Methods, signs and prevention tools
Money laundering involves filtering income from illegal activities through legitimate transactions, disguising its source and preventing detection by the authorities. Property purchases can be an effective way to launder funds, as they tend to involve large sums of money changing hands, complex transactions and little oversight.
That’s one of the reasons New Zealand’s anti-money-laundering (AML) regulations were expanded in 2018 – take a look at our AML for Real Estate explainer here. For real estate agents, compliance with the new laws is a given, but it’s also essential to have a good grasp on the issue – how money laundering works, red flags to spot and effective prevention strategies.
Here’s our brief guide to get you started:
Money laundering methods in real estate
Criminals use real estate transactions to launder money in several ways, including using third parties to buy property, filtering cash through a mortgage or renters, or simply buying and reselling quickly to legitimise funds.
In this scenario, people with a criminal record use a third party – like a friend or family member – to purchase property on their behalf. This keeps the criminal off the title and other documents, reducing the risk of authorities flagging the purchase for investigation. A third party might purchase the property using illicit funds transferred by the actual purchaser, or the criminal party may pay the deposit, but keep their name off the documentation.
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.
Laundering through loans
Sometimes, money laundering doesn’t start until after a purchase is complete. Criminals 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 activity. Because mortgage payments are rarely over the $10,000 threshold that triggers a laundering investigation, this lets people sift money through the bank without being detected. When the house is sold, the money from the sale is legitimate and far less likely to be traced back to its source.
Property price manipulation
Paying a different price for a property than the market would suggest can be another way to launder money through real estate. There are two ways to manipulate prices for gain. Undervaluing occurs when a buyer pays much less for a property than expected – on paper at least. The buyer pays the vendor the difference in cash or through other means. When the property is sold, the ‘profit’ from the sale is deposited in the bank as legitimate income.
Overvaluing happens when a criminal buys a property for more than its worth to get a larger mortgage. The larger the mortgage, the more funds can be laundered while the debt is being paid off.
Another technique to launder large quantities of funds and make a property transaction appear legitimate is through collusion. The act of collusion involves two or more buyers who would typically bid against each other, but conspire to work together to gain an unfair market advantage. This technique gives them the best chance of securing the highest bid for the illegally obtained funds to be transacted.
Buying and selling properties in quick succession can be a sign of money laundering. This method involves buyers purchasing property, then selling it for a higher price to a related third party, trust or business, giving the appearance of legitimate profit without the need to give up the property. Switching ownership and recording profit in this way can legitimise large sums of money and muddy the waters for auditors, making it harder to track illegal activity.
Real estate red flags
Money laundering can be difficult to spot if you don’t know the signs. After all, the people doing it are working hard to keep authorities in the dark – including the agent working on their property purchase.
Apart from complying with AML legislation and doing your due diligence on every new client, it’s smart to keep an eye out for irregular activity and things that just don’t add up. Red flags to watch for:
- Third-party involvement: someone other than the buyer handles most of the purchase, or the buyer joins the process at the last second to avoid background checks.
- Complex business or trust: a trust or business with a complex or confusing structure could be trying to hide the real buyer.
- Irregular sale price: the purchase price is much higher or lower than expected – this might be a sign of price manipulation.
- Buying remotely: the purchaser is located far from the vendor and property without a good explanation.
- Cash transactions: large amounts of cash are used to pay deposits or other fees.
- Unusual client behaviour: your clients activity may appear inconsistent from the appraisal stage right through to settlement.
Red flags aren’t necessarily proof of illicit behaviour, but they could indicate that further investigation is needed.
Preventing money laundering with regulation
The Anti-Money-Laundering and Countering the Finance of Terrorism (AML/CFT) amendment came into effect in 2019. It’s designed to combat money-laundering activity and stop terrorist organisations raising money or moving funds around New Zealand.
The updated bill requires businesses like real estate agents, banks, and other financial institutions to conduct rigorous due diligence with new customers, keep financial records, monitor accounts and set up a compliance programme to monitor the entire process. Any suspicious activity needs to be reported to the governing body, and businesses are audited regularly. The bill puts the onus on business, forcing them to be aware of the risks and on top of compliance at all times. Here’s what your business needs to know.
The requirements are thorough, designed to identify criminal activity and deter people from laundering money through New Zealand businesses or real estate purchases.
Help with your AML compliance
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. That’s where First AML comes in. We simplify the AML process for your business, helping you onboard new customers smoothly, access records easily and meet all your compliance requirements.
Digitising compliance means that your records, customer details and transaction data are stored in one, easily accessible place. You can check on the documentation of a new customer, set alerts for suspicious activity and send information to auditors without leaving your desk. It’s about freeing up admin time, as well as meeting the compliance requirements of the AML/CTF bill.
About First AML
First AML is an AML technology provider, and the maker of Source, an all-in-one AML platform. Source powers thousands of compliance experts around the globe to reduce the time and cost burden of complex and international entity KYC. Its enterprise-wide, long term approach to the KYC / CDD data lifecycle addresses time and cost challenges while minimising compliance, reputational and security risks.