MReport June 2021

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22 | M R EP O RT FEATURE M oney laundering, for the general public, is the stuff of gritty dramas like Ozark or the notorious dealings of Pablo Escobar and El Chapo. In popular culture, it is depicted as an activity to be done in the dark of night with neatly- stacked wads of cash deposited into duffel bags. The reality, however, is much more banal, with most money laundering occurring in the guise of an unremarkable series of transactions designed to obfuscate the trail for any who might be inclined to investigate. The real estate sector has long been a favorite of money laun- derers, as the lack of regulation and use of shell companies have enabled them to "wash" a large quantity of cash through the system in one transaction. The truth is that nobody really knows how much money is laundered through real estate—not least because much of it currently goes undetected. This opacity might serve shady operators well, but it can have catastrophic effects on the rest of the economy, as the 2008 housing crisis demonstrated all too devastatingly. Why Real Estate Is a Target B ecause the United States, until recently, did not require company owners—including those of anonymous shell companies—to reveal their identities, they were able to operate as if legitimate businesses, even if their dealings were anything but. Consequently, criminals and money laundering networks often use shell compa- nies to purchase property without raising suspicion from authorities. Global Witness, an NGO that has conducted multiple investigations into money laundering, noted that "all too often, the proceeds of crime and corruption [are] used to purchase homes" which, once resold, make any capital involved legally acquired. In 2018, three people in California—Surjit Singh, Rajeshwar Singh, and Anita Sharma—were sentenced to prison and ordered to pay hefty fines and restitution for their participation in a mortgage fraud scheme. The scheme entailed recruiting individuals with good credit to act as "straw buyers"— that is, someone who purchases a property on someone else's behalf—for properties owned by Surjit Singh's family members and associates. Because many of those straw buyers lacked the income to be able to afford those properties, Rajeshwar Singh, an accredited real estate agent, submitted falsi- fied loan applications on their behalf to improve their chances of being approved. In total, the Singhs and their accomplices were involved in the sale or refinancing of at least 14 different properties and were responsible for the origination of over $9.3 million worth of residential mortgage loans. As the broker responsible for the "sales", Rajeshwar Singh received com- missions on each transaction— while also being listed as the seller for half of the aforementioned properties. Meanwhile, Surjit Singh directed payments for "con- tracting services" (which never took place) to shell companies linked to his daughter and her partner out of escrow. In addition, he received rent from the inhabit- ants of the houses purchased by the straw buyers, despite the fact that the straw buyers claimed they would be the primary inhabitants of the property on their loan applications. Many of his family members also received some sort of financial benefit, either by selling their property as part of the scheme or receiving money directed out of escrow. In this case, the real estate transactions were the means for both committing fraud (by submitting fraudulent loan ap- plications) as well as for moving around the misbegotten gains so as to make them untraceable. The use of shell companies helped to further obscure where the money was going while also enabling funds to be distributed to multiple parties. While the Singhs were eventu- ally discovered, their example is, sadly, not as rare as one would like. In fact, in the second quarter of last year, it is estimated that one in 164 mortgage applications had some indication of fraud. Applications for investment properties were even riskier, with one in 28 applications estimated to contain indications of fraud. Of course, not all mortgage fraud is money laundering, but mortgage fraud for-profit schemes are often linked to other illegal activities Cleaning House: Combatting Money Laundering Money laundering remains a problem within U.S. real estate. Here's how the industry can push back. By Martin Cheek

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