Introduction
Money laundering in real estate has been a hot topic of late, with explosive headlines from the UK to the UAE to Canada to Australia. Most glaringly, dirty money from Russia has attracted tremendous attention following last year’s unprecedented sanction regimes brought on by the Ukrainian invasion. In particular, the UK real estate market has received widespread criticism for serving as a haven for questionable funds from Russian oligarchs, giving popularity to the term ‘Londongrad’. Research by Transparency International has estimated £1.5 billion of UK property has been purchased by Russians accused of corruption or with links to the Kremlin. Such reports sparked outrage and even legislation requiring the beneficial owners of property to be disclosed in a new public register.
In light of this crackdown in the UK, Russian cash is seemingly heading to places like Dubai instead. According to one source, since the Ukrainian invasion, the “Russian population in the UAE has risen fivefold to as many as 500,000”, propping up the luxury real estate market. But even before the war, Dubai was a popular refuge for criminals from all over the world looking to stash their ill-gotten gains. Last year the Dubai Uncovered property leak disclosed data from 2020 on criminals, officials, and sanctioned politicians with ties to the Dubai property market. One of the people identified in the leak is a Czech politician named Libor Novák who is accused of corruption, listed as owning six apartments in the Dubai Marina worth nearly $2.7 million. Another illicit actor is the Estonian businessman Marko Taylor, a convicted fraudster listed as owning a villa and an apartment worth over $1 million.
These instances are far from isolated. Reports in Australia (where it is thought that criminals linked to China laundered $1 billion through real estate in 2020), Canada, and the United States demonstrate the popularity of real estate as a medium to hide and launder illicit proceeds from bad actors worldwide.
But why is the real estate sector so attractive to criminals?
Real estate can be used at different stages of the money laundering process. At the placement stage, in some jurisdictions with poor money laundering frameworks properties can be bought with physical cash, with minimal or no checks on identity or source of funds. At the layering stage, property can be used to transfer and obfuscate illegal funds using complex ownership structures with shell companies or trusts obscuring the original source of funds. It’s very helpful for dealing with source of funds checks - financial institutions will often accept the explanation that funds derive from the sale of a property in a less well-regulated jurisdiction, without going further back and asking how you came to have the money to buy the property in the first place. Finally, real estate can also be used to legitimise illicit funds at the final investment or integration stage.
Other aspects of real estate’s appeal are the same features that appeal to regular investors. Real estate is viewed as a stable investment and thus a safe place to invest, compared to speculative assets such as cryptocurrency or stocks. In prime property markets where prices are high and generally increase over time, criminals can increase their wealth even further. And since housing prices are subjective and fluctuate over time, it is easy for them to be manipulated and over or undervalued.
A final advantage is that the high cost of property means criminals can launder large sums of money in a single transaction. As already noted, Dubai is a hot spot for luxury property transactions, being the “busiest market for $10mn-plus homes in the first quarter of 2023”, surpassing Hong Kong and New York. Reports state that the number of sales of homes in Dubai worth over $10 million has risen seventeen-fold in the last five years. For example, the average price of a villa in Dubai-Sea Mirror is around $20 million.
While the real estate market is subject to money laundering regulations in most countries, this is seldom well enforced. In practice, anti-money laundering practices are often extremely lax or even non-existent. Even in jurisdictions with ‘respectable’ reputations, money laundering through real estate is rampant. Canadian cities Toronto and Vancouver are prime examples, being notorious for attracting nefarious actors who use the extortionate markets to absorb their funds. As public awareness of the problem increases, and housing crises caused by soaring prices continue, governments worldwide are taking steps to rectify the problem, including measures such as unexplained wealth orders and land and property ownership transparency registries.
Reasons why real estate is attractive to criminals:
- Real estate is a stable investment that generally increases in value.
- Pricing is subjective and overvalued houses are common, allowing real estate costs to be easily inflated.
- As the cost of property is extremely high, criminals can launder large amounts in a single transaction.
- Money laundering regulations for the real estate sector are seldom enforced and anti-money laundering practices are often very lax.
- The sale of property is a good way to satisfy source of funds checks.
Common methods for money laundering 💸
One common method used to launder money through the real estate sector is purchasing a property using family and non-family proxies to avoid detection. This was clearly demonstrated in an investigation by the Organised Crime and Corruption Reporting Project (OCCRP), which revealed a Russian national named Sergey Toni owned real estate worth over $59 million despite having no profitable businesses of visible profile. Segey Toni’s father, however, is a deputy managing director of one of the largest transportation companies in the world, the state-owned Russian Railways. Another example revealed by the OCCRP is Chen Runkai, a Chinese property developer linked to a military corruption scandal. Chen owns million-dollar properties in the same Vancouver neighbourhood as his daughter, who purchased a mansion mortgage-free for about CAD 14 million (approximately £8.1 million) at the age of 25 while listing her occupation as a ‘student’.
Other common strategies include using anonymous front companies, especially in jurisdictions where anonymity is commonplace. This is particularly evident in the US, where certain states such as Delaware, Nevada and North Dakota allow for completely anonymous shell companies. While moves are underway in the US to create a database of beneficial ownership information, its effectiveness remains controversial. For more analysis on corporate transparency, check out FINTRAIL’s article here. The problem is widespread; anonymously held and corporate-owned real estate affects every jurisdiction with an international property market. A recent Transparency International investigation from July 2023 revealed the scale of the problem in France, showing that “the vast majority of corporate-owned real estate in France is held anonymously”, and nearly a third of all companies have not disclosed who ultimately owns them, despite legally being required to do so.
Criminals may also engage with third parties or trusts to be the legal owner of a property, further blurring true ownership.
What should financial institutions be doing?
For financial institutions looking to strengthen their anti-financial programmes against real estate money laundering, it’s vital to identify potential red flags and common typologies. Transactions involving real estate deals should be adequately scrutinised and the real estate industry as a whole should be considered higher-risk, potentially subject to enhanced due diligence measures. Compliance teams should focus on establishing original source of wealth and determining the ultimate beneficial owner of properties to identify nefarious actors or suspicious activity.
Potential red flags:
- Multiple property purchases and sales made in a short period of time
- Over / undervaluation of property prices
- Complex loans or credit finance (repayment can be used to mix illicit and legitimate funds)
- Financing of property using offshore lenders
- Unusual income (e.g. no declared income or inconsistency between declared income and th standard / value of the property)
- Cash purchases
- Unknown source of funds for purchases (i.e. incoming foreign wire transfers where originator/beneficiary customers are the same)
- Ownership of property is the customer’s only link to the country where real estate is purchased
- Straw buyers or properties purchased using family members’ names
- Properties purchased through front companies, shell companies, trusts and complex company structures
At FINTRAIL, we combine deep financial crime risk management with industry expertise to optimise your anti-financial crime programmes. We’re here to support you in creating robust policies and procedures; refining, enhancing or testing your systems and processes; and providing context-based training to your teams. Get in touch to find out how we can help you fortify your controls in a practical and efficient way.