Monday, March 25, 2013
Orlando REALTOR® | March/April 2013
Learn how to spot and remove
money-laundering activities from
your transactions, and wash
yourself clean of the related risks
The crime of money laundering is a growing area of concern in the United States, and the real estate sector — with its capacity for dealing with large sums of money — is quite vulnerable to laundering schemes and to the risks such schemes present.
However, there are plenty of red flags that indicate the possibility of money-laundering activities. Real estate professionals, inherently familiar with the "typical” transaction and buyer, are well positioned to spot and stop a money-laundering scheme.
Here are facts and guidelines that you can use to identify potential money-laundering risks to yourself and to your brokerage, and to implement practical measures to mitigate those risks.
What Is Money Laundering
Money laundering is the process that criminals use to disguise the illegal origin of their funds. Legitimizing, or "laundering,” this money through a financial system is critical for criminals who want to hide their activities and not draw attention to their illegally derived proceeds.
The actual process of money laundering is a three-step process that is initiated by introducing the illegal proceeds into the financial system, e.g., by breaking up large amounts into small deposits or by purchasing financial instruments such as money orders (referred to as "placement”). These activities are typically followed by distancing the illegal proceeds from the source of the funds through multiple financial transactions (referred to as "layering”) and finally by returning the illegally derived proceeds to the criminal from what appears to be a legitimate source (known as "integrating”).
A real estate transaction can be used in any one of the three stages of money laundering. For example, if an individual purchases a home and uses illegal funds as part of the downpayment, this would be considered "integrating.”
As a general matter, a real estate agent’s money-laundering related risk is substantially mitigated by the fact that the great majority of real estate transactions involve highly regulated entities such as banks and non-bank mortgage companies. However, when a transaction steps outside the norm or in cases where certain risk factors are present, a real estate agent faces an elevated chance of encountering a possible money-laundering scheme.
Characteristics of a real estate transaction that may be indicative of illegal financing activities can be grouped in the three categories of risk factors: country/geographic risk, customer risk, and transaction risk.
Geographic risk is a possibility when the buyer and/or the source of the buyer’s funds are located in a jurisdiction that has weak anti-money laundering laws, supports or funds terrorism, or has a high degree of political corruption. Although there is no definitive list of such jurisdictions, one good source is the list of jurisdictions that are subject to sanctions by the Office of Foreign Assets Control of the U.S. Treasury Department. In addition, the department maintains a list of individuals, groups, and entities that are subject to OFAC sanctions.
Consumer risk of money-laundering activities is flagged by unusual characteristics related to the buyer or others involved in the transaction such as:
- A large and unexplained geographic distance between the buyer and the property;
- A buyer who is or claims to be a high-ranking foreign political official or family member;
- The involvement of unusual third parties; or
- The titling of a residential property in the name of third party such as a friend, relative, business associate, or lawyer. (Also be wary of the use of identity-obscuring legal entities — as corporations, LLCs, or partnerships — without a legitimate business explanation).
Transaction risk within a money-laundering scheme can be identified by anomalies or troubling characteristics of the transaction itself such as:
- The involvement of a property that is clearly over or under valued;
- A seller who seems disinterested in negotiating a better price;
- The involvement of a large amount of cash, especially when a buyer brings actual cash to the closing;
- The cash purchase of a property by buyers who don’t fit the demographics of the typical cash buyer;
- The purchase of property that is inconsistent with the buyer’s occupation or income, or seems otherwise far beyond the buyer’s means;
- Plans for immediate resale of the property, especially if the sale entails a significant increase or decrease in the price compared to the prior purchase price, without a reasonable explanation;
- An unusually hasty transaction or an unusual source of funding that occurs without logical explanation; (for example, the use of a third-party who is not a parent, sibling, etc.; the use several different sources of funds without logical explanation; and funding that comes from a business but the property not going to be held in the business’ name or involves the purchase of property that doesn’t match the business’ purpose); or
- A buyer who purchases the property without viewing the property or expressing any interest in the characteristics of the property.
You should also be wary of any other activities or behavior and do not make professional or commercial sense based on your familiarity with the real estate industry and the normal course of business.
Knowing an your true customer and understanding their interest and planned use for a property plays a big role in identifying and combating money laundering. The process by which you form a reasonable belief that you know the true identity of your customer — and are then able to assess risk — is commonly referred to as customer due diligence. In cases where red flags are present, you should apply increased levels of customer due diligence, which could include the following:
- Obtaining additional information such as a driver’s license, passport, or other reliable identification document, in order to confirm the true identity of the customer;
- If a legal entity such as a corporation or a LLC is involved in the transaction, taking additional measures to identify who actually controls or owns the entity and then verify the identity of the owner; or
- Obtaining other appropriate information based on the agent’s experience and knowledge to understand the customer’s circumstances and business.
The presence of a single risk factor, or even multiple risk factors, does not necessarily mean the purchaser or seller is engaging in money-laundering activities. The role of the real estate agent is to be familiar with the risk factors; to exercise sound judgment based on your knowledge of the real estate industry; and to know the proper action to take (see sidebar).
Of course even the vaguest notion that something is quite right always warrants a conversation with your broker or brokerage management.
Source: National Association of REALTORS
Reporting Suspicious Activity
Reporting Large Cash Receipts
When confronted with suspicious activity, real estate agents always have the option of reporting the information to local law enforcement or the FBI.
You could also file a suspicious activity report (SAR) with the U.S. Treasury’s Financial Crimes Enforcement Network. (For more information, call 1.800.949.2732.) However, it is important to note that while the Bank Secrecy Act contains a safe harbor shielding financial institutions from civil liability in connection with the filing of a SAR, there is no precedent to suggest that the safe harbor would extend beyond financial institutions to real estate professionals.
Therefore, you should be prudent and file a suspicious activity report only after thoroughly evaluating the circumstances surrounding the suspicious activity. In addition, you should consider consulting an attorney on the matter prior to filing a SAR.
IRS Form 8300 must be filed by any business (including a real estate agent or broker) that receives more than $10,000 in cash in the course of a single transaction or two or more related transactions.
Cash, for purposes of this requirement, includes cash equivalents such as cashier’s checks, bank drafts, and money orders. If the cash-equivalent instrument is for more than $10,000, the transaction will be reported by the issuing bank, and the agent does not need to also file a Form 8300.
If, however, an agent receives a cashier’s check or other cash equivalent of less than $10,000, but which in combination with other cash or cash equivalents totals more than $10,000, a Form 8300 must be filed.
Download IRS Form 8300