Money laundering is when money made through criminal activity is made to look like they were legally obtained, in turn, “cleaning” dirty money so that it’s recognized in the legal economy.
And real estate industry seems like a commonplace to launder money and avoid tax evasion. Here’s our real estate specialists’ guide on how to spot a money-laundering scheme that could work in the real estate market.
Money Laundering in the Housing Market or Residential Real Estate
1. Using Third Parties To Purchase Residential Property
This is a common money laundering scheme wherein criminals buy property under a third party’s name and have that person as the legal owner.
But how does money laundering work specifically in this process? It starts with the illegal money being deposited into the third party’s bank account so they can make the cash purchases and a real estate transaction.
This allows the third party to be the main point-person regarding that piece of property, turning attention away from the criminal.
Often, this is because third parties, like company service providers, or a family member with no criminal record are less suspicious, making it difficult for a financial institution to prove if it was an illegitimate sale.
2. Loans and Mortgage
Money launderers use loans and mortgage payments as a coverup for their illegal funds. This is where they launder illicit funds and mix them with legitimate funds.
They then find another third party to cosign on a loan; usually, someone is more lawful since a criminal won’t approve a mortgage.
Once signed, the drug money is deposited into the bank as a mortgage payment. Overseas-based criminals withdraw the down payment to avoid direct contact with the bank. That is not just laundering, but also mortgage fraud.
3. Manipulation of Property Values
Undervaluing or overvaluing the real estate prices or property value can manipulate the market price.
Undervaluing the value (below the contract price) allows the remaining amount to be paid secretly with illegal funds.
Selling property at a higher price prompts the criminal to turn to the bank for a loan to pay the actual purchase price. The bigger the loan, the more illicit funds can be laundered.
Undervaluing and overvaluing are sneaky tactics because it might be difficult for a real estate business to determine a property’s actual value.
4. Structuring
Structuring is useful for depositing amounts greater than $10,000 and must fill out a currency transaction report (CTR).
This happens when the money launderer/s structure their cash deposits across different branches to avoid filling out such a report. It is a common way to launder money, but it can only be done so many times before the bank gets suspicious.
5. Rental Income To Disguise Illegal Funds
Another method how money laundering in real estate works is through the disguise of funds. Criminals will purchase real estate property in their name or a third party’s name. They move around their money using a paper person.
This person rents the property and pays the criminal rent every month, sometimes higher than market rates.
The criminal then deposits their illegal funds into the paper person’s account and transfers as much money as possible to their account to cover rent payments.
This way, the criminal can show that that money is from legitimate financial means.
In A Commercial Space
Commercial properties have very large cash flows, which makes it a tempting place for laundering money. Leasing and renting with high deposits and monthly payments make commercial real estate quite vulnerable.
Most commercial properties are made through LLCs (limited liability companies), allowing the beneficial owner to be hidden through shell companies.
Commercial real estate is also used as a means for corrupt politicians (politically exposed persons or PEPs) to hide their stolen funds and conceal assets through shell companies.
According to FinCEN (Financial Crimes Enforcement Network), there is one money laundering scenario where an account holder and government official took out a 6-digit loan to purchase a business. Only to find out that the individual had stolen money from their country of origin.
How To Look Out For Money Laundering Through Real Estate Transactions
Now that you have an idea of how money laundering in real estate works, it’s important how to spot the telltale signs of this illegal activity.
Real estate purchases are a secure investment, and prices can increase over time. Because of this, it can be easy to take advantage of cash deposits and purchases, the financial system, and the real estate sector.
So how do we avoid this? Through proper screening and verification.
For property managers, if you have a tenant [1] paying higher or lower rent than others, that’s a red flag. Similarly, it is worth looking into if the property price is higher or lower than the market value for real estate agents.
For a real estate agent, mortgage broker, other financial institutions, real estate professionals, or those in real estate closings, our experts strongly recommends to properly and vigilantly screen clients.
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