Money Laundering Real Estate

Real estate transactions often involve substantial values, complex ownership structures and, in some cases, international counterparties. This makes the real estate sector particularly attractive to those seeking to conceal the origin of funds, in other words to launder money. For property companies and real estate developers, this creates both legal obligations and significant reputational risks. In many situations, support from an AML lawyer can be critical to ensuring that processes and agreements are robust.

This article provides an overview of how money laundering in real estate can arise, the requirements imposed by anti-money laundering regulation and the practical measures real estate operators should have in place.

What does money laundering in real estate involve?

In brief, money laundering concerns attempts to conceal that money or other assets derive from criminal activity. Real estate can be used at several stages of the money laundering chain, both to “park” funds and to give them an apparently legitimate origin.

Typical patterns of money laundering in real estate may include, for example:

• Rapid resales of properties to different buyers without a clear commercial rationale.
• Transactions priced above or below market value.
• Buyers or sellers with complex or opaque ownership structures, for example chains of companies across several jurisdictions.
• Financing through external funds where the origin cannot be credibly explained.
• Payments from third parties without a clear connection to the transaction.

Legal starting points

The anti-money laundering framework is based on the EU Anti-Money Laundering Directives and is primarily set out in the Act (2017:630) on Measures against Money Laundering and Terrorist Financing. The Act applies to a range of obliged entities, including financial institutions and estate agents. Certain real estate developers and other operators may also fall within scope depending on how their business is structured.

Even where a property company is not formally subject to the Anti-Money Laundering Act, it may still be indirectly affected, for example through requirements imposed by banks, advisers, investors or other business partners that are themselves required to conduct customer due diligence and ongoing monitoring. It is therefore commercially important to maintain orderly procedures even where the statutory requirements do not apply directly.

Key concepts in the anti-money laundering framework include:

• Risk-based approach: anti-money laundering measures must be adapted to the risk in the business and in the individual transaction.
• Customer due diligence (KYC): an obligation for obliged entities to verify the customer’s identity, beneficial owner and the purpose of the business relationship.
• Reporting obligation: suspicions of money laundering must be reported to the Financial Intelligence Unit and, in certain cases, the transaction must be declined or discontinued.

Why is real estate particularly exposed?

Real estate is attractive for money laundering for several reasons. It is capital-intensive, can be held for long periods and creates an appearance of legitimacy. A property held for several years and then sold may give capital an apparently “lawful” origin, even though the original financing was criminal.

For property companies, this means, among other things, that:

• Counterparties may attempt to use the company as part of a wider money laundering structure.
• Incorrect or inadequate customer due diligence may result in suspicious transactions not being detected.
• High-risk transactions, for example unusual payment flows or unclear ownership arrangements, may create both legal and commercial problems at a later stage.

In addition to direct sanctions for breaches, such as administrative fines for obliged entities subject to the Anti-Money Laundering Act, there are also significant reputational risks. For a property company, an association with money laundering can affect relationships with banks, investors and tenants.

Practical risks and common pitfalls

Even companies with sound intentions may face difficulties if procedures are not sufficiently clear or if the risk assessment is not up to date. Common pitfalls include:

• No, or an inadequate, structure for identifying high-risk customers and high-risk transactions.
• No documented review of who the beneficial owner is within corporate structures.
• Insufficient verification of the origin of financing, particularly in large or complex projects.
• Lack of training, meaning that employees do not recognise obvious warning signs of money laundering in real estate transactions.
• No clear process for handling and escalating suspicions of money laundering.

Checklist – measures against money laundering in real estate

Even though not all property companies are directly subject to the Anti-Money Laundering Act, there are a number of measures that are prudent from both a risk and governance perspective. The following checklist can serve as a starting point:

• Carry out an overall risk assessment: identify where in the business the risk of money laundering is greatest, including transaction types, counterparties and geographies.
• Prepare internal guidelines: document how you assess risk, what information must be obtained from counterparties and how decisions are made in high-risk transactions.
• Customer due diligence procedures: even where you are not directly obliged under the Anti-Money Laundering Act, it may be prudent to:
• Verify the identity of counterparties.
• Identify the beneficial owner in corporate structures.
• Ask questions about the source of financing and the purpose of the transaction.
• Handling high-risk cases: define what constitutes high risk for your business, for example complex structures, unusual payment routes or certain jurisdictions, and describe the additional checks required.
• Train key personnel: project managers, transaction leads and management should understand the fundamentals of anti-money laundering regulation and common red flags.
• Documentation: ensure that assessments and decisions are documented in a way that can be followed up retrospectively.
• Cooperate with banks and advisers: banks’ information requirements can be used as a starting point for your own processes.

Contracts and transaction structure as tools against money laundering

Contracts can play an important role in addressing money laundering in real estate transactions. By integrating anti-money laundering considerations into, for example, transfer agreements, joint venture agreements and financing agreements, you can clarify responsibility, information sharing and the right to terminate the transaction where suspicion arises.

Examples of contractual components include:

• Clauses requiring information to be provided on ownership arrangements and financing.
• A right to terminate or withdraw from the agreement in the event of suspected money laundering.
• Provisions governing how the parties must act if a bank or other operator takes measures, for example freezing funds.
• Requirements for counterparties to maintain their own anti-money laundering procedures.

It is important that contractual regulation interacts effectively with the wider compliance structure, so that you do not create rights and obligations that are difficult to manage in practice. This includes, for example, the requirements imposed by the GDPR when personal data is processed as part of the procedures.

When should property companies bring in legal expertise?

Issues relating to money laundering in real estate transactions are often situation-specific and require an integrated assessment of law, business and risk. There may be particular reason to bring in specialist expertise where:

• You are planning to change your business model or establish operations in new geographies.
• You are handling larger or unusually structured transactions with several international counterparties.
• A bank or other financial operator imposes requirements that are difficult to interpret or implement in practice.
• Internal procedures have not been reviewed in light of recent changes to the anti-money laundering framework.

A legal review can help adapt procedures, agreements and decision-making processes so that they are consistent with anti-money laundering legislation and market expectations regarding governance, risk management and control.

At Morling Consulting, our lawyers have specialist expertise in the anti-money laundering framework and financial regulation. We help property companies and real estate developers operating across Europe identify risks, strengthen internal processes and draft agreements that address money laundering issues before they become a problem for the business. More information about our services is available at morlings.se.