This Week in AML
The Financial Action Task Force (FATF) recently issued updated Guidance for a Risk-Based Approach to the Real Estate Sector. The updated guidance focuses on the importance of member countries to bring the real estate sector into their money laundering/terrorist financing regimes. John and Elliot discuss the guidance, including the breadth of its coverage, the need for understanding and training of real estate professionals, and how the timing of the guidance intersects with FinCEN’s request for information about the sector.
FATF Updates its Guidance on the Real Estate Sector TRANSCRIPT
Elliot Berman: Hi, John, how are you this week?
John Byrne: I'm good. Elliot. Things are going well. We're close in the US Congress to the August recess. And I know we've talked about the enablers and provisions in NDAA. Our understanding is that the Senate may pick that up in September. Obviously, there there's been a couple of hearings.
But it's not; it's not the slow days of summer. Like some people say, one of the other areas that I know we both chatted about before we jumped on this is that FATF continues to produce some pretty compelling information and reports. And I saw the most recent one, and that's the risk-based approach guidance for the real estate sector.
Something. Sen is actively seeking information on a potential regulation. So it's on, it's on everybody's mind about the gaps in the real estate industry over time in terms of using real estate for the movement of illicit funds. So this comes out, this comes at a pretty, pretty important time.
Elliot Berman: Yes. I saw that, and it's interesting, and, again, it's along the lines.
A lot of the types of guidance that FATF has put out. The thing that caught my eye is that their initial guidance in this space was put out in 2008. Right. And then last summer they, you know, in their sort of setting their plan, they said, yes, you know, the part, all the nations who are involved said, it's time to update the risk-based guidance, to the real estate sector.
And here, you know, a year later, they put out updated guidance and, I'm very, I'm always impressed with that. When FATF says they will do something, they usually get it done.
John Byrne: Yeah. And look, there's, there's a lot in here, but, a couple of things we'd highlight, it's, almost an 80-page document.
So obviously, when folks get the opportunity to take a look at it, and part of it is based on the response of the mutual evaluations of jurisdictions and where those evaluations determine there still are both gaps and areas of a challenge if you will. But one of the things that struck me in the first part of it, we'll talk about some others, is when they talk about the real estate sector, it's a broad category, right?
It's aimed at professionals that work in and sell and buy real estate agents. Lawyers' notaries, real estate developers, title insurers, independent legal professionals, accountants, and those professions are covered under other recommendations of F a TF. But when we talk about guidance for the real estate sector, it's broad as it should be.
Elliot Berman: Right. Agreed. They also talk and emphasize that it's all types of realistic. Right. It's not just industrial or commercial, but it's also residential and agricultural. So they really, they really view this as a risk-based model, so they view the entire space. And then, you know, talk about how to apply risk analysis to it so that you zero in on where you need to, as opposed to just passing all real estate is high risk or, conversely, all real estate is low.
John Byrne: Right. And there are a number of charts in the guidance that reflects the review of that. So, the ranking of money loaning risks in the real estate sector. They say 37% of surveyed countries found the industry high versus others lower or medium. That's a pretty high percentage.
Right? So that's, and then when they talk about the real estate sector's understanding of money laundering and terrorist financing risk, 47% are poor or very poor, or actually 47%, 31%. So over 70. Percent, or almost 80% poor or very poor. Now, I would argue that. Is it their understanding or their willful to use a legal term? Their willful blindness?
Elliot Berman: Yeah, those charts caught my eye. The same statistics you're quoting, but I think some of it is, you know, just a perception that the risk is everywhere, but where, where you are a thing. And, so many different transaction types would raise red flags.
I know the guidance talks about a number of ones that caught my eye, which was not unusual. To think of it as high risk was, where the sources of funds were coming from multiple sources, possibly from multiple jurisdictions, you know, as opposed to a single source. But on the other hand, I think it's interesting.
, they recognize that just because real estate transactions, for example, have. Multiple entities involved don't per se make it a high risk because that is how many commercial real estate transactions are structured. Unique purpose entities are formed to hold the real estate for various tax, planning reasons, etc.
So, I appreciated the fact that, again, it wasn't, oh, you got a bunch of entities that make it high risk. It's all about evaluating, and AML CFT risk is not necessarily the kind of risk real estate professionals think about. So learning how to apply those measures will be a learning curve.
John Byrne: Right. And in addition, they do talk about adding typologies. That is, they are good examples. As we know, case studies typologies of types of activities that can be indicative, not necessarily conclusive, but indicative of money laundering. And so a whole host of those are. Some of these are interesting from my perspective use of non-financial professionals.
Okay. Potential red flag use of corporate vehicles. That's a well-worn area, unexplained use of virtual assets, obviously bringing those new technologies into these unexplained cash payments. I mean, as we know, many cities are in the US. Then overseas places like London where cash purchases of these properties.
So there are no mortgages, and there's no extensive documentation unexplained. So what's going on? Using client accounts is another typology, which in itself sounds innocuous. I would argue that I think it's good to flag the construction and renovation of real estate that happens all the time.
Right. You're putting something together. You're renovating. Okay. But maybe there are some things you need to check out there. So, you know, adding those typologies certainly helps in terms of training, awareness, and all the things that are so important to be proactive in this space.
Elliot Berman: Yeah. Another thing that they note and think is, again, sort of obvious, but not a connection to forget. And that is the fact that in many countries, including the US, the availability of accurate, up-to-date information about beneficial owners is hard to come. And so as a, as, as they urge, member organize member countries to adopt this approach, they are also at the same time, recognizing that they need to adopt a more transparent, more accessible.
Registry or some other methodology for being able to track down beneficial ownership. Because without that, it's very difficult to measure the transaction's risk accurately.
John Byrne: Right? So there's a lot in here. We can't cover it all. Maybe we'll write a blog about this, but, toward the end, they talk about examples of what they consider to be supervisory best practices.
I won't say ironically, but I will say it ironically, the what they call the estate's agents authority in Hong. Has adopted a risk-based approach to supervising a state agency's policies and procedures. And I think they feel that that's been intense. Since April 2020, 60 agencies have been adjusted to lower-risk groups due to the increase in AML CFT compliance.
So there are a bunch of examples, but that's one and some other jurisdictions they also highlight. So, both here are red flags. Here are some reasons why there are high-risk categories. And then here are some of the ways in which you can handle this from a regulatory standpoint.
So there's a lot of really good information in here. And, I think, again, both of us have been involved in AML for quite a long period of time. I've always felt that the real estate in. Got a pretty easy pass for an extended period of time. And maybe this sort of the report itself won't, but maybe the focus in jurisdictions, as I said, FinCEN is already capturing information on what, what we can do potentially with the real estate industry here that we're not currently doing, maybe that will improve the due diligence.
You certainly can't say there are not enough resources out there. They highlight one thing we do well, and that's geographic targeting orders. So I'd be remiss if I didn't say that. I think the GTOs that FinCEN has issued over time has been extremely useful and valuable. So that gets called out in the report as a positive supervisory area.
Elliot Berman: Yes. So let's see, what do you have in the hopper?
John Byrne: I just did an interview the other day. That'll get posted in the next couple of weeks on the FinCEN and department of commerce joint alert on their evading export controls, which sounds in the weeds, but is actually pretty relevant to everything that's going on, particularly in Ukraine.
So, that's, that's gonna be out. I have a couple of meetings this week and next. We're hoping in late August, the 25th, I believe you correct me, Elliot, to do a webinar on issues related to broadly speaking transparency. So we have some meetings this week with some potential panelists, but the goal would be to explain where there are gaps in terms of laws of regs and some practical advice on transparency, whether it's dealing with corruption or politically exposed persons or what have you. So we're still working on that, but that's something to look for toward the end of the month, end of the month.
Elliot Berman: It's the 26th.
John Byrne: I missed it by that much.
Elliot Berman: That's okay. You're all right. And registration for that webinar will be opened by Friday when you hear this. So thanks, John, have a great weekend, and I'm actually gonna see you in person.
You and I will record in person next week in Buffalo. Cause we have a meeting there. So if I don't talk to you before, I'll see you in Buffalo.
John Byrne: Sounds good. Take care. See ya.
Elliot Berman: All right. Bye.