This Week in AML

FATF Guidance for the Real Estate Sector

The Financial Action Task Force (FATF) has issued a 2nd Draft Guidance Paper for consideration and agreement to public consultation for the Real Estate Sector. This latest guidance paper will update earlier guidance issued to the sector. John and Elliot discuss some aspects of the draft, including the limited understanding of participants in the sector of money laundering and terrorist financing risks, the large role that the sector plays in many national economies, and the tie in to the Advanced Notice Proposed Rulemaking for new real estate sector reporting requirements, issued by FinCEN in December 2021.



FATF Guidance for the Real Estate Sector TRANSCRIPT


Elliot Berman: Hi, John, how are you this week?


John Byrne: Hi, Elliot. Good. I was able to watch President Zelensky's speech to Congress this morning. It was pretty compelling, and obviously, we've talked in the past several weeks about sanctions and security issues that way. So you know, it just continues to be something that it's hard to know what the end game is, but obviously, one of the things that our community is doing is responding to legal compliance requirements.


And obviously, as we've talked about before, sanctions are one of those—so really interesting, which leads me to two things I just want to mention briefly. One of them is we already talked about what the justice department is doing regarding kleptocracy. But today, they announced with the treasury department the launching of a multi-lateral Russian oligarch task force, and the meeting was virtual, but they included Australia, Canada, the European Commission, Germany, Italy, France, Japan, the UK.


And it's all about, you know, working together, collaborating to target Russian assets being obviously the key here to inflict more and more economic pain on Putin's regime and hopefully have the populous respond. So I thought folks that are watching that space note the international nature of that. So I wanted to mention that, and I think it sort of leads us to our general conversation today, and that's real estate. We know that the US, through FinCEN, has sent out a request for information. Series of questions on how real estate can be misused for moving listed funds, but FATF just released a docent for public consultation on their most recent guidance. I assume you saw that?


Elliot Berman: I did. And you know, FATF has been talking about the risks and issues related to the real estate sector for quite some time. And this is their latest draft of their newest guidance paper in that space. It had some pretty interesting information in it.


None of it was shocking to me, and I'm sure it wasn't shocking to you. One is in the data section. They had a graph that showed that 79% of the participants. And that means real estate brokers generally in the real estate sector have a poor or very poor understanding of money laundering and terrorist financing risks.

So you know, the people who are actually the professionals managing the transactions don't have a lot of sensitivity to the risks they may be involved in.

John Byrne: Right. And you know, the report is over 50 pages, the public consultation document, and there are so many things relevant to us as AML practitioners.


They also make the case about the percentage of impact on real estate economies, which is obviously very high things like in many countries, real estate firms are not required to file SARS or STRs. And that obviously means they're not paying much attention, if any, to the source of funds.

So that is also a major gap, which hopefully eventually gets close to some degree. But I think having this come out and making it very clear, you know, that real estate is part of so much that we depend on. It goes back to what we said earlier about oligarchs. I mean, you know, when I worked for ACAMS, I go down to Miami. You knew that most of those buildings were owned by the Russian oligarchs, who pay cash. You know, it's just crazy.


Elliot Berman: Right. And as you mentioned, it's a significant part of many economies. And I think a lot of financial institutions and other financial service providers may not necessarily view real estate, at least portions of the real estate sector, as high risk, even though with some of the information in the consultation document.


It seems as though there's a case to be made that at least a little closer, look again, not everybody and not every operator in the sector is bad. But the nature of the sector, the PR, the speed of some of the transactions, the lack of transparency to actual beneficial ownership, something you and I have talked about many times and continue to be on the top of everybody's list.

As we slowly in the US grind towards something that is better than what we have today. But it just seems it's time for real estate to, you know, take its share of the responsibility of knowing what's going on in its transactions.


John Byrne: Yeah. You know, if you think about it, this is sort of been a focal point for FATF for a number of years, and they referenced in the guidance document reports as early as 2007 that said the real estate sector is clearly prone to abuse.

And activities that could be indicative of money laundering, including some of what you just talked about, but also use of non-financial professionals, unexplained use of virtual assets, which is relatively new, of course, unexplained cash payments, which we've referenced use of client accounts, use of corporate vehicles.


Like you just said, you know, then use them to purchase a commercial property. Inconsistent with the business purpose. I mean, that's, that's an age-old, one of the only red flags, right. You know, you drive by the pizza parlor and say that pizza's not very good or nobody in there.


So I would urge all professionals in the AML space and their colleagues to take a look at this. The guidance documents, when they get updated, as we know, eventually have an impact on jurisdictions are, you know, our countries already going through analysis. But there's a lot of good information here that might help you as you respond to the FinCEN requests for information and just in general.

And I don't disagree at all. I can remember way back when. You and I first worked together when I was at the bankers association. The real estate industry wanted nothing to do with anti-money laundering issues. They didn't feel they had an obligation to do anything, and they successfully pushed off requirements for many, many years. And hopefully, maybe that day is over.


Elliot Berman: Agreed. So John, I know we've got an upcoming webinar. That would be great if you didn't mind giving the shameless plug. 


John Byrne: So the next one is banking, high-risk customers. It's an issue that we constantly grapple with, and it's obviously an international issue. So we're going to have presenters that are going to discuss it from all angles. And again, the title itself is Banking High-risk Customers Across the Globe. So they'll talk about that, and I'm sure they'll get the impact of the potential collateral damage of de-risking when you deal with high-risk customers, but definitely a practical webinar.

We'll give you some really good, useful information, March 24th, a one o'clock Eastern time,


Elliot Berman: And you can register by going to amlrightsource.com. So thanks, John. You have a great weekend, and I will talk to you next week.


John Byrne: Take care, stay safe.


Elliot Berman: Yep. Bye-bye.