Are Regulators Struggling to Tackle Money Laundering?

A whopping USD 800 billion to USD 2 trillion is predicted to be laundered every year, globally.

And even though the gap between the two figures is vast, it goes to show how governments and authorities struggle to handle such a crime. Money laundering is often associated with drugs or gang-related crime, and often, something as mundane as real estate or business transactions are hiding the culprits.

Reconnecting with Dennis Miralis this month, we discuss international money laundering through Australian real estate. How easy is it and what can be done to tackle the issue?

What is the connection between money laundering and the property market?

The laundering of illicit funds through real estate is an established money laundering method in Australia. Studies have shown that criminals may be drawn to money laundering through real estate due to the fact that it is relatively uncomplicated and requires little expertise. Furthermore, real estate can be bought using cash, true ownership can be disguised, and property is a secure investment with good potential to increase in value.

What are some of the most common methods of money laundering through real estate in Australia?

Case studies have revealed that criminals may buy real estate using a third party1 or family member as the legal owner. Property is either purchased on their behalf, or proceeds of crime are deposited into their bank account to make the purchase. This method allows criminals to avoid direct involvement in the money laundering process.

Loans and mortgages2 can also be used as a cover for laundering proceeds of crime, and their repayment can be used to mix illicit with legitimate funds. Money launderers often also collude with third parties such as real estate agents to manipulate the value of a property.

Can you explain more about the manipulation of property values?

The key methods used are over and under-valuation.

Under-valuation3 involves recording the property value on a contract of sale which is less than the actual purchase price. The difference between the contract price of the property and its true worth is paid secretly by the purchaser to the vendor using illicit funds. The purchaser is able to claim that the amount disclosed in the contract as having been paid is within their legitimate financial means. If the property was sold at the market or higher value, the apparent profits would serve to legitimise the illicit funds. This method is also used to pay less stamp duty.

Criminals may also overvalue real estate with the aim of obtaining the largest possible loan from a lender. The larger the loan, the greater the amount of illicit funds that can be laundered to service the debt.

The audit trail may be further confused by reselling property in quick succession4. The property is sold at a higher value, either to related or acquainted third parties, or to companies or trusts controlled by the criminal. This gives an appearance of seemingly legitimate profits while the criminal maintains ultimate control over the property.

What are some other ways that money is laundered through real estate that allow criminals to evade detection in Australia?

Cash may be deposited below the $10,000 reporting threshold3 across different banks/branches to avoid triggering threshold transaction reports to AUSTRAC. The funds are then used to obtain bank cheques to buy real estate.

Another common method is leasing out the properties, providing tenants with illicit funds to cover the rental payments, in order to legitimise the illicit funds.

Criminals may buy property using illicit funds with the intention of conducting criminal activity at the property5, such as drug production.

Illicit funds can also be used to pay for renovations, thereby increasing the value of property. The property is then sold at a higher price.

One of the most commonly known methods is the use of front companies, shell companies, trusts and company structures2 established in Australia or overseas. Property held in the name of one of these companies allows criminals to distance themselves from ownership.

How is the money laundering process facilitated? Which parties are involved?

The Financial Action Task Force (FATF) recently released a report6 on the international activities of professional money launderers. The report shows that professionals such as lawyers, accountants, real estate agents, financial advisers and trust and company service providers may assist criminals to launder money through real estate. These parties also commonly conduct legitimate businesses alongside their dealings with the proceeds of crime.

How exactly do these professional facilitators help in the laundering process?

These professionals may assist criminals to launder money through real estate in a number of ways including establishing and maintaining domestic or offshore legal entity structures, such as trusts or companies, facilitating or conducting transactions on behalf of the criminal, receiving and transferring large amounts of cash, establishing complex loans and other credit arrangements, introducing criminals to financial institutions and facilitating the transfer of ownership of property to third parties.

How and where do these professional money launderers operate?

Investigations and research have shown that they operate all over the world, and often it’s a very sophisticated network with various professionals responsible for distinct portions of the money laundering process, as well as associates or contacts that coordinate with each other to facilitate money laundering.  Such groups frequently conduct their activities and transactions across multiple borders and countries.

How do these professionals evade detection and carry on their normal occupation?

The complexity, global scale, and expertise in the provision of services make combatting the activities of professional money launderers a challenging task for law enforcement.

Something that contributes significantly to this is ‘layering’.  Layering is the process through which proceeds of crime received by professional facilitators are funnelled through an intricate and complex web of transactions, often via multiple countries, to disguise the origin of the funds, prior to it being returned to the criminal organisation from which they originated.  This can involve cross-border cash movements and underground banking, the intermingling of funds through international bank transfers, and multiple virtual currency transfers.

Proxy networks are one layering technique that serves as a prime example of the difficulty posed by professional money launderers to law enforcement in identifying and investigating this type of criminal conduct.  A proxy network uses a series of international money transfers, for example, fake trade contracts and loan agreements through shell companies ‘located’ in a variety of jurisdictions to launder the proceeds of crime into seemingly legitimate funds. This activity is designed to eliminate the traceability of the original funds.

What are the key risks relating to money laundering through real estate, and how can they be mitigated?

In its briefing document9, the European Parliamentary Research Service demonstrates that unusual or suspicious patterns can be identified relating to a number of key areas: customer risk, transaction risk and geographical risk.

Spotting the money laundering risk behind the real estate transaction can help to perform a risk-based assessment and address the matter.

Customer risk relates to the ability to identify the real purchaser and ascertain any third party involvement that may be obscuring the true beneficial ownership.

Customer risk also covers purchases involving high-ranking foreign officials or their families, who require specific attention either as politically exposed persons (PEPs) or because of specific international provisions, such as sanctions.

Transaction risk relates to elements such as a mismatch between the buyer and property, the use of complex loans, or anything which does not appear to make professional or commercial sense. An example of the latter may be a purchaser who is not interested in obtaining a better price or has not viewed the property prior to purchase.

Geographical risk can relate to both the property and the buyer. A number of questions to be asked include:

  • Does the location of the property match the location of the buyer and seller?
  • Are the buyer and/or seller located in a country with a weak AML regime or a high degree of corruption?

There is clearly a strong international element to money laundering through the Australian property market. Does this also apply to criminals based overseas?

Yes, overseas-based crime groups and individuals may buy real estate in Australia using illicit funds to conceal assets from authorities in their home jurisdiction. Criminals may seek to integrate their funds into Australian assets in an attempt to avoid confiscation in their home jurisdiction. Purchases may be funded through overseas-based personal, company or trust accounts. Criminals may also use third parties to buy and sell property to further conceal ownership.

Who is primarily responsible for monitoring this type of activity in Australia?

AUSTRAC is the main Australian agency who can potentially detect money laundering through the property market, and then involve other relevant agencies in the investigation and prosecution of the offence. Money laundering through real estate may be identified where transactions intersect with the regulated AML/CTF sector, providing AUSTRAC with a degree of visibility over possible offences. AUSTRAC’s approach to regulation7 is further outlined in a recent report.

What impact does this activity have?

Money laundering through real estate can distort real estate prices, pricing legitimate buyers and even renters out of the market.

These factors can also affect decisions about where to live, resulting in a change of neighbourhood and the related displacement of less affluent households.

What do you see as the key challenges for law enforcement agencies in combating money laundering through real estate, and the professional facilitators involved?

As is clear, the complexity and geographical spread of actions involved make it difficult for authorities to pin down this criminal activity and, even then, it is difficult to gather complete evidence of the source and movement of funds.  Consequently, law enforcement is increasingly reliant on international assistance and partnerships to effectively combat this type of activity and the parties that help facilitate it.

Do you feel that current legislation is sufficient in effectively deterring money laundering through the property market? How could it be more effective?

In Transparency International’s recent ‘Doors Wide Open’ report8, it is posited that the ease with which money can be laundered through real estate relates to insufficient rules and enforcement practices in attractive markets such as Australia. Transparency International proposed a set of reforms and measures to establish an effective system to detect and prevent money laundering through real estate:

Coverage of anti-money laundering provisions should be adequate

All entities involved in real estate transactions (e.g. real estate agents, lawyers, accountants and mortgage lenders) should be required by Governments to conduct due diligence on customers.

Beneficial ownership identification should become the norm

Governments should require that real estate agents and other entities engaging in property transactions keep records on the beneficial owners of customers before proceeding with the sale or purchase.

Checks on foreign and domestic politically exposed persons (PEPs) should be enhanced

Governments should require all reporting entities who engage in the buying and selling of real estate to identify whether a customer is a PEP, a family member or an associate of a PEP – and conduct enhanced due diligence. Foreign PEPs and their associates should be treated as high-risk clients.

Foreign companies should only gain access to the real estate market upon providing information on their real owners

Governments should require that companies provide beneficial ownership information which is available to law enforcement, and preferably also in a public registry. This information should include name, nationality, date of birth, address, and how control is exercised.

Suspicious transaction report (STR) rules should be adequate and implemented

Governments should require all parties involved in real estate transactions to report suspicious transactions to the financial intelligence unit, and these reports should be accessible by law enforcement agencies.  Supervisory bodies should provide guidance on identifying ‘red flags’ and on effectively submitting STRs.

Professionals who can engage in real estate transactions should be registered and submit to “fit and proper” tests

All relevant parties should be required to register with a designated public authority and undergo anti-money laundering training.

Money laundering risks in the sector should be understood and fully acted upon

Both governments and reporting entities should conduct risk assessments and use the findings to improve enforcement and compliance, respectively.

Supervision of the sector should be consistent and effective

Governments should determine a single independent supervisory body to oversee reporting entities’ compliance with anti-money laundering legislation.

Supervisory bodies and the country’s financial intelligence unit should be independent and should have powers to request information and conduct on-site checks.

Sanctions in the sector should be effective and dissuasive

Administrative and criminal sanctions should be enforced against individuals and companies to punish non-compliance with anti-money laundering legislation.

What are some of the challenges faced when representing clients charged with international money laundering?

Given what has been said already about the international nature of money laundering and the difficulties involved in detecting it, it is unsurprising that prosecutions for international money laundering are intelligence based and resource intensive. Often, they involve several law enforcement bodies working collaboratively to investigate and collect the necessary evidence across borders. The use of mutual legal assistance requests, the issuing of Interpol red notices and the freezing of assets are some of the procedures often found in these cases. It is also likely that a decision will need to be made about which jurisdiction will ultimately prosecute the offender, which in turn means that there could be a request for extradition. Individuals who are being investigated and prosecuted against this backdrop, therefore, face many legal and procedural challenges in many jurisdictions in a way that has never really been seen before in criminal law. It remains fundamental to international criminal justice that all of these processes comply with the rule of law and a suspect’s human rights, including the right to silence, bail, legal representation and a fair trial.

Dennis Miralis

References:
  1. AUSTRAC, 2010. AUSTRAC typologies and case studies report 2010 (Case 9). Available at: http://www.austrac.gov.au/sites/default/files/documents/typ_rpt.pdf
  2. AUSTRAC, 2009. AUSTRAC typologies and case studies report 2009 (Case 28). Available at: http://www.austrac.gov.au/sites/default/files/documents/typ09_full_rpt.pdf
  3. AUSTRAC, 2012. AUSTRAC typologies and case studies report 2012 (Case 9). Available at: http://www.austrac.gov.au/sites/default/files/documents/typ_rprt12_full.pdf
  4. AUSTRAC, 2007. AUSTRAC typologies and case studies report 2007 (Case 39). Available at: http://www.austrac.gov.au/sites/default/files/documents/typologies_report.pdf
  5. AUSTRAC, 2010. AUSTRAC typologies and case studies report 2010 (Case 1). Available at: http://www.austrac.gov.au/sites/default/files/documents/typ_rpt.pdf
  6. FATF, 2018. Professional Money Laundering. Available at: http://www.fatf-gafi.org/media/fatf/documents/Professional-Money-Laundering.pdf
  7. AUSTRAC, 2018. AUSTRAC’s approach to regulation. Available at: http://www.austrac.gov.au/sites/default/files/AUSTRAC_ApproachRegulation1811_v2WEB.pdf
  8. Transparency International, 2017. Doors Wide Open – Corruption and Real Estate in Four Key Markets. Available at: https://knowledgehub.transparency.org/assets/uploads/kproducts/2017_DoorsWideOpen_EN.pdf
  9. European Parliamentary Research Service, 2019. Understanding money laundering through real estate transactions. Available at: http://www.europarl.europa.eu/RegData/etudes/BRIE/2019/633154/EPRS_BRI(2019)633154_EN.pdf

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