The TIC Company
The Financial Action Task Force (FATF) have released updated guidance for the real estate sector, making it clear that they are keen to see increased understanding of ML/TF risk across the sector. The guidance is intended for all areas of real estate, such as residential, commercial, agricultural and industrial real estate.
The purpose of the guidance is to show best practice for the sector, and provide detailed guidance as to how FATF envision this to be implemented at a business, regulatory and policy level, bearing in mind a risk-based approach at each level. In discussing the application of this guidance, FATF makes it clear that multiple sectors are essential in tackling ML/TF in the real estate industry, such as banks, conveyancers, and mortgage providers.
Some quick numbers
FATF undertook research in updating their guidance for the industry, and their findings are indicative of the ML/TF risk in real estate. They also collated findings from their latest round of Mutual Evaluations on the knowledge of AML/CFT obligations in the real estate industry.
37% of countries surveyed viewed real estate as being at high risk for money laundering or terrorism financing, with just 9% viewing the sector as being low or low-medium risk. During the fourth round of Mutual Evaluations, 78% of countries assessed had poor understanding of how real estate can be used for ML/TF, but for 47% of those countries, real estate was a highly important aspect of their economy. The guidance stated that “[t]he low levels of
ML/TF risk awareness in the sector appear to be mostly linked to the nature, size
and functions present in the sector… which challenge its ability to have a shared understanding of risks, as well as criminal trends and potential shared threats.”
How real estate businesses can protect themselves
1. Know your customer
Traditionally, property has been owned by natural persons, and the property was used exclusively for single purposes, such as residential or commercial. This is changing, with complex ownership structures for private investors becoming the norm. Furthermore, property ownership is not just for owner-occupiers. Globally, property is increasingly becoming a favoured method of investment - and this has been the case in New Zealand for some time.
Complex ownership structures can be set up for legitimate purposes. For example, an investor may manage their properties via a set up of companies and trusts, or the family household may be held in a trust for inheritance purposes. However, these complex structures can obfuscate the beneficial ownership, and make it difficult to determine who the customer really is.
These complicated structures means truly knowing your customer has become ever more important. A key message from FATF is to adopt a risk-based approach to customer due diligence (CDD), ensuring that risk is considered not just on the transaction, but also on the customer.
2. Regularly review and update risk assessments
FATF recommends that all real estate businesses regularly review and update their AML/CFT Risk Assessment, particularly in the face of real estate markets that change very quickly. This is particularly true for companies that are finding complex ownership structures to be a regular occurrence in their client portfolio.
3. Create a culture of compliance
When compliance is viewed positively within a business, risk is more effectively managed and mitigated, creating a better outcome for all concerned:
Higher-risk customers are scrutinised more closely, and it is harder for clients to avoid the CDD process.
The risk-based approach is upheld, and staff are more likely to flag a potential risk or red flag.
Training is held regularly and staff are aware of their obligations and the procedures to meet those obligations.
If the overall attitude toward compliance is negative, red flags are ignored or not identified. Clients find it easier to circumvent the CDD process, and this may not be questioned by the real estate business. Training may be irregular, or rarely occur, and staff do not know what their obligations are, nor how the business meets them.
Good compliance comes from the top downwards. FATF found during their review of the real estate sector that compliance knowledge is still very low, making real estate businesses vulnerable to the impacts of ML/TF. Training for all levels of staff in the business is key to understanding obligations, and will overall contribute to a positive attitude toward AML/CFT compliance.
Not just the real estate sector
It is obviously very important that real estate professionals understand their obligations under the AML/CFT Act, and know how to spot red flags and suspicious behaviour. However, other industries can contribute to this, and help to manage the ML/TF risk in the sector also.
Banks, conveyancers, lawyers, and mortgage companies all contribute to the sale and purchase of real estate. While they may not be engaged like a real estate agent is, they each have a part to play in the transaction.
FATF recognises the contribution of other sectors to the real estate industry, and are encouraging those sectors to be familiar with red flags and pay attention to red flags.
What does this mean for me?
FATF stated in their guidance “The success of a risk-based approach (RBA) is dependent on a comprehensive understanding, assessment and management of ML/TF risks, and on taking appropriate measures to mitigate these risks effectively.”
You may already be taking appropriate measures but if you’re not, you may need to make improvements in the following areas:
The level of detail included in your risk assessments.
The standard of your AML/CFT programme – to ensure they are commensurate with identified risks.
The quality of expertise within your team – to ensure everybody knows how to carry out their duties correctly.
The attitude towards compliance – to ensure there is a positive compliance culture throughout the business.
If you have some questions about the latest guidance, or want some help with your
compliance programme get in touch with our team of AML experts.
FATF guidance for a risk-based approach - real estate sector (PDF download)