Organizations crack down on money laundering in real estate

Money laundering is an age-old crime but governments and other organizations are starting to crank up the heat, in a move to crack down on ill-gotten gains funnelled into commercial real estate.

In Germany, the government has deemed real estate to be ‘a sector with elevated risk’ with regard to money laundering, according to an inquiry by parliamentary fraction Bündnis 90/Die Grünen. The Green Party has been quick to blame the real estate sector for not doing more to crack down on money laundering and party chairman Robert Habeck recently called for the creation of a property registry to make property ownership more transparent.

‘Despite very strict checks, it can sometimes be very hard to figure out who is really behind a deal,’ Sabine Georgi,head of business development Germany, at RICS in Frankfurt, told REFIRE. ‘Germany’s tax authorities are also notified when a property changes hands – they could also investigate the details. The industry could do more but a company can be abused and just not know it.’

According to the Bündnis 90/Die Grüneninquiry, 7% of reported money laundering activities took place via real estate investments in 2016, ‘opening up possibilities for placing large sums of cash’. Moreover, in around 40% of cases, Russian-Eurasian or Italian structures were involved. The government also believes that Italian crime syndicate, the 'Ndràngheta,based in Calabria, has invested in Germany’s hotel and gastronomy sectors as well as in the retail sector.

Government register falls short

The German government is required to set up a register to track the investor base of companies in Germany, in line with AML legislation. ‘So far, this register doesn’t really exist in a meaningful form and checks have shown that the register is still incomplete,’ Dr. Ingo Seidner, EMEA head of compliance and integrity management at JLL, told REFIRE.

And it gets more complicated, Seidner said: ‘According to German law, we can’t rely on any registered information, which means we are forced to do our own checks by using expensive external databases. That means huge costs for databases and human resources in order to meet the identification requirements. Small market players who can’t afford it will ignore the laws and impose a high money laundering risk. A further part of the problem is that AML laws are ambiguous, different from EU country to country and focus on the financial sector as opposed to the real estate ones, which means that their laws aren’t always a good fit for us. Ambiguous laws imposed without sufficient resources for monitoring and execution makes it hard to prevent money launderers.’

In turn, this makes it easier for suspect deals to slip through the net. The German media - including Tagesspiegel and Berliner Zeitung- has unearthed investments in German real estate on behalf of Russian oligarchs including, allegedly, Russian businessman Arkady Rotenberg, co-owner of the Stroygazmontazh (SGM) group, the largest construction company for gas pipelines and electrical power supply lines in Russia, and a close friend of president Putin. Rotenberg, who is subject to personal sanctions by the US government related to the events during the Ukrainian crisis, has allegedly acquired around €1b of commercial real estate in Germany, including the LES 1office complex in Hamburg and the Sofitel Hotelin Frankfurt am Main. (Rotenberg, however, has denied that these properties belong to him.)

Germany’s FBI proposes sanctions

The Bundeskriminalamt (BKA) – Germnay’s equivalent of the FBI – has also highlighted the risk of money laundering in the sector. In 2012, it commissioned auditors Deloitte & Touche in Düsseldorf to undertake a study titled ‘Money Laundering in the Real Estate Sector in Germany’. They concluded that ‘there is generally a lack of awareness and experience to recognize money laundering activities’ and that ‘even with good will, money laundering cannot be recognized’.

Part of the problem, according to the BKA, is that money laundering tends to be associated with cash-only deals, which can be misleading. In addition, ‘real estate agents and building societies clearly give preference to economic interests as compared to the issue of money laundering’. As regulatory measures are concerned, ‘the supervision of this sector should be harmonized as much as possible, in spite of the jurisdiction of the federal states stipulated in the constitution’. Moreover they noted that ‘supervision should be considerably intensified and sanctions should also be considered as a last resort’.

However, money laundering can be hard to eradicate because it can happen at both the construction and the sales level, Seidner warned. ‘Real estate is expensive, which means that you can launder a lot of money in one go,’ he said. ‘Also, if a unique building comes up for sale, there really isn’t an existing price to compare it to, which offers an opportunity to hide a lot of money because the sale price isn’t transparent.

Equally, a lot of projects under construction go over budget, which increases the ‘space’ for bribery. In addition, the right property in the right location is a safe investment, a safe port for criminals and oligarchs from around the world. This makes Germany very attractive to them, particularly if they come from unstable countries where they fear losing everything if there is a change in power.’

RICS addresses financial crimes

Other organizations are also keen to stamp out money laundering. Last month, RICS announced that it was consulting on a new standard designed to help real estate professionals and regulated firms address the risks posed by bribery and corruption, money laundering and terrorist financing.

The new draft standard, ‘Countering bribery and corruption, money laundering and terrorist financing’ sets out the obligations for RICS professionals and regulated firms to minimize their exposure to these risks, thereby guarding against financial crimes in their day-to-day business operations.

‘The risks of bribery and corruption, money laundering and terrorist financing cut across our profession, regardless of geography or industry specialism,’ said Peter Bolton King, RICS’ global director of professionalism and ethics. ‘If these risks are not appropriately identified and managed, they could have a direct impact on day-to-day work, as well as on businesses and consumers, and the trust these groups place on professionals. By setting out the obligations of RICS professionals and regulated firms, the Professional Statement promotes transparent and ethical business behaviour, which promotes market confidence in the profession.’

Through an extensive global consultation, RICS aims to engage professionals and industry stakeholders on whether the proposed professional statement meets their needs and sets out their obligations to mitigate the impact of these risks on their business practices.

‘Cross border real estate investment has increased a lot. Germany is particularly vulnerable to money laundering due to its size and the liquidity of its real estate market. If you want to do business in an ethical way, this (cracking down on money laundering) will always be at the back of your mind,’ Georgi said.

This is supported by research conducted by the Financial Action Task Force (FATF), an organisation that works with governments to support legal and regulatory requirements to root out money laundering, terrorist financing and related threats within the global financial system. Other international bodies such as the United Nations and Transparency International have also identified the real estate sector as being particularly vulnerable to illicit funds.

In this era of unparalleled public scrutiny, today’s organizations face ‘a perfect storm of fraud-related risks – internal, external, regulatory and reputational’ – according to PwC’s ‘Global Economic Crime and Fraud Survey 2018’. In its 2014 ‘Global Economic Crime Survey’, PwC identified construction as one of a number of sectors particularly prone to incidents of bribery and corruption. The Organization for Economic Co-operation and Development (OECD) has also identified construction as a high risk sector globally for bribery and corruption, often through state procurement processes.

‘Our focus on bribery and corruption, money laundering and terrorist financing is not new for RICS or for the profession in general,’ stressed Bolton King. ‘Governments legislate against these crimes, some organisations have strict policies that guard against them and most individuals understand the repercussions associated with them. As a global professional body, RICS has a responsibility to ensure that we set out the minimum requirements and obligations for our professionals and regulated firms to ensure their activities do not involve or facilitate bribery, corruption, money laundering or terrorist financing.’

Once finalized, the professional statement will apply to all RICS professional disciplines and is global in scope. The consultation runs from May to July and is available at www.rics.org/amlps (ssk)