How Money is Laundered through Real Estate (Not a How-to-Guide)

By Melanie Reuter

It has been said that one of the easiest ways to launder money is through real estate. Money is laundered as a way of making the source of the money appear to come from a legitimate, legal source when it has in fact, been made through illegal activities including trafficking of drugs, weapons and people; smuggling; fraud; corruption; and extortion.

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) estimates that $590 billion to $1.5 trillion (U.S.) is laundered worldwide each year.

Although the ways to launder money are vast and intricate, FINTRAC reports that there are three typical steps generally involved:

• Placement: involves placing the proceeds of crime in the financial system;
• Layering: involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds (e.g., the buying and selling of stocks, commodities or property); and,
• Integration: involves placing the laundered proceeds back in the economy under a veil of legitimacy.

Real estate is an easy vehicle through which to disguise the origins of funds as it is easy to buy real estate with cash and to disguise the real ownership of the asset. It is relatively uncomplicated compared to other laundering strategies.

A typical way to launder money through real estate is to merely use a third party. Money launderers buy property, use a family member or other person as the legal owner on the title and provide all of the funds to the third party. According to the Australian Transaction Reports and Analysis Centre (AUSTRAC), in some cases, third parties may be cleanskins complicit third parties who have no criminal record. The use of third parties distances criminals from the illicit funds, disguises ownership and complicates asset confiscation efforts by authorities .

Alternatively, false income or employment information may be provided to banks as verification for the origination of funds. Canada s requirement that real estate deposits must be in the account of the person on the title for 90 days prior to the close of the transaction is one way the government is trying to mitigate money laundering.

Money may be laundered through mortgages, wherein the loans are taken out as a cover. Cash repayments of smaller structured cash amounts are used to repay loans or mortgages, allowing the illicit funds to be blended with legitimate money. For example, Loan-back schemes involve criminals borrowing their own money funds. AUSTRAC reports that Foreign offshore companies controlled by criminals are used as an apparently arms-length lender. The loan is then used to buy real estate and repayments are made using illicit funds. This process hides the true nature of the funds and gives the loan repayments an appearance of legitimacy. Essentially, the criminal creates a company to loan itself money thus providing verification of its origin.

Under-valuing real estate at the time of sale is a third tactic employed. Buyers and sellers (and sometimes real estate agents) collude to underestimate the value of a property. The difference is then transacted off the record.

For example, if the money launderer is buying a property, she may entice the seller to say its worth $100,000 less and then give the seller the $100,000 in cash. The money launderer may offer more than the seller wanted, benefitting the seller and in the case of provinces with land transfer tax, saving the buyer the percentage of tax on the undeclared amount. This also has the unintended consequence of lowering the values of real estate in the immediate area by reflecting a low (and inaccurate) comparable.

Further, the property may be quickly resold at a higher value to complicit partners or trusts to further confuse the audit trail. This falsely inflated sale price gives the appearance of real profits, and the criminal keeps ownership of the property. This has the unintended consequence of inflating real estate prices in the immediate market by having high (and inaccurate) comparables.

money laundering does not cease with a purchase or sale of real estate. Money launderers will often rent properties out to fake tenants and provide them with the money to pay rent. This often occurs congruent to grow ops. Marijuana is grown in the home and the tenant who cares for the crop pays rent with money made from the grow op, which is owned by the landlord/owner. Owners can also merely deposit monies into their own account under the guise of it being tenanted. Therefore, a person needs to be vigilant, while buying properties from money launderers. Noticeable instances can be seen throughout the world where tenants were accused of helping those criminals. And if that is not the case, in reality, the tenants in question are entitled to consult a law firm of similar calibre to Alberta Legal (albertalegal.ca) to get them permanent or temporary relief from this false accusation/charge. In case of any prolonged judicial hearing, they can also assist in receiving the “not-guilty verdict”. Thus, long story short, any case of money laundering can thus, damage the trust of tenants in the proprietors.

Money laundering through real estate is a recurring issue in Canada and around the world. Unfortunately, the actions the government can take are limited, and the process continues to impact real estate markets.

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