Real estate: what’s the AML risk?

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Moneyval report on Cyprus’s progress in implementing Anti-Money Laundering policies underscores the risk in the real estate sector as a significant hindrance to the effectiveness of the Cypriot AML regime. There were a number of other factors included in the report, which is worth a read. There were also many positive points brought up, including Moneyval’s conclusion that ‘Cyprus understands the money laundering and terrorist financing risks that it faces to a large extent, albeit the understanding of terrorist financing risk is less comprehensive.’

Lawmakers and regulators will now hopefully be looking at how supervision of the real estate sector can be enhanced to more effectively mitigate the risk. In the meantime, let’s have a closer look at what this risk is. 

The oldest trick in the ML book

Why is real estate so attractive to money launderers? For starters, its attraction is the same as for any other investor, according to this briefing by the European Parliamentary Research Service: 

"Real estate is as attractive to criminals as it is to any investor (prices being generally stable and likely to appreciate over time) and is also functional (the property can be used as a second home or rented out, generating income). Real estate also provides a veneer of respectability, legitimacy and normality. This applies to both residential and commercial properties as part of a reliable and profitable investment strategy." (Source: EPRS). 

The above reasoning provides a solid grounding for money launderers’ seeing real estate as a useful tool for the third/final stage of the money-laundering cycle, that of ‘integration’ of illicitly gotten funds into the legal economy. Don’t forget that property continues to then generate ‘what appears to be a legitimate source of revenue’ afterwards, whether through being sold or rented (Source: EPRS).

Citizenship and security

In Cyprus, the situation is further complicated by the innovation of the ‘Cyprus Investment Programme’, whereby foreign nationals who invest at least EUR 2 million in Cyprus qualify for Cypriot, and thus EU, <a href="http://gnosislearning.com/Articles/ID/61/Golden-passports-and-the-limits-of-due-diligence ">citizenship. This scheme has had a questionable reputation, not least because evidence has been mounting of lax due diligence. 

<a href="http://gnosislearning.com/Articles/ID/61/Golden-passports-and-the-limits-of-due-diligence ">

A few high profile cases of foreign Politically Exposed Persons (PEPs) acquiring Cypriot citizenship have also added to concerns that Cypriot citizenship constitutes a major money laundering blindspot. This was emphasised by Moneyval’s recent report on Cyprus: 

<a href="http://gnosislearning.com/Articles/ID/61/Golden-passports-and-the-limits-of-due-diligence ">"The competent authorities are not yet sufficiently pursuing money laundering from criminal proceeds generated outside of Cyprus, which pose the highest threat to the Cypriot financial system. Moreover, they have not been very proactive at freezing and confiscating foreign criminal proceeds at their own initiative, although they have been instrumental in assisting other countries." (Source: Council of Europe)

What kind of foreign criminal proceeds? 

A recent case uncovered by Reuters generated some consternation among observers of the Cyprus Investment Programme: the investigation found that members of Cambodia’s ruling elite had been granted Cypriot citizenship. Cambodia is ruled by Prime Minister Hun Sen, who is considered by many to be a dictator since he has been in power since 1985. Recent election results in 2013 were disputed by the political opposition. 

Members of Sen’s family, as well as members of his government, have been granted Cypriot citizenship. This raises questions about the potential for illicit gains from corruption entering the Cyprus and European economy. 

Another scandal associated with the Cyprus Investment Programme is the case of Jho Low, a Malaysian businessman who is a fugitive after his alleged central involvement with Malaysia’s multibillion-dollar 1Malaysia Development Berhad state fund scandal (Source: FT). Low was granted Cypriot citizenship after an investigative report alleged him to be at the centre of a plot to misappropriate more than $700m from 1MDB. More stringent requirements for due diligence would have brought up the high money laundering risk of this individual.

Reputational consequences

The key starting point has to be more serious consideration to due diligence in the real estate sector. 

Take a case we looked at a few years ago, that of the current US President, Donald Trump, and allegations around money laundering in relation to murky real estate dealings. Although the allegations at the time have not amounted to much, they do make the case for more robust due diligence when it comes to real estate especially, given its historical role in aiding money laundering.

Moneyval’s recommendation for Cyprus has been for the state to conduct a comprehensive AML/CFT risk assessment of the Cyprus Investment Programme. It has also invited Cyprus to report back to Moneyval at its first plenary in 2021. 

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