services or products can be used for ML/TF;
- Nature of services offered;
- Risk indicators based on objective factors and experience. Considerations include, without limitation, information on a business’s compliance history, professional complaints, and internal controls; and
- Miscellaneous sources. Considerations include, without limitation, information from other government sources, whistle-blowers, or negative news reports.
- Routinely assessing and communicating AML/CFT risks to the real estate sector;
- Updating AML/CFT regimes based on risk, such as changing laws, regulations or other measures;
- Allocating more supervisory resources to areas of higher ML/TF risk;
- Educating, encouraging, and monitoring real estate professionals’ adoption of an RBA that is in line with FATF recommendations, and that is risk-appropriate. These tasks may include, without limitation:
- Securing and allocating adequate resources;
- Supervising the implementation of effective controls by real estate professionals;
- Enforcing AML/CFT obligations, including without limitation, remediation plans and proportionate and dissuasive sanctions;
- Identifying new investigative tools to address significant ML/TF issues. The FATF Guidance notably highlights FinCEN’s Geographic Targeting Orders (a topic on which we previously have blogged extensively) as a potential example;
- Collecting guidance, feedback, and collaboration from the private sector;
- Developing and implementing routine trainings for supervisors, covering topics such as general AML/CFT issues, interaction among the various sub-segments of the real estate sector and financial system, and sanctions; and
- Regularly reviewing and measuring the effectiveness of risk-based supervision strategies.