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Background of Real Estate Laundering
Real estate is not covered under the Prevention of Money Laundering Act, however, Real Estate Money Laundering plays a significant role in the integration of the funds into the Indian economy. Investing in real estate is a classic technique for laundering dirty money, especially in politically, economically, and monetarily stable countries like India.
The certification program offered by Indiaforensic on Risk-Based Money Laundering covers a detailed session on Money Laundering through Real Estate.
Though Money Laundering Regulations don’t cover the Real Estate Sector Directly, it covers the transactions in the financial institutions. Investments in the Real Estate properties, Joint Ventures, and Financing deals take place through the banking system.
The land is a conduit for laundering dirty cash. Corruption proceeds largely go into the land and structures erected on the land. The unstructured growth of this sector has not only affected economic life and urbanization but has created environmental problems in various Indian cities. Since constructing the buildings require no skills besides networking with vendors, all the major politically exposed persons have interests in real estate.
Reasons for Real Estate Money Laundering
The real estate sector is frequently used in money laundering activities due to the following reasons:
- real estate can be bought using cash; (With the introduction of the Real Estate Regulatory Authority this was supposed to be curtailed)
- true ownership can be disguised; (With the introduction of Benami Transactions Act, this was expected to be prevented)
- property is a secure investment with good potential to increase in value.
- huge amounts are involved, which provides value to launderers in lesser efforts.
- value of the property can be increased through renovations and improvements
Money laundering takes place with large amounts of money. Criminals try to launder large amounts of money that they cannot buy cash. Real estate is one of the sectors where large amounts of money are used the most.
Methods of Real Estate Money Laundering
Some common methods include but are not limited to:
- Investment of illicit money in real estate to purchase or sell, for renovations and improvements, etc.
- Structuring of cash deposits across different banks/branches to avoid triggering threshold transactions to buy real estate.
- Price manipulation e.g. over-valuation, under-valuation, reverse flip, or multiple purchases and sales in a short period of time.
- Purchase of properties to facilitate other criminal activity such as drug production, thus generated revenue may then be used to buy additional properties to disguise the original source of funds.
- Use of front companies e.g. shell corporations, trusts, etc. to hide beneficial ownership and links to criminal activity.
- Use of third parties or family members with no criminal record as the legal owner to avoid direct involvement in the money laundering process.
- Use of loans and mortgages (e.g. lump sum cash repayments to integrate illicit funds into the economy, loan back money laundering method).
- Use of professional facilitators (e.g. real estate agents, lawyers, accountants, etc.) to complicate the money laundering process.
- Rental income legitimizes illicit funds, when there is no one occupying the real estate, you still deposit cash in the bank accounts under the pretext of rent.
- Investment by overseas-based criminals to conceal assets and avoid confiscation from authorities in their home countries.
Risk Based Money Laundering Course offers a complete overview of real estate money laundering.
The real estate sector has been abused in many cases in the past by criminals who seek to launder funds derived from any criminal activity.
The sector is vulnerable mainly in the third stage of money laundering. Integration is the third stage in the money laundering cycle where a criminal integrates the illegally derived funds into the financial system. When large sums of money are obtained by way of proceeds of crimes or by corruption then real estate is the biggest facilitator for criminals. It provides ways to integrate wealth into one place.
Red Flags of Real Estate Laundering
- The use of cash to accumulate funds for a property purchase, down payment, or loan repayment
- Multiple purchases or sales over a short period of time, sometimes involving over/undervalued property or straw men buyers
- Use of offshore lenders for making payments for the purchase of real estate assets
- Unknown source of funds used for the purchase, such as foreign wire transfers where the originator and beneficiary are the same people
- Ownership of the property is the only link between the customer and the country in which the property is purchased
