A Question Of Due Diligence

A Question Of Due Diligence

The crime of money laundering continues to be a growing area of concern in the United States. Law enforcement agencies and the financial sector devote considerable time and resources to combating the masking of illegal financial proceeds to make them appear legitimate.

While financial Institutions have long been involved in efforts to identify and combat the flow of bad money through the financial system, many non-financial businesses and professions are also vulnerable to potential money laundering schemes. Real estate professionals are one category of the non-financial business sector that may encounter money laundering activities.  The purpose of this article is to highlight new guidelines available from FinCEN and the National Association of Realtors (NAR) that recently were released.

Money laundering is the process criminals use to disguise the illegal origin of their funds.  Legitimizing, or “laundering” this money through the financial system, is a critical component for criminals to hide their activities and not draw attention to their illegally derived proceeds.

While real estate transactions in and of themselves have historically been presented as relatively low risk for money laundering, there is still an opportunity that a transaction could include suspicious activity on the part of the buyer or seller. Real estate in and of itself is not necessarily the best money laundering vehicle because of its’ illiquidity. This is NOT to say that real estate transactions are not potential targets of fraudsters who can afford to be patient.  The onus of responsibility here used to be clearly on the lending bank but now the realtors; title companies and escrow companies will share this responsibility.

The proper exercise of Due Diligence is requires the financial institution to understand the buyer’s “source of funds”.  However, many lenders confuse “source of funds” (where did monies or funds originate from) with  “sources of wealth” (being defined as what financial accounts are customer’s funds located in). A further complication arises.  Lenders find that they cannot ask such questions because it would be in conflict with fair lending regulations and may be construed to be somehow “discriminatory”.  I know, go figure, laws that conflict with one another.

From our work in the lending arena, we can comfortably attest that very few, if any, of the lending operations in the financial sector can accurately or effectively answer the questions about the buyer’s “source of funds”.  When you have a foreign buyer who is self employed and is contributing a cash down-payment of USD $2M on a USD $4.7M real estate purchase of a secondary residence in the U.S., the question of source of funds becomes quite relevant.   Does the person have income from questionable sources or sanctioned countries?  Does the client’s ability to make a sizeable down-payment “fit” their income and/or circumstances as you understand them to be?

There is also a clear conflict between the lines of business that are competing to place a loan and the compliance group that has the often misunderstood and often disdainful task of safeguarding the financial intuition from illicit funds flowing through it.

The new guidelines are designed to solicit the assistance of real estate agents in identifying suspicious activity and help to mitigate money laundering risk in real estate transactions.  Real estate professionals understand the normal progression of transactions in the transfer of real estate. They, therefore have the ability to recognize and evaluate variances from the norm may signify an enhanced risk. To be successful, brokers and agents should be aware of how real estate transactions may be used in illegal financing schemes and what steps should be taken to detect and deter those activities.

Guidelines are available both at www.fincen.gov and at the National Association of Realtors web site. While these are not necessarily complete from an implementation perspective, they are a start. Training on Anti-Money Laundering  and Sanctions Compliance Risks is available through Financial Examinations and Evaluations, either through their (live) on-site training programs or via web casts. Contact  Shaun Hassett at www.feeinc.com for more information.

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