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Financial Crime in Real-Estate

Thursday 26 April 2018


Imagining the new regulatory framework 


* This article was originally published in the GRC Professional: AML & Financial Crime Edition 2018. Please log in to your member account to download your edition of the magazine.


 
What would regulation for Designated Non-Financial Businesses and Professions (DNFBPs) look like in Australia? What will regulators expect to see, and what will be the cost of compliance?

Following the Statutory Review of the Australian AML/CTF framework last year, it was recommended that there needed to be more focus on tranche 2:

The Attorney-General’s Department and AUSTRAC, in consultation with industry, should:

(a) develop options for regulating lawyers, conveyancers, accountants, high-value dealers, real estate agents and trust and company service providers under the AML/CTF Act, and

(b) conduct a cost-benefit analysis of the regulatory options for regulating lawyers, accountants, high-value dealers, real estate agents and trust and company service providers under the AML/CTF Act.
 
As working groups are still trying to establish a reasonable regulatory structure, sectors such as real estate must wait to find out what new regulation might mean for them.

In 2016, the Financial Action Task Force (FATF) identified the Australian real-estate sector as being at serious risk for money laundering.

However, the Real Estate Institute of Australia (REIA) is still waiting to learn from both Government and regulators as to the role they and their members can play in helping to plug what has been described a ‘gaping hole’ in the financial sector.
Speaking recently to GRC Professional, REIA President Malcolm Gunning said the Australian Government was looking at real estate agents to be the ‘policemen’ at the beginning of the sale process.

According to Gunning, however, this is inappropriate and there should be AML/CTF regulation for consideration around the point of sale.

“What we have suggested to the Attorney General (AG) is that, while we understand the situation and are very willing to assist, in some cases, we don’t think real estate agents are significantly qualified enough at national level,” Gunning explained.

In New South Wales, it is possible to become a registered salesperson in a week. When taking into consideration the more complex issues of the situation, Gunning doesn’t believe residential real estate agents are properly equipped.


 
A need for more education
For real estate agents, there needs to be education around what is needed to monitor their business for potential financial crime.

“What the AG is concerned about is the real estate agents’ role in money laundering and financial crime,” Gunning said.

The proposed model in New Zealand, where regulation for real estate agents and entities’ licences will roll out in January of next year, is potentially suitable for the Australian framework.

“The New Zealand model is something we have looked at,” Gunning said, “and it’s not unreasonable. There is a lot education is required around it, but at this stage, there’s no firm police powers.”


 
New Zealand and real estate
While the expansion of the AML/CTF regime remains a theoretical discussion in Australia, real estate entities have until January 2019 before the regime will apply to them.

According to the Phase 2 Sector Risk Assessment Report, released in December of last year, NZD$1.35 billion (approximately AUD$1.24) is generated from money laundering annually.

Data from the Real Estate Institute of New Zealand (REINZ) and Quotable Value New Zealand (QV) indicates that around NZD$60 billion (approximately AUD$55 billion) of real estate is contracted per annum.

There is an understanding from regulators that ‘there can never be a zero-risk situation’ and thus the onus is on reporting entities to dictate how much ML/TF exposure they can tolerate.



According to the Report:


Although the Financial Transaction Reporting Act 1996 (FTRA) has been in place for 20 years, Phase 2 entities have not been subject to annual report obligations that would normally inform this section of the SRA.
 
There are about 15,000 licenced real estate agencies operating in New Zealand, including 860 companies and 148 agencies operating as sole traders.
 
The NZ real estate sector is attractive to money launderers for several reasons:
 

  • Agents and entities are widely available, and this provides the impression of respectability, legitimacy, or normality.
 
  • Offenders can move large amounts of illicit funds in a single transaction without raising suspicion, and the duration of the relationship with a real estate agent is short-lived.
 
  • The ability to create additional steps in the ML/TF chain to hinder detection and investigation.
 
  • Ease-of-access to services and techniques to which money launderers would not normally have, or be comfortable doing, such as buying and selling property.
 
  • The large number of agents means offenders can seek out a suitable agent to target.
 
 
The Report suggests the ‘buoyant’ housing market in NZ has created more opportunities for exploitation by transnational criminals. This something that has been observed in other jurisdictions, including Australia.
 
This threat means real-estate entities and agents must be more aware of the relationships between sellers and buyers of property.
 
The purchase of property by non-residents can also be a factor in heightening the ML/TF risk, and close attention needs to be placed on the risks posed by certain jurisdictions. Compliance programs, therefore, must consider and monitor:
 

  • Bribery
  • Corruption
  • Capital flight
  • Tax evasion
 
Impact on the way business is traditionally done
Like any industry facing a new set of regulations, members of REIA are concerned about the impact a new compliance framework may have on the way they traditionally do business.

At the same time, however, Gunning makes it expressly clear that REIA does not condone financial crime or illegal practices.

“But how much research or in-depth knowledge do you have to put in place to list a property for sale?” Gunning asked.

Once the new framework has been established through working groups and consultation, there will also be the question of how much time the industry will have to implement the desired compliance frameworks and processes to the satisfaction of the regulators. In short: how will they know they are getting it right and how will they prove to the regulator that they are doing all in their power to get it right?

 

The current process
Currently, the way it works is that the real estate agent is asked to sell and it is their job to ensure their clients are the right people.

“Normally, you can question that by doing a quick title search,” Gunning said. “You can go to a number of our registered databases and see who the registered owner is. If you are going to sign-off an agency agreement, for example, then you need to have all the owners, and if it is a company, then you need to have the appropriate agency to sign it off. Otherwise, the agency is invalid. Those are the cross checks in place. That’s fundamental."

However, a sophisticated attempt to wash the money is a challenge for any real estate agency.

Gunning explained, “What are you going to do? Sit down and ask 20 questions. And you know what the answer is going to be: ‘I want to talk to another agent. I want to sell the property. Do you want to sell it or don’t you?'"

 

Education
Gunning thinks education is fundamental so that real estate agents know and ask the appropriate questions.

“We have suggested to the AG that there needs to be education to inform agents so they be can mindful when listing properties and to avoid any potential problems they might get tied up in.”


 
Liability
The concern from the perspective of the Institute is that the AG wants real estate agents to be held liable if the purchase/or sale of a property proves to have been done to conceal a predicate crime.

“That’s not reasonable,” Gunning said. “If it is deliberately done then, of course, that’s a crime. But to be the police person at the point of sale is difficult.”
According to Gunning, a lot of the monitoring should be done at the contract preparation stage.

“What our discussions have been about is not to have multi-levels of non-related regulations. Foreign investors and anti-money laundering are sort-of related regulatory areas, so that should be either at the exchange of contract or prior to settlement. That’s where it needs to be done.”

This particular concern affects all regulated entities in other sectors who have to meet different regulatory requirements on much the same data.

Gunning said his real estate agency, Gunnings Real Estate, deals with many Chinese investors and there is very little financial crime taking place in this space.

If there is money laundering happening, then it is very sophisticated and sometimes is being impacted by the presence of third parties.

“What takes place is normally run through financial advisers or third-party advisers—that is, companies already established in Australia and it flows through that,” he explained.

Of vital importance to both Gunning and REIA is that any new regime does not impede the ‘free market’ currently enjoyed in Australia.