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How Does Anti-Money Laundering Impact Real Estate Agents?

Individuals, groups, and organizations committing financial crimes often try to launder money through real estate agents. As a result, real estate agents that do not mitigate money laundering risks by achieving AML compliance are subject to fines and may also face reputational damages.

Government agencies and laws enforce money language regulations, depending on the area. For example, the European Parliament passed the Fifth Money Laundering Directive in April 2018, with the new rules added into national legislation during January 2020.

The European directive regulates the prevention of terrorist financing and money laundering. It states that real estate agents set procedures that anticipate and prevent money laundering attempts. The goal is to minimize the risk of financial crimes attempted on estate businesses.

In this article:

What Are the Risks of Money Laundering for Real Estate Agents?

Criminals can use several techniques to perform money laundering by purchasing real estate. Real estate agents should be alert to these techniques. They may face legal implications even if they do not handle the funds themselves but are involved or aware of the transaction.

Money laundering techniques involving real estate include:

Buying a property with money obtained from criminal activity and then selling or renting it to receive a clean source of funds.
Buying a property through companies with a complex structure, using multiple bank accounts, hides actual real estate ownership.
Paying a real estate agent a lump sum of money and later retrieving it, or performing mortgage fraud.
Performing tax evasion, for example, by lowering the price of real estate below a taxable threshold, falsifying the cost of furniture, or using fake corporate structures.
Using proceeds from real estate to finance terrorism—even if the source of the funds is legitimate, and even if amounts are small.{{cta('007d8804-adf3-4d63-890c-9f783f8025e1','justifycenter')}}

What Is the Money Laundering Regulation 2017 (MLR 2017)?

Organizations monitored by the UK HMRC for anti-money laundering need to adhere to the approval requirements specified in the Money Laundering, Terrorist Financing and Transfer of Funds Regulation of 2017.

These rules ensure that an organization's senior management and beneficial owners are the appropriate individuals to adopt these roles. In addition, before an organization can register with HMRC, the managing personnel must pass certain approval checks.

If an individual or organization doesn't adhere to the Regulation, they could face criminal prosecution or civil penalties, including imprisonment for up to two years or an unlimited fine. In addition, not adhering to the regulations could result in money laundering charges, according to the Proceeds of Crime Act 2002.

What Is AML 5 (EU Fifth Money Laundering Directive)?

AML 5 reinforces the AML-CFT process in several ways, including:

Broadening the range of firms and sectors subject to AML-CFT processes
Increasing transparency concerning the beneficial ownership of the organization
Introducing tighter controls regarding transactions with customers based in risky third countries
Providing enhanced identification of PEPs
Limiting the anonymous employment of virtual currencies
Improving information and cooperation sharing between supervisory authorities

EU Member States had to incorporate AML 5 into national legislation by January 10, 2020.

Organizations subject to AML-CFT rules must examine their compliance systems and tighten their KYC policies to adhere to the standards put in place by national legislators in various countries. Inability to comply could lead to penalties and enforcement actions by authorities such as the ACPR in France or the HMRC in the UK.

What Do Real Estate Agents Need to Do to Comply with AML Regulations?

Real estate agents that operate in the UK can achieve compliance with AML regulations by doing the following:

Register with HMRC—HM Revenue and Customs (HMRC) is the AML supervisor for real estate agents and other business areas. HMRC supervisors ensure companies comply with the legislation and maintain a register of their supervised population. Trading as an estate agent without registering with HMRC for AML supervision is considered an offense.
Appoint an MLRO—the regulations require real estate agents to register a nominated individual within the business to serve as a Money Laundering Reporting Officer (MLRO). In addition, where applicable, companies are also required to nominate a Deputy MLRO.
Risk assessment and written procedures—real estate agents must prepare a written policy statement that demonstrates how the business plans to manage risks and the detailed processes set in place to prevent money laundering. Companies should train and support their staff to help them understand and implement AML policies. Additionally, businesses must undertake an AML risk assessment that covers the business, how it operates, and all clients.

Many real estate agents use technology tools to assist with AML compliance. Read our guide to AML software.

What Is a Suspicious Activity Report (SAR) and AML Red Flags?

Real estate agents can voluntarily report information on suspicious activity to local authorities. In addition, businesses can file a suspicious activity report (SAR) when there is reasonable suspicion or red flags indicate a real estate transaction is possibly serving as a vehicle for illegal financing activity. SARs are used by financial institutions and serve as an essential tool that helps law enforcement agencies combat money laundering.

Here are the primary red flags that should trigger a SAR report:

Geographical risk: If a customer or their source of funds is within a jurisdiction that supports or funds terrorism, has a high degree of political corruption or has a weak AML regime.
Customer risk: Indicated by the buyer's location, the involvement of a third party, or the property's location regarding the buyer.
Transaction risk: Characterized by over-valued or user-evaluated properties, unusual funding sources, a large amount of cash, or the transaction speed.

Know Your Customer (KYC) Requirements for Real Estate Agents.

KYC is a control procedure implemented to identify customers and prevent financial risks. Real estate agents use KYC to assess and identify risks related to illegal financial activities, including money laundering, corruption, terrorist financing, and fraud. KYC procedures enable real estate agents to obtain the information needed to assess customers.

KYC is a requirement that enables compliance with Financial Action Task Force (FATF) proposals and the European Union Directives (EU).

Customer Due Diligence for Real Estate Agents

Real estate agents are required to perform customer due diligence (CDD) in money laundering and risk assessment processes before allowing customers to buy a property.

Businesses are required to apply CDD procedures to all beneficial owners involved in a counterparty and property sale and to any customer and stakeholder before finalizing a deal.

CDD and all processes must comply with FATF standards with all suspicious dealings. However, in some cases, CDD procedures do not provide sufficient coverage. For example, individuals considered politically exposed persons (PEPs) and their families and other high-risk cases require further AML measures. Therefore, enhanced due diligence (EDD) procedures must be implemented in these cases.

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