In the last five years alone, at least $2.3 billion has been laundered through U.S. real estate transactions, according to a new report by Global Financial Integrity, a Washington, D.C.-based think tank. This staggering number in all likelihood just represents the tip of the iceberg and it shows that decisive action is needed to keep criminals from exploiting weaknesses in the system, and laundering money that will then be used to fund illegal activity around the world.
In the course of researching its report, GFI compiled a database of over 100 real estate money laundering cases from the U.S., U.K, and Canada from 2015 to 2020. These cases were identified based on news reporting and documents published by law enforcement officials, which makes it likely that there is a great deal more illicit activity happening under the radar that has not yet attracted the attention of regulatory authorities.
Why is the U.S. real estate market so attractive to money launderers? There are several factors, but one of the most critical is the fact that gatekeepers — lawyers, real estate agents, financial institutions, etc. — have, in the GFI’s words, “repeatedly facilitated REML by high net-worth individuals through willful blindness or direct complicity.” Moreover, the real estate industry is not required to comply with anti-money-laundering regulations, which means that even if a real estate agent notices any suspicious activity, they are not obligated to report their suspicions with any higher authority.
One particularly shocking finding from the report is the fact that well over half of the reported cases from the United States involved a politically exposed person; that is, someone who plays a prominent role in political life and is therefore at a higher risk of being involved in money laundering. Given that there are numerous solutions available on the market that will alert real estate agents and investment advisors if their potential clients are on PEP lists or are particularly high-risk, this statistic is particularly worrying. Not only is this a huge loophole that money launderers are clearly exploiting to the fullest, it also shows how little awareness the real estate industry seems to have about the problems in its midst.
Of course, real estate professionals have a professional interest in seeing as many transactions go through as possible, especially when it comes to more expensive properties. Because there are currently no obligations on the sector to file suspicious activity reports — and no penalties associated with not reporting — there is no real incentive to report. And because there is no incentive to report, there is also no incentive for real estate agents and others involved with the transaction to educate themselves about the warning signs of potential money laundering activity. This all lends itself to an unfortunate Catch-22, where the people in an ideal position to identify money laundering are neither equipped nor empowered to stop it in its tracks.
It’s clear that, as the GFI states in its report, “the current U.S. regulatory approach … has critical shortcomings that will require comprehensive reform before it can adequately address the threats to the U.S. financial system and national security.”
While it will be some time before regulatory changes can be implemented, this report should act as a wake-up call for the entire industry. There are no longer any excuses for remaining ignorant of the role that real estate can play in money laundering — nor are there any reasons not to immediately implement some kind of electronic verification system to vet clients. The real estate industry needs to be an active player in the fight against money laundering — not an accomplice.
