MONEY LAUNDERING IN THE PROPERTY SECTOR

Property is attractive to money launderers for the same reason it is attractive to any investor: it is a stable, high-value and secure asset and, unfortunately, South Africa is appealing because of the impression that the local industry is slack in applying due care. This is why the Financial Intelligence Centre Act (FICA) is imposing new anti-money laundering obligations.

By Michael Meadon

All successful criminals involved in financial crime face a serious problem: how do you make illicit income appear legitimate? Whether they are corrupt individuals, drug dealers, tax evaders, smugglers, or another flavour of bad guy, such criminals all need a special kind of financial alchemy to turn criminal lead into legitimate gold. This alchemy is money laundering: the process of introducing money into the financial system ("placement"), disguising its origins by moving it around in complex ways ("layering"), and finally reintegrating it into the legitimate financial system ("integration"). Simply put, money laundering is how criminals turn dirty money into seemingly clean money, and how they ultimately secure the economic benefits of their crimes.

BACKGROUND

Financial crime is multi-faceted, multi-national and very often invisible, making it hard to identify, measure and combat and money laundering is no exception. Money laundering techniques are complex and varied, targeting banks and other financial institutions, casinos, dealers in high value and luxury goods , and of course the real estate market. Property is attractive to money launderers for the same reason it is attractive to any investor: it is a stable, high-value and secure asset that will typically appreciate over time and that criminals can either use directly or rent out to generate income. Unfortunately, it is also more attractive in some places - including South Africa - because of the perception that the due diligence the industry applies is lax, and therefore that launderers can operate undetected. The South African Financial Intelligence Centre ("FIC") has identified numerous instances of criminals using the proceeds of crime to purchase property, including rhino poachers, drug dealers and corrupt politicians and officials.

Because the property sector is so vulnerable to money laundering, the Financial Intelligence Centre Act ("FICA") imposes anti-money laundering obligations on several industry players, including estate agents, attorneys and trust companies. In the parlance of the Act, they are "Accountable Institutions", a designation that carries significant legal obligations and duties. I will not summarise all of these obligations; instead, I will highlight a couple of key principles and mention a few indicators that are often typical in a money laundering transaction.

KEY PRINCIPLES

Thankfully, some FICA compliance requirements are simple, like registering with FIC or appointing a person responsible for combating money laundering. Others, like training staff or documenting and implementing a Risk Management and Compliance Programme, can be much more involved. But the true heart of anti-money laundering (and the closely related matter of countering the financing of terrorism) is Know Your Customer ("KYC") and Customer Due Diligence checks.

Such checks start with identifying who all the parties to a transaction are and then verifying their identities. Importantly, this includes an obligation to understand ownership and control of your counterparts: corporate vehicles - like trusts, companies, and partnerships - must be unravelled and traced to beneficial owners or beneficiaries who are natural persons. In other words, you must identify the actual named individuals who stand to benefit from a transaction, and cannot be satisfied by nominees, intermediaries or fronts. Money launderers will try their best to hide their identities, so these identification and verification steps are vital: FICA expressly forbids even a single transaction with an anonymous client.

Simply knowing the identity of your client is not enough however: really knowing your customer requires establishing the nature of their business or occupation, the intended purpose of their relationship with you, and their source of funds. To put it simply, you must establish why clients want to engage in a transaction (does it make logical sense?), what they do (is the transaction reasonably understandable given their business, occupation and economic situation?) and where they got their money (is it legitimate or are there signs it may not be?). Wherever possible, you should aim to verify the answers clients give you to these questions, and should not automatically or blindly accept what clients tell you.

Another key principle is that when conducting business or transactions with Politically Exposed Persons or "Prominent Influential Persons" in FICA, ("PEPs") more scrutiny should be applied during the due diligence process. The reason for this is that financial institutions and other regulated industries are required to complete additional checks on PEPs to ascertain whether additional risks could arise from conducting business with them. . The Financial Action Task Force ("FATF") guidance states that when doing business with PEPs (or their close associates and relatives), you should obtain senior management approval for the relationship, and, depending on inherent risk factors, apply enhanced monitoring and further due diligence by e.g. taking further steps to verify their source of funds. Similar approach applies for both local and foreign PEPs, in particular if an individual is from or represents a jurisdiction which could pose a higher than average financial crime risk, and you are required to consider whether any given transaction is consistent with their legitimate income and makes economic sense.

RED FLAGS

FATF has identified a number of signs to look out for when completing KYC checks and any enhanced due diligence. While not exhaustive nor individually definitive, some of the indicators FATF have suggested may lead to necessary additional due diligence are

• Properties bought with cash, bank notes, bearer cheques or other anonymous instruments
• Transactions taking place via intermediaries who are foreign nationals, or involving PEPs or individuals or entities from offshore centres, tax havens or other high risk jurisdictions
• Transactions entered into at a value significantly different from market values
• Transactions that indicate that the parties are not acting on their own behalf and are trying to conceal the identity of the real customer
• Properties bought on behalf of minors, incapacitated persons or those who seem to lack the economic capacity to make such purchases.
• Transactions involving the same property that follow in rapid succession (e.g. purchase and immediate sale) and that entails a significant increase or decrease in price
• Properties bought by or for people who are publicly known to have been convicted, investigated or questioned for economic crimes

HOW DO YOU COMPLY?

The above due diligence steps are only a high-level overview and far from complete, they may already seem daunting. How are you supposed to do all of this? How are you supposed to know when a prospective client is the sister of a PEP? How can you know that someone was convicted of drug trafficking in another country? How do you unwrap opaque corporate structures? How do you establish source of funds?

First, the bad news: compliance is not easy, or cheap and not always perfect. But the good news is that perfection isn't expected of you - you are expected to take reasonable steps, and apply a risk-based approach focusing your efforts on the highest risks - and there are dedicated tools and services that make compliance practicable. Two of these are; risk screening (World-Check) and Enhanced Due Diligence services.

The cornerstone of any Customer Due Diligence process is screening: the process of checking customer names against high-quality and curated structured data expressly designed for anti-money laundering and sanctions compliance. A market leader in this field World-Check is a risk intelligence database which helps organizations across the world meet their regulatory obligations, make informed decisions and help prevent them from inadvertently being used to launder the proceeds of financial crime or being associated to corrupt business practice. The database is managed by a team of over 350 highly trained analysts, speaking more than 65 languages, who monitor more than 600 sanctions, regulatory and law enforcement lists and thousands of media sources, as well as company information and regulatory filings, to deliver accurate and up-to-date data. Used by intelligence agencies, law enforcement, regulators, banks, insurers, lawyers, estate agents and many others throughout the world. World-Check is a purpose built and easy to use due diligence solution that is easily absorbed into various workflow screening platforms through a delivery method that suits your requirements.

For those identified as higher risk parties to transactions, you may require help doing Enhanced Due Diligence. Perhaps one of the parties to a transaction is a legal entity in a high-risk jurisdiction that you can't find reliable information about, or perhaps a purchaser is a PEP from China and no one in your team speaks Mandarin. In situations like these, you can order a bespoke once-off Enhanced Due Diligence report where we undertake a detailed review of the party for you, including in a wide range of foreign languages. You can then use this information - provided in English in a summarised professional report - to help you make confident compliance decisions.

CONCLUSION

Those involved in financial crime are seen to be actively targeting the property sector to try to hide and secure their criminals proceeds, and all the parties involved in the sector have legal duties to help prevent this from happening. This article has highlighted just a few of the risk factors and necessary financial crime risk management controls that you must apply. These may seem daunting but it is possible to take reasonable and effective steps to comply, and tools and services to do just that are available.

Editor's note: All estate agencies will be required to be fully compliant with the provisions of FICA by 1 April 2019. The Estate Agency Affairs Board (EAAB) advised industry body Rebosa that from beginning February they will host a series of roadshows to educate the industry on the compliance with the Act. The EAAB website provides access to study material designed to assist estate agencies with meeting FICA compliance obligations and they promised to have a draft RMCP template ready soon. The study material will also be included in the prescribed study material for the Professional Designation Examination for principal estate agents (PDE 5) and form part of the Continuing Professional Development (CPD) programme. You can also visit Rebosa's website to download their RMCP template.