MReport June 2021

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24 | M R EP O RT FEATURE such as organized crime, drug trafficking, and terrorism, where money to be laundered often originates. The Scope of the Problem I n a 2018 statement before the Senate Banking, Housing, and Urban Affairs Committee, Steven D'Antuono, Section Chief for the FBI's Criminal Investigative Division, noted that the flow of illicit proceeds into luxury real estate, hotels, and other assets "threatens the transparency and integrity of our financial system" by preventing legitimate op- erators from buying or investing into those same properties, thus limiting their ability to participate in a free and open market. In other words, properties that might otherwise have been put to legiti- mate, beneficial use as homes or investments are taken beyond the reach of law-abiding citizens. Nor is this the only impact that real estate money launder- ing has on society. The example of the Singhs is illustrative in this case, as we can see clearly the effect that it has on financial institutions, which are tricked into giving loans to people who either do not need them or view them as an opportunity to profit. This then reduces the amount of capital available for people who genuinely need financial assistance to purchase a property, which in turn can have a profound effect on their quality of life. There are other, more insidious effects as well. By shielding their identities behind LLCs, bad actors can use their anonymous position to create a phony bidding war that raises property prices, then purchase those expensive proper- ties without revealing where they got the money from. As Global Witness notes, the anonymity of these owners "can mean that ten- ants struggle to hold landlords ac- countable, cities fail to fight graft, and that researchers can't answer basic questions about the hous- ing market"—all of which further erode people's basic rights. In recognition of the outsize threat that money laundering in real estate poses to the United States, the government has, in recent years, beefed up its enforce- ment of existing anti-money laun- dering measures. In addition, the U.S. Treasury Department and the Financial Crimes Enforcement Network (FinCEN) have recently identified loopholes in the cur- rent AML regime pertaining to real estate and are committed to remedying them, so it is to be ex- pected that even tighter regulation is on the way. Currently, there is a re- quirement that firms raise a "Suspicious Activity Report" (SAR) when they suspect a transaction may be fraudulent. The number of these SARs filed by loan and finance companies has been growing steadily, from just 1,500 in 2015 to nearly 26,000 in 2019. On the one hand, this reflects growing awareness of the problem, but it also shows just how prevalent money laundering remains, and how difficult it is for authorities to curtail it entirely. One issue is that not all real estate transactions are required to comply with the strict anti-money laundering requirements laid out in the Banking Secrecy Act (BSA). If the purchaser does not require a mortgage nor any other type of involvement from a regulated financial institution, then none of the parties involved in the transaction are obligated to be compliant with the BSA. FinCEN estimates that about 22% of real estate transactions for residential properties fall under this category. While financial institutions are kept under increasing levels of scrutiny, cash deals are a huge blind spot that money launderers take full advantage of. However, the passage of the Anti-Money Laundering Act of 2020 (AML) shows that regula- tors are committed to closing the loopholes within U.S. financial law. One of the most important provisions of the AML is that it requires all companies, includ- ing LLCs, to disclose information about their beneficial owners (i.e., anyone who either owns or controls a significant portion of that company) to FinCEN, thus depriving would-be money laun- derers of anonymity. These new requirements, coupled with new technologies that make perform- ing background checks faster and simpler, will hopefully enable regulators and financial institu- tions to reduce the prevalence of money laundering in the United States. 2021 has already proven to be a new era for financial crimes. In January, the Financial Crimes Enforcement Network (FinCEN) penalized Capital One to the tune of $390,000,000 for "willfully fail- ing to implement and maintain an effective Anti-Money Laundering (AML) program to guard against money laundering." Identity verification is the first step in combating money laundering, as it is imperative to know that the person you're dealing with is who they say they are—and has not been involved with any criminal operations in the past. However, in order to effectively prevent money laun- derers from continuing to find ways around existing laws, there need to be tools available to real estate agents, mortgage brokers, and anyone else involved in a transaction to be able to perform the necessary background checks to identify them. Automated anti-money laundering solutions can help perform this function by confirming (or flagging) someone's identity in minutes, while simul- taneously screening them against existing sanctions lists. These solutions will not only allow brokers and firms to fulfill their moral obligations to reporting po- tential money launderers, but also protect them from inadvertently becoming involved in an illegal scheme. After the Department of Treasury began requiring anyone using an LLC to purchase high-end real estate to identify themselves, all-cash purchases by corporations fell by around 70%, which suggests that the loss of anonymity is a powerful deterrent to money laundering in the real estate space (while also indicating how widespread it has been). All in all, however, in order to effec- tively prevent money launderers from operating and make it diffi- cult for them to enjoy the fruits of their illegal labors, it is incumbent on all players within the real estate industry, from real estate agents to financial institutions to regulators, to better understand the processes that money launder- ers rely upon. . MARTIN CHEEK is VP of SmartSearch, a provider of an anti-money-laundering verification service based in Lehi, Utah. Identity verification is the first step in combating money laundering, as it is imperative to know that the person you're dealing with is who they say they are—and has not been involved with any criminal operations in the past.

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