Large sums of money, complex transactions, little oversight – it makes the perfect conditions for money laundering.
Here are 5 common ways criminals use real estate to launder money.
Money laundering is the concealment of illegally obtained money, typically through legitimate transactions, and one of the most common ways of doing this is via, what can appear to be, legitimate real estate transactions.
Property purchases can be an attractive and effective way for criminals to hide dirty money as this allows its source to be disguised and prevent detection by authorities.
Why real estate? Property purchases tend to involve large sums of money changing hands, complex transactions and little oversight, and this combination makes it the ideal conditions for money laundering.
Australia’s anti-money laundering regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), ‘estimated that in 2020, Chinese interests alone laundered more than $1 billion through Australian real estate while the Australian Federal Police (AFP) told the inquiry that of the $187 million in assets it seized in the 2021 financial year, $116 million was in real estate assets’. [source]
The AML/CFT Act in New Zealand was expanded in 2018 to clamp down on money laundering activities in the real estate sector. Although compliance with the law is a given, it’s important for real estate agents to have a solid grasp and understanding on the ways money laundering works in real estate, and what you should look out for.
Here are the 5 most common ways criminals use real estate to launder money.
1. Third-party purchases
In this tactic, criminals use a third party to buy property. This can be done by either using a third-party’s bank account to deposit and withdraw illicit funds to buy property, or alternatively, use a third party – like a friend or family member – to transact on their behalf. In some cases, third parties may be ‘cleanskins’ – complicit third parties who don’t have a criminal record.
This complex setup distances the criminals from the illicit funds, keeps their information off the title and other documents, disguises ownership and subsequently reduces the risk of authorities flagging the purchase for investigation.
Once the purchase has gone through, the money launderer can either pay the mortgage by filtering money through the lender, or on-sell the property quickly to recoup the investment (see number 5).
2. Money laundering through loans
Money laundering doesn’t only happen at the purchase stage. Sometimes, money laundering doesn’t start until after a purchase is complete, where money launderers use loans or mortgages to layer and integrate illicit funds into high-value assets such as real estate.
Essentially, loans or mortgages are taken out as a cover for laundering their criminal proceeds. For example, criminals will buy property using legitimate funds for the deposit, then take out a mortgage on the remainder – as with a normal purchase. The mortgage is then paid with funds from criminal activities, allowing illicit funds to be blended with legitimate funds.
As mortgage payments are rarely over the $10,000 threshold that triggers a laundering investigation, this easily allows criminals to filter money through the lender without being detected. When the property is sold, the proceeds from the sale are legitimate and far less likely to be traced back to its criminal source.
3. Property price manipulation
Paying a higher or lower price for a property than the market value is another way to launder money through real estate. Property price manipulation involves collusion between buyers, sellers and/or third parties (e.g. real estate agents) to under- or overestimate the value of a property. The difference between the actual and the stated price is then settled with undisclosed cash payments.
Undervaluing occurs when a buyer pays much less for a property than the market value – on paper at least. This means that the recorded price on the contract of sale is less than the actual purchase price. The difference between the contract price and the actual purchase price is paid secretly by the purchaser (criminal) to the vendor using illicit funds. If the property is later sold at the market (or higher) value, the ‘profit’ from the sale is deposited in the bank as legitimate income.
On the flip side, overvaluing happens when a criminal buys a property at a price much higher than the market would suggest to obtain the largest possible loan or mortgage from a lender. The larger the loan or mortgage, the more illicit funds can be laundered while the debt is being paid off.
4. Buyer Collusion
Another technique used by criminals to launder large quantities of illicit funds and make property transactions appear legitimate is through collusion that involves multiple buyers. These buyers would conspire to bid against each other to gain an unfair market advantage. This tactic gives them the best chance of securing the highest bid for the illegally obtained funds to be transacted.
5. Successive on-selling at higher value
Buying and selling properties in quick succession can be a sign of money laundering. Criminals use this method to muddy the waters and confuse auditors, making it hard to track illegal activities. Criminals will buy a property, then sell it for a higher price to a related third party, trust or company, which gives the transaction an appearance of legitimate profit without the need for the criminals to give up the property. Switching ownership and recording profit this way can legitimise large sums of money, making it harder to trace it back to an illegal source. Even if you’re completely on board with the need for anti-money laundering rules, it can be difficult to keep up with compliance when you’re running a busy real estate business. Our latest ebook breaks down the steps your business needs to take when setting up a successful compliance programme – download it today!