The potential for money laundering in real estate is higher than you might think.
That’s the message the Financial Crimes Enforcement NetWork (FinCen), a bureau of the U.S. Treasury, is trying to get out to real estate professionals. FinCen’s mission is to protect the nation’s financial system from financial crimes.
To combat the potential for money laundering in real estate transactions, FinCen ordered all-cash home sales of $2 million or more to be reported in five high-cost California counties between 2016 and 2017.
Money laundering occurs when an individual or organization hides money obtained in an illicit criminal manner through the purchase or sale of a more legitimate asset, such as a house. Real estate can be an ideal vehicle through which to hide large sums of money, since property commands a high price and the value is somewhat subjective. Thus, it can be effectively corrupted by nefarious participants to “clean” large sums of dirty money.
To gain an idea of just how common this activity is, 30% of sales reported under these targeted orders involved individuals or companies who had separate suspicious activity reports (SARs) previously filed against them.
For example, in 2016, the U.S. intervened in a high-profile case of money laundering by a Malaysian state-owned investment fund, 1MDB. The U.S. seized over $1 billion in assets, including a hotel, a mansion and two homes in Beverly Hills, as well as a home in Los Angeles.
How agents can help combat money laundering
FinCen asks real estate professionals to timely file SARs when they suspect their real estate transactions are improperly being used to mask criminal activities. Unlike covered financial institutions, which are required to file SARs when suspicious activity is observed, filing an SAR to report suspicious activity is voluntary (though actively encouraged) for real estate professionals.
Suspicious transactions most often occur:
- in high-value markets, such as in California’s expensive coastal markets; and
- with all-cash transactions, as no financing allows corrupt buyers and sellers to avoid many anti-money laundering safeguards.
Not sure what qualifies as “suspicious behavior?”
There are a handful of red flags all real estate professionals ought to be familiar with. Watch out for transactions that:
- make no logical financial or investment sense for the buyer or seller, for example:
- sales that generate no revenue or involve high fees or monetary penalties;
- give no regard to a property’s assessed value, condition or location, for example:
- when the buyer purchases a million-dollar home for cents on the dollar;
- involve funding from unknown sources or far exceed the buyer’s income level, for example:
- when a low-income individual purchases a million-dollar home with all-cash; or
- are conducted in any irregular manner, for example:
- when a buyer or seller asks for documents to be altered.
To file an SAR, use FinCen’s online Bank Secrecy Act’s (BSA’s) filing system.
For detailed instructions and answers to frequently asked questions regarding filing an SAR, see this filing information.
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