Money laundering isn’t an issue that comes to mind when you’re trying to get a transaction closed but it’s enough of a problem in real estate that NAR and the U.S. Department of Treasury got together a short while ago and created guidelines to help you identify and respond to its signs.
How often does it happen? The Treasury Department doesn’t track the issue in a way that enables us to get a precise picture of its prevalence in real estate, but we know using federal financial crimes data it’s a significant matter, says Michael Rosen, a Treasury policy analyst.
The problem is more pronounced in commercial real estate, Rosen says. White collar criminals turn to commercial real estate to integrate ill-begotten gains into the economy because dollar amounts can be high and transactions complex, with different corporations sometimes involved, including off-shore corporations that wire money in from accounts that aren’t regulated by the U.S.
In residential real estate, amounts and frequency tend to be smaller than in commercial, but even so it shouldn’t be thought of as out of the ordinary that someone might be trying to launder funds through a home purchase. Money from illegal drug sales is often behind these home purchases.
The guidelines NAR and Treasury developed are organized into three types of risk: geographic, transaction, and customer. When you have a transaction that appears to fall into one or more of these categories, you want to conduct a little bit of due diligence to see if you need to give law enforcement officials a head’s up. Geographic risk applies to the origin of one of the parties, often the buyer. Some countries have weak financial controls or they’re on a federal government watch list. If you have a party from one of these countries, you’ll want to take a minute to get more information to see if something’s suspect.
Customer risk is mainly an issue in commercial real estate and applies to companies that have a shadowy purpose or their business interest in a property isn’t clear. Again it’s just a matter of doing a little due diligence to see if there’s something not right.
Transaction risk has to do with the source of purchase money, or the amount of cash the buyer’s putting up, or something in general that seems out of the ordinary
Bottom line, money laundering doesn’t happen a huge amount in residential real estate, but it happens, and the guidelines are intended to keep the number low by arming you with a few simple tips so when a deal involving possible illegal funds comes your way, you’ll suspect it for what it is and let authorities know.
The guidelines also serve as a reminder that anytime you accept $10,000 or more in funds, for an earnest money deposit, for example, you have to file a federal form with the IRS. That’s been the law for a while, and if the guidelines do nothing else, they at least remind you of your duty in these cases. With the $10,000 threshold, compliance isn’t voluntary.