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News & opinion

1 10月 2018

Money laundering and the real estate sector

In the second of a series, Henry Brandts-Giesen and Jane Khoo discuss how the real estate sector can be used for money laundering and terrorist financing.

This has led to new counter-measures being extended to cover lawyers and real estate agents engaging in real estate transactions.

The buoyant housing market in some economies across the world has seen increased opportunities for those seeking to launder illicitly obtained money. These opportunities are being actively exploited by criminal enterprises and terrorist organisations.

The abuse of the real estate sector

Purchasing residential and commercial property is often a reliable and profitable investment strategy. However, these transactions can also be used by criminals to integrate illicit funds into the legitimate economy by camouflaging its true nature with a veneer of respectability, legitimacy, and normality.

The people involved in money laundering often obscure the identities of the beneficial owners of the property or the origin and destination of the funds. Common methods used include:

  • Using financial products, such as mortgages. The repayments of loans and interest enable large sums of illicit funds to be converted into legal assets.
  • Using corporate or trust vehicles to hide the ownership of assets and the beneficiaries, the source and destination of the money. Nominees and trusts are often used as money laundering and terrorism funding vehicles.
  • Using collective investment schemes and financial institutions. These can enable co-mingling with illicit funds.
  • Transferring the proceeds of crime to a lawyer or real estate agent by electronic transfer, supposedly as part of a sale and purchase agreement. This can enable the transfer of funds between different parties (sometimes in different countries) and away from dubious origins.

Lawyers and real estate agents are sometimes engaged by criminals due to their expertise in carrying out real estate transactions. Acting as gatekeepers to the property and financial markets, lawyers and real estate agents can become involved in money laundering.

Knowingly or not, these professionals may be providing services that money launderers would not normally have access to or be comfortable doing on their own, such as buying and selling properties. The large number of these service providers in developed markets also provides a wide range of options for offenders to select from. Many legal and real estate businesses are unsophisticated and ill-equipped to identify the risks and apply appropriate counter-measures.

Real estate transactions are also usually high in value. Sale prices merely capture the deal made between a willing buyer and willing seller at a particular moment in time and in specific circumstances. This can mean that the real market value of a property is actually very difficult to gauge. The speculative nature of the sector and any unique circumstances relevant to a transaction can complicate an examination of a deal to give a clear indication of real value.

In Auckland, data from 2017 shows an average increase across all property sectors of 45 per cent.  For many analysts there is no simple explanation for this.

The ease of overvaluing or undervaluing properties can also lead to the manipulation of prices, whereby the asset is subsequently sold and purchased at unusual profit (or loss) margins. Large sums may therefore be disguised and laundered through real estate vehicles without raising suspicion.

The New Zealand context

Real estate in various forms is readily available in New Zealand and it is a very active and relatively liquid market compared to some countries. A combination of this accessibility, low sovereign risk, relatively open market, stable economy and high tourist and migrant numbers have (among other factors) led to exponential growth in the number of real estate transactions in recent years.

It is therefore reasonable to assume that, at least to some extent, New Zealand’s real estate sector is being abused by money launderers. This would be consistent with comparable markets such as the United Kingdom, United States, Canada and Australia.

The New Zealand real estate sector has therefore been assessed as being highly vulnerable to money laundering.

Phase 2 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (‘AML/CFT Act’)

It’s difficult to argue that the real estate sector merits closer consideration merely on the basis of the large scope of monetary transactions and the social impact of money laundering. Given the number of cases in which money laundering, and in certain circumstances terrorist financing, have been detected, the case for regulation of the real estate sector in this regard is stronger than ever before.

Lawyers engaging in (among other transactions) real estate transactions and real estate agents brokering the deals are sometimes able to detect signs of money laundering and terrorist financing. This has led to the extension of AML/CFT Act to cover the real estate sector.

Under the AML/CFT Act, lawyers, accountants and real estate agents in New Zealand have joined or will soon join financial institutions as being required to comply with the obligations under the Act if they represent a client who is selling or buying real estate; or accept a deposit in cash of $10,000 or more, or an international wire transfer of $1000 or more.

These obligations include:

  • carrying out AML risk assessments
  • implementing AML compliance programmes
  • carrying out due diligence on customers
  • continually managing these programmes
  • appointing an AML compliance officer
  • reporting suspicious activities to the police
  • reporting annually to the Department of Internal Affairs
  • to be externally audited every two years.

AML/CFT regime and the real estate sector

Following the next phase of its implementation, the AML/CFT regime will no doubt lead to significant changes in the ordinary course of real estate transactions and associated activities in New Zealand.

Real estate agents, lawyers and accountants will be obliged to disclose information to law enforcement and government agencies in certain transactions. The AML/CFT regime will also result in an increased cost of doing business – for the service provider and for the purchaser and seller, who may bear at least some of the costs.

Whether this will be effective to stem the flow of dirty money, and whether the associated erosion of privacy is too much of a price to pay, is yet to be determined.

  • Henry Brandts-Giesen and Jane Khoo work at Kensington Swan, one of New Zealand’s leading commercial law firms based in Auckland and Wellington.

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