By Alan Markoff
It’s not just those working in the financial services industry who have to beware of potential money launderers; developers and realtors do, too, and the penalties for non-compliance can include hefty fines and even jail time.
That was a key message delivered in the AML Seminar for realtors and developers presented by the management consulting and training solutions company, FTS, on 6 July at the Grand Cayman Marriott Beach Resort.
Provenance Properties Cayman Islands was one of the sponsors of the event. Vice President Real Estate Marketing and Sales Sue Nickason said the Provenance Properties team found the event worthwhile.
“Maintaining strong adherence to AML guidelines is critical to the Provenance Properties team,” she said. “We routinely refresh our training on this topic and appreciated the opportunity to sponsor this event and expand our AML knowledge.”
Paul Byles, director of the presenting company FTS, spoke first, outlining the various negative impacts that money laundering can cause to societies and economies. These, he said, range from adversely affecting the government’s monetary policy and destabilising bank balance sheets, to distorting capital markets in terms of prices and lending rates, and thwarting inward investment because of reputational damage.
“No one wants to invest money in a place with a bad reputation,” Byles said.
With respect to the real estate sector, Byles said it is vulnerable to money laundering because of the high value of properties, the difficulties in assessing their true value, the high value of appreciation and the fact that the legal owner might not be the beneficial owner of a property.
“Sometimes the parents get involved when children put a property in the name of Mom or Dad,” Byles said.
The use of third party or “straw” buyers to purchase real estate is just one of the methods of laundering money outlined by Byles; other common methods include using illicit funds to do expensive renovations on property and then selling it for a higher price; buying properties through a company with a complex ownership structure; and leasing or rental arrangements.
“Sometimes the money launderer will pay the tenant [with illicit funds] to make the payments,” Byles said.
Claudia Brady is the head of compliance and enforcement at the Department of Commerce and Investment, which regulates the real estate and development sectors.
Brady said that those defined under the Anti-Money Laundering Regulations as “designated non-financial businesses and professions” — which include real estate agents and brokers — must register with the Department of Commerce and Investment and provide certain required information. These companies or individuals must have in place a compliance programme with systems and training plans and then file an annual questionnaire with the department. A computerised risk assessment is done based on the answers to the questionnaire, which could then lead to a desktop review or an on-site inspection.
If an inspection finds areas of concern, a feedback report is given to the realtor/broker, who is given a specific length of time to correct the issues. Failure to rectify the areas of concern can lead to fines, de-regulation or revocation of a company’s business licence.
There are several compliance issues the department can find during an inspection, including inadequate training plans, deficient record-keeping and failure to carry out an independent audit of the AML system.
Another problem sometimes found during an inspection is the lack experience in the compliance officer.
“It’s a major problem for us to have a compliance officer who knows absolutely nothing about the job,” Brady said.
Despite being the regulator, Brady said the Department of Commerce and Investment tries to help businesses.
“Our role as the regulators is to get you compliant, not to penalise you,” she said.
HSM Chambers partners Huw Moses and Linda Da Costa both spoke about the legal risks that arise from real estate transactions with regard to anti-money laundering regulations.
Moses pointed out that in many cases, it’s real estate agents who bear the risks and not their employers because they are considered independent contractors.
His first bit of advice is to be aware of the red flags that could indicate money laundering.
“If you are suspicious, report it,” he said. “File a [suspicious activity report]. This is your get-out-of-jail-free card.”
Da Costa said that some of the warning signs/red flags that realtors and developers should look out for include: clients with a criminal record of serious crimes; a purchaser or seller not interested in a better price; a lender who doesn’t want a registered security; a buyer not interested in a property’s characteristics; a transaction that does not make commercial sense; a seller that has no bank account and wants the money sent to a third party; a purchaser who backs out of a transaction after being asked for know-your-customer — KYC — information; and the KYC documentation that contains inconsistencies in names, addresses or other important information.
Moses offered some good news for realtors or developers — they can, in general, transfer their risk to lawyers, who have to comply with even more stringent anti-money laundering regulations.
“Use a lawyer … and I think you have a good shot at transferring that risk,” Moses said, noting that HSM uses an extensive screening procedure for every real estate transaction.
This article first appeared in the August 2021 print edition of Camana Bay Times with the headline “Money laundering thread to real estate addressed.”
About the author
Alan Markoff has worked with Dart as the editor for Camana Bay Times for four years and has been writing professionally since 1997. Born and raised in Cleveland, Ohio, Alan graduated from the State University of New York at Albany with a degree in English, and first moved to the Cayman Islands in 1982. He has 17 years of experience in the real estate industry and previously worked as a journalist for the Cayman Compass before joining Dart to relaunch the Camana Bay Times monthly newspaper. Alan is passionate about food and wine and he loves to write about both those subjects. He is also the leader of Grand Cayman’s Slow Food Chapter.