The Real Estate Institute of Australia (REIA) is urging policy makers to consider home buyers, renters and small businesses when tackling sophisticated money launderers.

REIA President Adrian Kelly addressed claims by some institutions that money laundering is driving home prices.

“Low supply, high demand, high taxes, increased demand for homes over units, and uncertainty from sellers to list new properties created by the ongoing COVID-19 pandemic are all key factors in the current market,” Kelly said.

Mr Kelly said that from a market point of view, these well-documented factors are driving high property prices.

“The vast majority of demand is experienced domestically and by Australians to repatriate.”

According to submissions from Transparency International Australia (TIA) and the Australian Transaction Reports and Analysis Center (AUSTRAC) to the Senate Committee’s investigation into the suitability and effectiveness of Australia’s Anti-Money Laundering and Counter-Terrorism (AML/CTF) regime, the real estate sector has been exploited by money launderers, given the sector’s weakness and major failings in compliance with the regime.

Here’s an excerpt from TIA’s submission:

Criminals may be drawn to real estate as a channel to launder illicit funds because of the ability to buy real estate with cash, to disguise ultimate beneficial ownership of real estate, the relative stability and reliability of real estate investments, and the ability to to renovate and improve real estate, increasing its value.

To avoid direct involvement in ML trials, criminals may attempt to purchase real estate using a third party or family member as legal owner, usually a cleanskin with no criminal record. They can use loans or mortgages to stack illicit funds and integrate them into high-value assets such as real estate.

The AUSTRAC said in a 2015 report that money laundering of illicit funds through real estate was “an established money laundering method in Australia”, with $1 billion worth of suspicious transactions from Chinese investors to Australian real estate in 2015-2016.

Acting National Manager of AUSTRAC, Bradley Brown, confirmed in his testimony to the Senate Committee that there is no agreed upon evidence linking criminal activity to a strong real estate market.

“I just want to note that it’s important to recognize that the impact sections of our risk assessment that are being done describe the potential impacts of activities, not necessarily the actual impacts or what happens,” said Mr Brown.

“We note that widespread, concentrated real estate purchases with yields can drive prices up. And the word is can.”

Kelly said it is critical to contextualize the claims about money laundering and its impact on the housing market.

For example, while $116 million of the $187 million in assets seized by authorities in fiscal 2021 came from the real estate industry, its scale in comparison to the overall market needs to be considered.

“To put this into context, the Australian commercial sales market alone recorded more than $50 billion in sales during this period and the residential sector recorded a staggering 598,000 transactions,” he said.

Kelly urges the Senate Committee to make “practical recommendations” that target sophisticated money launderers without creating a financial burden on homebuyers, renters and real estate agencies.

Additional Tranche Two or Gateway reporting to intercept money launderers could incur costs of up to $120,000 for small businesses and brokers.

“If the expected tranche two reporting activities are carried out, the costs to the industry could easily reach billions,” he said.

“A Commonwealth-led cost-benefit analysis would be needed to qualify broker costs against the expected benefits of additional reforms and how additional reporting will actually detect more criminal activity.”

“We stand ready to play our part in eradicating criminal activity and protecting our customers.”

How the real estate industry is being used for money laundering

AUSTRAC’s analysis published in 2015 analyzed 10 methods of money laundering in the real estate market.

One of the interesting methods was through property value manipulation, where criminals buy and sell real estate at a price above or below its market value.

“Buyers, sellers and third parties, such as real estate agents, conspire to under- or overestimate the value of a property. The difference between the actual and stated values ​​will be settled with undisclosed cash payments,” the AUSTRAC report said.

Another interesting method was through rental income.

The AUSTRAC report said that using this method, criminals rent out properties to generate rental income.

To legitimize illegal funds, criminals provide their tenants with money, which would be considered “fictitious rent”, making it appear as if it were legitimate rental income.

Criminals can also buy property under another name and pay rent with illegal funds.

Here are some of the other common methods criminals use to launder money through real estate:

  • Use of third parties
  • Use of loans and mortgages
  • Structuring cash deposits to buy real estate
  • Purchase of real estate to facilitate other criminal activities
  • Real estate renovations and improvements
  • Use of front companies, shell companies, trust and corporate structures
  • Use of professional escorts or ‘gatekeepers’
  • Overseas criminals investing in Australian real estate

Photo by Clint Patterson on Unsplash