In the past five years alone, according to a new report from Global Financial Integrity, a Washington, D.C. resident think tank laundered at least $ 2.3 billion through US real estate transactions. This astonishing number, in all likelihood, represents just the tip of the iceberg and shows that decisive action is required to stop criminals from exploiting system weaknesses and laundering money that is then used to fund illegal activities around the world.
In the course of researching its report, GFI compiled a database of over 100 real estate money laundering cases from the US, UK and Canada from 2015 to 2020. These cases have been identified through news reports and law enforcement documents, which makes it likely that much more illegal activity is happening under the radar that has not yet caught the attention of regulators.
Why is the US real estate market so attractive to money launderers? There are several factors, but one of the most critical is the fact that gatekeepers – lawyers, real estate agents, financial institutions, etc. – have, in the words of the GFI, "through willful blindness have repeatedly enabled REML by wealthy individuals or" direct complicity. " The real estate industry is not obliged to comply with money laundering regulations, which means that even if a real estate agent notices suspicious activity, he is not obliged to report his suspicion to a higher authority.
One particularly shocking finding of the report is that well over half of the reported cases from the United States involved a politically exposed person; that is, someone who plays a prominent role in political life and is therefore at greater risk of being involved in money laundering. Given that there are numerous solutions out there to alert real estate agents and investment advisors when their potential clients are on PEP lists or are particularly high-risk, this statistic is particularly worrying. Not only is this a huge loophole that money launderers are apparently taking full advantage of, it also shows how little awareness the real estate industry seems to have of the problems at their midst.
Of course, real estate professionals have a professional interest in ensuring that as many transactions as possible are carried out, especially when it comes to more expensive properties. As the sector currently has no reporting obligation – and no penalties related to failure to report – there is no real incentive to report. And because there is no incentive to report, there is no incentive for real estate agents and others involved in the transaction to find out about the warning signs of possible money laundering activity. All of this results in an unfortunate catch-22 where people in an ideal position to identify money laundering are neither equipped nor empowered to stop it.
It is clear that, as the GFI notes in its report, "the current approach to regulation in the US … has critical flaws that require major reforms before it can adequately address threats to the US financial system and national security".
While it will be some time before regulatory changes can be implemented, this report should serve as a wake-up call for the entire industry. There are no more excuses for not knowing the role of real estate in money laundering – and there are also no reasons not to immediately put in place some kind of electronic verification system to screen customers. The real estate industry must be an active player in the fight against money laundering – not an accomplice.