The FATF has released an updated guidance note on the Risk-Based Approach (RBA) for the real estate sector, outlining businesses operating in the sector can most effectively assess and mitigate money laundering and terrorist financing (ML/TF) risks.  

Real Estate as a Target for Money Laundering – A Pervasive Threat 

Although the real estate sector has always been an avenue through which criminal networks launder illicit funds, the real estate sector has become increasingly exposed to this threat in recent years. 

Money laundering in the real estate sector is a serious issue with far-reaching consequences. Some of the world’s most developed economies – England, Australia and the United States – have all become home to expansive money laundering networks based in the real estate sector. 

An investigation by Transparency International has shown that since 2016, over EUR 6.7 billion worth of suspicious funds has been invested in London’s real estate market alone. The UK’s national risk assessment of money laundering and terrorist financing for 2020 noted that…

“Corrupt foreign elites continue to be attracted to the UK property market, especially in London, to disguise their corruption proceeds.” – UK Home Office. 

As a result, AML/CFT regulations for the industry are being tightened in an attempt to mitigate the risks that pervasive money laundering poses to the legitimacy and continued functioning of the sector. 

New Challenges, New Guidelines – Update from the FATF 

In light of this growing challenge posed to the real estate sector, the FATF has released an updated RBA guidance document to assist businesses in the real estate sector to comprehensively assess and mitigate risks. 

“The FATF Risk-Based Guidance to the Real Estate sector

When conducting a comprehensive risk assessment in order to design an effective risk management strategy, the FATF identifies three broad categories of risk that should be considered in detail:

• Geographical risks, such as the areas of operation and those countries identified by FATF or other regional and national authorities as high-risk.
• Customer risks including particular attention to any additional parties in a transaction and any underlying beneficial owners.
• Transaction risks including the methods of financing and delivery channels.

The FATF also identifies several strategies for risk mitigation that are to be employed by businesses operating in the real estate industry. Broadly, these strategies for risk mitigation include: 

• Customer Due Diligence/Know Your Customer (KYC): checks must be conducted to establish and verify the true identity of each customer and the ultimate beneficial owner of the property before the transaction takes place.
• Due Diligence: if it has been reasonably established that the customer represents a lower MF/TF risk, simplified due diligence measures can be applied to mitigate lesser MF/TF risks. 
• Enhanced Due Diligence: in instances where the customer represents higher ML/TF risks, the business must apply more intensive identity verification and data validation checks. 
• Beneficial Ownership: processes to establish exactly which individual benefits from the privileges associated with ownership of a legal entity.

There are certain conditions under which the FATF recommends that a real estate business conducts enhanced due diligence on a client. These highlighted ML/TF risk factors include: 

• Clients have links to high-risk jurisdictions (e.g., South Africa’s status as an FATF greylisted country). 
• The client is a Politically Exposed Person (PEP) or a family member or close associate with a PEP.
• Complex ownership structures are deliberately used to obfuscate beneficial ownership.
• The real estate professional has not received adequate information from the customer and has to: take reasonable steps to establish the customer’s source of wealth or source of funds; request additional information regarding the customer including further CDD information where concerns have arisen about the veracity or adequacy of information previously obtained.
• Clients are involved in cash sensitive businesses or are requesting to settle a transaction by way of cash and/or VAs without transparency of the source of payment.

Why Risk Assessment and Risk Mitigation is Essential for the Real Estate Industry 

It is crucial for businesses in the real estate sector to ensure constant and full compliance with national AML/CFT laws and regulations – failure to do so can lead to the imposition of serious fines and even jail time. 

“A business with deficient or non-existent risk management, governance, policies, controls and procedures is exposed to considerable risks that include compliance, operational, and reputational risks” – FATF.

With this in mind, the exact challenges faced by the real estate sector will vary from business to business. 

“Legal and regulatory frameworks vary by country and a ‘one size fits all’ approach to AML/CTF is unfeasible” – FATF. 

Although there are universally recognized guidelines for AML/CFT regulations, every country typically has their own set of regulatory requirements that govern how businesses, institutions and organizations in that specific country must conduct business with their customers. 

When doing business in a country and ensuring compliance with its complex financial regulations, it is important to employ experts in the relevant country who are best equipped to operate within the nexus of legislation, law enforcement and economic realities while delivering high-quality and cost-effective services.  

Enhanced Due Diligence, Identity Verification and Data Validation Services for South Africa 

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. We offer a wide range of FICA-compliant KYC services that encompass politically exposed person checks, account verification services, and company sanction and credit checks. To experience our full suite of due diligence solutions and see how we can help your business verify client information and meet its AML/CFT regulatory obligations, book a demonstration by contacting our team here.