A look at the major money laundering risks that are on the rise in the property market

Property practitioners in South Africa have been identified as potentially vulnerable to money-laundering and terrorist financing (TF) activities.

This was revealed by the FIC (Financial Intelligence Centre) in their recent Assessment of the inherent money-laundering and terrorist financing risks impacting the real estate sector report, according to James George, a compliance manager at Compli-Serve SA.

George says that while further consulting within the real estate sector will still take place, the report rounds up the risks to be aware of for real estate agents and those working in the sector.

“The FIC has stressed the urgency in taking effective anti-money laundering (AML) measures in real estate, wherever possible.”

How criminals creep into property transactions

Property investment is typically a stable asset and because of this, it can attract criminals as well as reputable buyers.

George notes that the FIC said that laundering money through property transactions easily integrates illicit funds into the legal economy, while providing a safe investment, making it all the more popular.

“It can even open opportunities for criminals to enjoy an income from an illicit property investment, where the reason they came to own the property is not common knowledge or just plain dodgy.”

“Locally property transactions tend to come with a paper trail including banks, estate agencies and attorneys through conveyancing. This process often excludes estate agents from receiving the funds or registering the property themselves and this can also mean that some due diligence on the origin of funds falls by the wayside.”

Unfortunate trends include criminals using opaque financing or cash in a property purchase, using false documentation, or working with suspicious companies that make it difficult to ascertain who the true owner is in a transaction.

George says that criminals may even pay higher rent for a property intended for illegal activities (potentially unknown by the owner).

“The distance between the location of the property and the prospective buyer or tenant can also play a role, particularly in international property transactions, where jurisdiction might mean more relaxed regulations or controls exist on AML efforts.”

The overvaluing or undervaluing of property prices is another concern. Money laundering can effectively create distortions in property prices within a suburb or area because of criminals being willing to pay more than market value to quickly finalise a transaction.

“Interestingly, most reports of suspicious activity in the sector from 2016-2021 were in the form of cash threshold reports (CTRs). This indicates that many rentals are still being paid for in physical cash. It’s important that the purpose of renting be clarified, and estate agents are advised by the FIC to always assess the method of payment and deal size. If a property is of high-value or overpriced and is paid for in cash, it may warrant a second look at the origin of the funds, to be sure that the transaction is legitimate,” George concludes.

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