September 23, 2023
by Miguel Cassagne
Introduction.
The world of real estate is a sector of the economy that has experienced steady and significant growth over the years. However, this very growth has attracted the attention of undesirable actors seeking to use the real estate sector for illegal purposes such as money laundering and terrorist financing.
To address this growing concern, the Financial Action Task Force (FATF) has issued updated guidance on the Risk-Based Approach (RBA) in the Real Estate Sector, with significant implications for real estate brokers and companies.
The FATF Guide Update.
The FATF's guide on the Risk-Based Approach in the real estate sector was updated in July 2022 as a top priority to reflect the evolving landscape of money laundering and terrorist financing (ML/TF) within the sector. This update aims to alert and ensure that the sector remains well-positioned to combat such illicit activities.
The guide was primarily developed to outline the principles and benefits of adopting a risk-based approach to address ML/TF. It is intended to be read in conjunction with the FATF Recommendations (2012) and provides real estate professionals involved in property transactions with the tools and examples necessary to support the implementation of FATF standards for ML/TF prevention.
According to the FATF, this approach is considered the cornerstone of a country's ML/TF framework, reflecting the characteristics of legal, regulatory, and financial frameworks. The success of a Risk-Based Approach (RBA) depends on a comprehensive understanding, assessment, and management of ML/TF risks, as well as the adoption of appropriate measures to effectively mitigate these risks.
Structure of the Guide.
The analyzed guide is divided into three main sections, providing an overview of the RBA in the sector, including the general risks and challenges that real estate professionals may encounter and how to effectively mitigate and manage them.
The following section outlines the main risk categories to which the sector may be exposed and makes recommendations on the types of mitigation policies that should be designed, implemented, and reviewed, including customer due diligence (CDD) and beneficial ownership identification. The guidelines emphasize the need for training and awareness that real estate professionals must have to effectively implement ML/TF requirements.
The final section offers guidance for supervisors and self-regulatory bodies (SRBs) and highlights the need for appropriate powers to enable these bodies to carry out their functions effectively. This includes powers to supervise activities and impose appropriate sanctions when necessary. Additional recommendations are provided to enable effective oversight, including resource allocation based on the level of ML/TF risk and the evaluation of the effectiveness and adequacy of controls implemented by real estate professionals.
Focus on Private Sector Guidance.
The third part of the FATF Guide, updated as of June 2022, focuses on providing specific guidance for private sector professionals involved in real estate transactions on behalf of their clients. In this regard, the FATF underscores the critical need for real estate professionals to understand and address money laundering and terrorist financing risks in their businesses.
Risk Assessment.
The first essential component of the RBA in the real estate sector is risk assessment. This entails real estate professionals understanding how they could be exposed to these risks and designing systems to effectively address them. This risk assessment should be ongoing and take into account various factors, including geographical, customer, and transactional risks.
Geographical risks involve assessing the effectiveness of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regimes in the country of operation and identifying any deficiencies. Additionally, it is crucial to evaluate specific threats and vulnerabilities related to real estate in a given location, as well as the level of legal transparency and compliance with existing legal frameworks. The location of the property, the buyer and seller's locations, and the transaction's purpose must also be carefully analyzed.
Risk Categories and Factors.
The identification of potential risks is categorized into key areas. These include geographical factors, customer risks, and transaction risks, which are critical areas of focus. Real estate professionals must pay special attention to clients originating from high-risk countries, those linked to high-risk industries, or those listed on financial sanctions lists.
Moreover, careful consideration should be given to transaction characteristics, such as the use of third parties, foreign accounts, or foreign currencies, as well as any unusual requests or expedited transactions. These indicators can serve as red flags for suspicious activities.
In that regard, the Guide highlights the following risk factors within each risk category:
a.) Geographical Factors
? Effectiveness of the country's AML/CFT regime and identified deficiencies.
? Level and nature of threats and vulnerabilities relevant to real estate in the given geography.
? Level of legal transparency and compliance with existing legal frameworks.
? If a country is subject to sanctions, embargoes, or similar measures.
? Where the property is located.
? Where the buyer and seller are located and the purpose of the transaction.
? If funds were generated abroad and the transaction occurred without in-person meetings.
b.) Customer Factor
? If the customer originates from a high-risk country or has ties to high-risk industries.
? If the customer is listed on targeted financial sanctions lists.
? If the buyer participates in a citizenship-by-investment program.
? Unexplained or unusual source of funds.
? Undue pressure to conclude the transaction quickly.
? Use of intermediaries or legal entities to shield identity.
? The customerr profile doesn't align with the property value.
? Sudden changes in customer behavior.
? Use of complex legal structures that can obscure beneficial ownership.
? Negative media coverage of the beneficial owner.
? If the owner or beneficiary is a Politically Exposed Person (PEP) or has ties to a PEP.
c.) Transaction Factor.
? Use of third parties, foreign accounts, or foreign currencies to send or receive funds.
? Proposal to settle using virtual assets.
? Use of unusual and complex loans or financing means.
? Full or partial settlement in cash or foreign currency without a valid reason.
? Purchase of multiple properties at the same time or successive transactions in a short period.
? A previously sold property is remarketed after renovation with no obvious source of funds.
? Transactions that lack an obvious economic rationale, particularly when there's an obvious loss.
? Requests to expedite transactions, possibly above or below value.
? The customer requests that proceeds from a sale or rental be sent to a high-risk jurisdiction or a third party.
Documentation of Risk Assessments.
Proper documentation of risk assessments is a critical requirement. Real estate professionals must maintain up-to-date records of their assessments, categorizing them based on risk level (low, medium, or high) and ensuring accessibility to all staff. Furthermore, these assessments should be periodically reviewed and updated to reflect changing trends and new threats.
Risk Mitigation.
The FATF guide emphasizes the importance of risk mitigation in the real estate sector. Policies for mitigating money laundering and terrorist financing must be designed, implemented, and regularly reviewed. These policies can include:
? Customer Due Diligence: Real estate professionals must reasonably believe they know the true identity of each client and the ultimate beneficial owner of the property before a transaction is conducted. Customer due diligence is fundamental to ensuring transparency and legality in the operation.
? Simplified Due Diligence: When it is reasonably established that a client presents a lower risk of ML/TF, simplified measures can be implemented, such as reducing the required amount of information. However, this should be done prudently and based on a risk assessment.
? Enhanced Due Diligence: If circumstances indicate a higher risk of ML/TF, such as with Politically Exposed Persons (PEPs), more rigorous due diligence must be applied. This may include obtaining approval from senior management and increased monitoring.
? Beneficial Ownership: To mitigate the risks of property transactions lacking adequate, accurate, and current information on the beneficial owner, entities must take additional steps.
These include understanding the ownership and control structure of any legal entity, assessing the degree of verification required for beneficial owners based on associated ML/TF risks, and documenting the additional procedures applied and actions taken to identify the beneficial owner.
Regulatory Obligations.
The guide also emphasizes the importance of robust internal controls and effective management within real estate companies. Internal controls should focus on the timely identification and mitigation of money laundering and terrorist financing risks, and senior management and the board of directors must approve and promote these controls.
Compliance Culture and Training.
Finally, the guide highlights that a positive compliance culture is essential for the successful implementation of the RBA in the real estate sector. Business leaders must demonstrate a genuine commitment to AML/TF and ensure that all employees are adequately trained and aware of their responsibilities in preventing money laundering and terrorist financing.
Conclusion.
The FATF Guide on the Risk-Based Approach in the Real Estate Sector is an invaluable resource for real estate professionals and companies. Its focus on risk assessment and mitigation provides a solid foundation for preventing the misuse of the real estate sector for illegal purposes. By adopting the recommendations of this guide, real estate professionals can significantly contribute to the fight against money laundering and terrorist financing while protecting their businesses from adverse contingencies and consequences. The effective implementation of these FATF risk-based standards is essential for the sustainable and secure future of the global real estate sector.