Estate Agents

Sector Specific AML/CFT Guidance Notes

December 2015

Whilst this publication has been prepared by the Financial Services Authority, it is not a legal document and should not be relied upon in respect of points of law. Reference for that

purpose should be made to the appropriate statutory provisions.

Contact: AML Unit, Enforcement Division Financial Services Authority PO Box 58, Finch Hill House, Bucks Road, Douglas Isle of Man IM99 1DT Tel: 01624 646000 Fax: 01624 646001 Website: www.iomfsa.im Email: aml@iomfsa.im

Isle of Man Financial Services Authority

Page 2 of 12

Contents 1. Foreword ............................................................................................................................ 3

2. Introduction ........................................................................................................................ 3

3. Risk Guidance ..................................................................................................................... 4

4. Higher Risk Indicators ......................................................................................................... 6

5. Customer Due Diligence ..................................................................................................... 7

5.1. Who is the customer? ................................................................................................. 7

5.2. Source of funds ........................................................................................................... 8

6. Case Studies ........................................................................................................................ 9

6.1. Misuse of a real estate agent to gain introduction to a financial institution, possible

link to terrorist financing ............................................................................................... 9

6.2. Use of a professional when buying real estate ......................................................... 10

6.3. Overvaluation of real estate and use of third parties launder funds ....................... 10

6.4. The use of an offshore company to buy real estate ................................................. 11

Isle of Man Financial Services Authority

Page 3 of 12

1. Foreword For the purposes of this sector specific guidance, the term ‘Estate Agent’ refers to businesses conducting activity described under sub-paragraphs 1(d) of Schedule 4 to the Proceeds of Crime Act 2008 (“POCA”). The definition of estate agent mirrors that of Section 15(1) of the Estate Agents Act 1975 which defines an estate agent as: 15 Persons treated as practising, or carrying on business, as estate agents (1) For the purposes of this Act, practice as an estate agent shall be taken to be, and only

to be, the doing, in connection with the sale or proposed sale of land of any of the following acts, namely — (a) bringing together, or taking steps to bring together, the vendor and a prospective

purchaser; (b) negotiating as to the terms of the sale with the vendor or a prospective purchaser; (c) acting as an auctioneer;

For the purposes of Section 15 ‘sale of land’ includes the grant of a tenancy at a rent and any other disposal for valuable consideration of an estate, interest or right in or over land, whether subsisting before or created by the disposal, and ‘vendor’ and ‘purchaser’ shall be construed accordingly.

As such the business of selling or letting property is caught under POCA. By virtue of being included in Schedule 4 to POCA (when engaging in the activities specified in sub-paragraph h) this sector is subject to the requirements of the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 (“the Code”). Also, the estate agents sector is included in the Designated Businesses (Registration and Oversight) Act 2015 which came into force in October 2015. The Financial Services Authority now has the power to oversee this sector for Anti-Money Laundering and Countering the Financing of Terrorism (“AML/CFT”) purposes. The Authority wishes to thank the Isle of Man Estate Agents Association for their assistance in developing this sector specific guidance.

2. Introduction The purpose of this document is to provide some guidance specifically for the estate agents sector. This sector specific guidance should be read in conjunction with the main body of the AML/CFT Handbook. It should be noted that guidance is not law, however it is persuasive. Where a person follows guidance this would tend to indicate compliance with the legislative provisions, and vice versa.

Isle of Man Financial Services Authority

Page 4 of 12

This document will cover unique money laundering and financing of terrorism risks (“ML/FT”) risks that may be faced by the estate agents sector and will provide further guidance in respect of customer due diligence (“CDD”) measures where a once size fits all approach may not work. Also, some case studies are included to provide context to these unique risks. The information included in this document may be useful to relevant persons to assist with their risk assessment obligations under the Code. This document is based on Money Laundering & Terrorist Financing Through the Real Estate Sector - June 20071 The Authority recommends that relevant persons familiarise themselves with this, and other typology reports concerning the estate agent sector. There is also reference in Transparency International’s 2015 Report Corruption on your Doorstep2 (“TI Report”) in relation to the sale and purchase of property which is worth considering.

3. Risk Guidance Guidance in relation to conducting risk assessments is provided under Part 3 of the AML/CFT Handbook. This section aims to provide further guidance to the risks generally unique to this sector. The services of the estate agency sector may be used by money launderers to provide an additional layer of legitimacy to the criminal’s financial arrangements, especially where the sums involved may be larger. As the financial sector has increased its due diligence efforts, Designated Non-Financial Business and Professions (“DNFBPs”), such as estate agents, have become more and more attractive to money launderers. Real estate is a relatively stable and safe investment which has the capacity to generate returns or capital appreciated much more effectively than much of the securities market. This makes real estate an attractive and sound investment for those seeking a return on their money. As a direct consequence of this, the real estate market is an attractive place for money launderers to integrate or layer their assets. Estate agents are in a unique position to deal with the customer and develop much more of a relationship with that customer than a bank or legal professional, as such they are in a position to be able to identify unusual or suspicious behaviour and file appropriate disclosures. The use of real estate to launder money appears to afford criminal organisations a three key advantages:

it allows them to introduce illegal funds into the legitimate economy;

1 http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20and%20TF%20through%20the%20Real%20Estate%20Sector.pdf 2 http://www.transparency.org.uk/publications/15-publications/1230-corruption-on-your-doorstep/1230-corruption-on-your-doorstep

Isle of Man Financial Services Authority

Page 5 of 12

earning of additional profits through rental income or purchase and resale;

and in some cases obtaining tax advantages (such as rebates, subsidies, etc.). Some areas within the real-estate sector are more attractive than others for money laundering purposes. This makes the task of hiding the funds of illegal origin in the total volume of transactions easier. The real estate sector offers numerous possibilities for money laundering as demonstrated by the case studies below, however the areas identified as being of the highest risk include:

hotel businesses;

construction/development firms; and

development of public or tourist infrastructure (especially luxury resorts). Furthermore the over-valuation or under-valuation of real estate presents a particular vulnerability of money laundering. This technique consists of buying or selling property at a price above or below its market value. This process should raise suspicions, as should the successive sale or purchase of properties with unusual profit margins and purchases by apparently related participants. An often-used structure is, for example, the setting up of shell companies to buy real estate. Shortly after acquiring the properties, the companies are voluntarily wound up, and the criminals then repurchase the property at a price considerably above the original purchase price. This enables them to insert a sum of money into the financial system equal to the original purchase price plus the capital gain, thereby allowing them to conceal the origin of their funds. In the case of successive sales and purchases, the property is sold in a series of subsequent transactions, each time at a higher price. Law enforcement cases have shown that these operations also often include, for example, the reclassification of agricultural land as building land. The sale is therefore fictitious, and the parties involved belong to the same criminal organisation or are non-financial professionals in the real-estate sector who implicitly know the true purpose of the transactions or unusual activity. A number of cases reveal that criminals and terrorists have used non-financial professionals or gatekeepers to access financial institutions. This is especially important during the process of determining eligibility for a mortgage, opening bank accounts, and contracting other financial products, to give the deal greater credibility. According to the TI report UK property can be chosen to be laundered as:

it has a badge of respectability;

large amount of criminal proceeds can be used in one process;

income can be generated be letting the property; and

little risk of capital loss. The reported impact on communities is:

raises in house process;

Isle of Man Financial Services Authority

Page 6 of 12

removing availability;

shift in developer’s priorities i.e. away from affordable homes; and

creation of “ghost communities.

4. Higher Risk Indicators As with the basic elements of a risk assessment discussed under Part 3 of the AML/CFT Handbook, the following list provides examples of factors or activities that are likely to indicate a higher risk of ML/FT and should warrant further attention or scrutiny by the firm (just because a feature is listed below it does not automatically make the relationship high risk, provided suitable controls are in place). As with all types of risk assessment, a holistic approach should be taken and the indicators below should be taken into consideration along with a wide range of other factors:

1. The customer is:

evasive or over secretive about where the money is coming from;

avoiding personal contact without good reason;

known to have convictions for acquisitive crime, known to be currently under investigation for acquisitive crime or have known connections with criminals;

prepared to pay substantially higher fees than usual without legitimate reason;

using an unknown address or just a correspondence address (for example, a PO Box, shared office or shared business address, etc.), or where the details are believed or likely to be false;

hurrying along the transaction with no regard to added cost etc.; and / or;

unexpectedly repays problematic loans or mortgages or who repeatedly pays off large loans or mortgages early, particularly if they do so in cash.

2. The transaction involves:

persons residing in tax havens or risk territories, when the characteristics of the transactions match any of those included in the list of indicators;

persons who are being tried or have been sentenced for crimes or who are publicly known to be linked to criminal activities involving illegal enrichment, or there are suspicions of involvement in such activities and that these activities may be considered to underlie money laundering;

the use of monetary instruments i.e. the use of cash and/or cheques which do not state the true payer (for example, bank drafts), where the

accumulated amount is considered to be significant in relation to the total amount of the transaction;

the use of unusual or unnecessarily complex legal structures are used without any economic logic;

the use of mortgage schemes inappropriately (e.g. obtaining mortgages and using illegal funds to repay the loan / interest), also use of front men / actors to obtain mortgages);

the use of complex loans / credit finance (e.g. back to back loan schemes. loan back schemes – these are explained further in the FATF Guidance);

Isle of Man Financial Services Authority

Page 7 of 12

the use of non-finance professionals in the transaction i.e., sectors with possibly less regulation;

manipulation of the appraisal or valuation of a property followed by a succession of sales and purchases;

the party asking for the payment to be divided in to smaller parts with a short interval between them;

doubts as to the validity of the documents submitted with loan applications.

the buyer taking on debt which is considered significant in relation to the value of the property.

foundations, cultural or leisure associations, or non-profit-making entities in general, when the characteristics of the transaction do not match the goals of the entity;

the parties not showing particular interest in characteristics of the property and / or;

the use of investment schemes and financial institutions.

3. The required service was refused by another estate agent or the relationship with another estate agent was terminated.

4. There is an absence of documentation to support the customer’s story, previous transactions or business activities.

5. There are unexplained changes in instructions, especially at the last minute. 6. The use of an intermediary without appropriate rationale. 7. Transactions performed through intermediaries, when they act on behalf of groups of

potentially associated individuals (for example, through family or business ties, shared nationality, persons living at the same address, etc.).

5. Customer Due Diligence

Please see the Code and the AML/CFT Handbook for the general requirements in relation to CDD. This section sets out some further considerations for the estate agency sector.

5.1. Who is the customer?

Sales: In relation to the sale of real estate for the purposes of the Code, the estate agent’s customer is the person selling the property. Therefore the requirements of the Code such as risk assessment, customer due diligence (including source of funds), ongoing monitoring, record keeping etc. would apply to this person. Where the seller is a legal person or a legal arrangement the beneficial ownership and control paragraph at paragraph 13 of the Code should also be complied with.

Isle of Man Financial Services Authority

Page 8 of 12

The estate agent is under no obligation to identify or verify the identity of the purchaser in an arrangement, however if the estate agent suspects that the purchaser may be involved in ML/TF, the business must make a disclosure on that person. Please see the Code and Part 7 of the AML/CFT Handbook for further details in relation to disclosures. Letting: In a letting arrangement, for the purposes of the Code, both parties to the arrangement (i.e. the tenant and the landlord) would be the customer. Therefore the requirements of the Code such as risk assessment, customer due diligence (including source of funds), ongoing monitoring, record keeping etc. would apply to these persons. In the estate agency sector it is likely that the tenant’s source of funds would already be established for commercial purposes, this is also a Code requirement so it should be ensured this is recorded appropriately. In relation to the landlord, the Code requirements are as stated above apply however usually the landlord would not be paying any funds to the estate agent therefore the requirement to establish the source of funds is likely to be largely superfluous.

5.2. Source of funds

Sales: In order to comply with the Code the estate agent must take reasonable measures to establish the source of funds i.e. how the property being put on the market was purchased in the first place. What the estate agent is attempting to establish here is whether proceeds of crime may have been used to purchase or part purchase the property being proposed for sale. The source of funds could be established in the following ways (any higher risk indicators should be considered): Where a previous property was sold to purchase the one under proposal; in which case establishing the source of funds is fairly straight forward, a signed undertaking from the seller stating that the property is owned by them and they have the right to dispose of the property would be sufficient. If the transaction was undertaken using the same estate agent, previously obtained internal records may be sufficient to provide further information on the source of funds if this is required.

1. Where the house proposed for sale was a new purchase (such as a first time buyer or

investing in the buy-to-let market) the source of the funds would normally take the form of a mortgage or other lending instrument. The estate agent should take reasonable steps to establish where the lending is from. An estate agent can normally take comfort from the fact that the source of lending is from a reputable or well established lender such as a known bank. Details of the deposit for that purchase should be sought,

Isle of Man Financial Services Authority

Page 9 of 12

normally by asking the seller or requesting the information as a part of the customer application form.

2. Where the property for sale was an outright purchase with no clear source of funds as

discussed above, further details should be sought from the seller and documented on file.

In practice the source of funds is likely to involve a combination of the 3 methods above, the estate agent should consider the materiality of the level of funds involved (particularly where the funds under question had come directly from the customer) and take steps to establish the source of funds accordingly. The important thing is to establish whether the source of funds declared by the seller seems reasonable based on the estate agents own knowledge and experience. Further details in relation to establishing source of funds can be found at paragraph 4.13 of the AML/CFT Handbook. Letting: Source of funds for lettings purposes are much straight forward. Ordinarily payments are made by tenants to the estate agent’s pooled client account by BACS or other bank transfer. The source or funds information is therefore generally available. The estate agent would normally only have to scrutinise where rental payments are made in cash. Or where funds are paid in from an unexpected source.

6. Case Studies

6.1. Misuse of a real estate agent to gain introduction to a financial

institution, possible link to terrorist financing

A trustee for a trust established in an offshore centre approached a real estate agent to buy a property in Belgium. The real-estate agent made inquiries with the bank to ask whether a loan could be granted. The bank refused the application, as the use of a trust and a non-financial professional appeared to be deliberately done to disguise the identity of the beneficial owner. The bank submitted a suspicious transaction report. Following the analysis of the financial intelligence unit, one of the members of the board of the trust was found to be related to a bank with suspected links to a terrorist organisation. The higher risk indicators in this case were:

the use of a loan;

the use of a legal arrangement; and;

the use of a designated non-financial business / profession.

Isle of Man Financial Services Authority

Page 10 of 12

6.2. Use of a professional when buying real estate

A lawyer created several companies on the same day (with ownership through bearer shares, thus hiding the identity of the true owners). One of these companies acquired a property that was an area of undeveloped land. A few weeks later, the area was re-classified by the town hall where it is located so that it could be urbanised. The lawyer came to an estate agent and in successive operations, transferred the ownership of the property by means of the transfer of mortgage loans constituted in entities located in offshore jurisdictions. With each succeeding transfer of the property, the price of the land was increased. The participants in the individual transfers were shell companies controlled by the lawyer. Finally the mortgage was cancelled with a cheque issued by a correspondent account. The cheque was received by a company different from the one that appeared as acquirer on the deed (cheque endorsement). Since the company used a correspondent account exclusively, it can be concluded that this company was a front company set up merely for the purpose of carrying out the property transactions. After investigation it was learned that the purchaser and the seller were the same person: the leader of a criminal organisation. The money used in the transaction was of illegal origin (drug trafficking). Additionally, in the process of reclassification, administrative anomalies and bribes were detected. The higher risk indicators in this case were:

the use of bearer shares;

the use of cheques;

the use of correspondent bank accounts;

the use of successive transactions;

the use of shell companies; and;

The use of a designated non-financial business / profession.

6.3. Overvaluation of real estate and use of third parties launder funds

The parents of Mr X (Mr and Mrs Y) purchased a residential property and secured a mortgage with a Canadian bank. In his mortgage application, Mr Y provided false information related to his annual income and his ownership of another property. The property he had listed as an asset belonged to another family member. Mr and Mrs Y purchased a second residence and acquired another mortgage at the same Canadian bank. A large portion of the down payment came from an unknown source (believed to be Mr X). The monthly mortgage payments were made by Mr X through his father’s bank account. This was the primary residence of Mr X. Investigative evidence shows that Mr X made all mortgage payments through a joint bank account held by Mr and Mrs Y and Mr X.

Isle of Man Financial Services Authority

Page 11 of 12

Mr X then purchased a residential property and acquired a mortgage from the same Canadian bank. Mr X listed his income (far higher than the amounts he had reported to Revenue Canada) from Company A and Company B. Mr X made the down payment and monthly payments. Over two years, Mr X paid approximately CAD 130 000 towards the mortgage. During this time his annual legitimate income was calculated to be less than CAD 20 000. Mr X also used his brother Mr Z as a front man (nominee) on title to purchase an additional property. Investigators discovered that Mr Z had stated an annual income of CAD 72 000 on his mortgage application listing his employer as Mr X although Mr Z had never worked for his brother, and his total income for two years was less than CAD 13 000. Mr X made the down payment on this property, and his tenants, who were members of Mr X’s drug trafficking enterprise, paid all the monthly mortgage payments. A total of CAD 110 000 was paid towards this property until Mr X and his associates were arrested. Mr X and his father purchased a fifth property. The origin of the down payment, made by Mr Y, was unknown but is believed to be the proceeds of Mr X’s drug enterprise. Monthly payments were made by Mr X. The use of real estate was one of many methods Mr X employed to launder the proceeds from his drug enterprise. Recorded conversations between Mr X and his associates revealed that he felt it was a fool-proof method to launder drug proceeds. Mr X was convicted in 2006 of drug trafficking, possession of the proceeds of crime and laundering the proceeds of crime in relation to this case. The higher risk indicators in this case were:

provision of incorrect information when obtaining a mortgage;

lack of clarity in relation to source of funds; and;

the use of nominees.

6.4. The use of an offshore company to buy real estate

(Predicate offence: suspected violations related to the state of bankruptcy) A bank reported a person whose account had remained inactive for a long period but which suddenly was inundated with various cash deposits and international transfers. These funds were then used to write a cheque to the order of a notary for the purchase of a real estate. It appeared that the party involved had connections with a company in insolvency and acted in this way to be able to buy the property with a view to evading his creditors. The final buyer of the real estate was not the natural person involved but an offshore company. The party involved had first bought the property in his own name and subsequently had passed it on to the aforementioned company.

Isle of Man Financial Services Authority

Page 12 of 12

The higher risk indicators in this case were:

The use of cash / international transfers;

The use of a corporate vehicles; and;

The use of a designated non-financial business / profession.