Money laundering in real estate - Signs and prevention tools

Money laundering involves filtering income from illegal activities through legitimate transactions, disguising its source and preventing detection by the authorities. Property purchases can be an effective way to launder funds, as they tend to involve large sums of money changing hands, complex transactions and little oversight.

That’s one of the reasons New Zealand’s Anti-Money-Laundering (AML) regulations were expanded in 2018. For real estate agents, compliance with the new laws is a given, but it’s also essential to have a good grasp on the issue – how money laundering works, red flags to spot and effective prevention strategies.

Money laundering methods in real estate

Criminals use real estate transactions to launder money in several ways, including using third parties to buy property, filtering cash through a mortgage or renters, or simply buying and reselling quickly to legitimise funds.

Third-party purchases

In this scenario, people with a criminal record use a third-party – like a friend or family member – to purchase property on their behalf. This keeps the criminal off the title and other documents, reducing the risk of authorities flagging the purchase for investigation. A third-party might purchase the property using illicit funds transferred by the actual purchaser, or the criminal party may pay the deposit, but keep their name off the documentation.

Once the purchase has gone through, the money launderer can either pay the mortgage by filtering money through the lender, or on-sell the property quickly to recoup the investment.

Laundering through loans

Sometimes, money laundering doesn’t start until after a purchase is complete. Criminals buy property using legitimate funds for the deposit, then take out a mortgage on the remainder – as with a normal purchase.

The mortgage is then paid with funds from criminal activity. Because mortgage payments are rarely over the $10,000 threshold which triggers a laundering investigation, this lets people sift money through the bank without being detected. When the house is sold, the money from the sale is legitimate and far less likely to be traced back to its source.

Property price manipulation

Paying a different price for a property than the market can be another way to launder money through real estate. There are two ways to manipulate prices for gain. Undervaluing occurs when a buyer pays much less for a property than expected – on paper at least. The buyer pays the vendor the difference in cash or through other means. When the property is sold, the ‘profit’ from the sale is deposited in the bank as legitimate income.

Overvaluing happens when a criminal buys a property for more than it’s worth to get a larger mortgage. The larger the mortgage, the more funds can be laundered while the debt is being paid off.

Successive on-selling

Buying and selling properties in quick succession can be a sign of money laundering. This method involves buyers purchasing property, then selling it for a higher price to a related third-party, trust or business, giving the appearance of legitimate profit without the need to give up the property.

Switching ownership and recording profit in this way can legitimise large sums of money and muddy the waters for auditors, making it harder to track illegal activity.

Real estate red flags

Money laundering can be difficult to spot if you don't know the signs. After all, the people doing it are working hard to keep authorities in the dark – including the agent.

Apart from complying with AML legislation and doing your due diligence on every new client, it’s smart to keep an eye out for irregular activity and things that just don’t add up. Red flags to watch for:

• Third-party involvement: someone other than the buyer handles most of the purchase, or the buyer joins the process at the last second to avoid background checks

• Complex business or trust: a trust or business with a complex or confusing structure could be trying to hide the real buyer

• Irregular sale price: the purchase price is much higher or lower than expected – this might be a sign of price manipulation

• Buying remotely: the purchaser is located far from the vendor and property without a good explanation

• Cash transactions: large amounts of cash are used to pay deposits or other fees the appraisal stage right through to settlement.

• Unusual client behaviour: your clients' activity may appear inconsistent from the appraisal stage right through to settlement

Preventing money laundering with regulation

The AML/CFT amendment came into effect in 2019. It’s designed to combat money-laundering activity and stop terrorist organisations moving funds around New Zealand.

It requires real estate agents, banks, and other financial institutions to conduct rigorous due diligence with new customers, keep financial records, monitor accounts and set up a compliance programme to monitor the entire process. The bill puts the onus on business, forcing them to be aware of the risks and on top of compliance at all times.

It can be difficult to keep up with compliance when you’re running a busy real-estate business. Make sure your business has a digital AML compliance process to onboard customers, access records easily and meet all the requirements.

In the fast-moving world of real estate, it could make all the difference.

Chris Caigou

Co-Founder & Chief Customer Office, First AML