Measures to Control Money Laundering in Real Estate

The South African real estate industry provides numerous opportunities for criminal abuse. The amount of money to be made in both residential and commercial real estate creates temptations for fraud and money laundering

Published on 24 April 2009 in ISS Today

The South African real estate industry provides numerous opportunities for criminal abuse. The amount of money to be made in both residential and commercial real estate creates temptations for fraud and money laundering. A recent International Monetary Fund study concluded that about $3.5-trillion is laundered worldwide each year, and of this it estimated that $5 billion to $8bn is probably attributable to South Africa. Media and court reports point to the involvement of criminals running fraud syndicates and drug trafficking in buying up or developing property. It is therefore understandable that the spotlight has been turned onto this sector – particularly at professionals who facilitate transactions. In terms of the Financial Intelligence Centre Act, every business that could be abused to launder dirty money is obliged to follow certain procedures set out in the act, or face stiff penalties. Although property transactions in some areas are often effected in cash, until recently it was not widely recognized that this is suspicious activity that needs to be reported.

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Estate agents are now required to keep records of the manner in which the client`s identity was established, the name of the person who gathered the information, the nature of the transaction handled, the parties involved in the transaction and the financial accounts at the conclusion of the sale. All these records must be stored for five years, either in electronic format or on paper and be easily retrievable. To comply with Financial Intelligence Centre Act (FICA) estate agents must establish and verify each client`s identity, keep records of all sales transactions and report any suspicious or unusual deals.

For the purpose of concluding both a single transaction and a business relationship with a client, the estate agent must keep records of:

The Estate Agency Affairs Board (EAAB) has been working to raise awareness of the risks pertaining to real estate, warning estate agents about the risk of receiving cash payments into their trust accounts without a reasonable explanation. A frequent impediment to effective implementation is the concern by estate agents that they could lose business or face reprisals from clients if they file suspicious transaction reports (STRs), which later turn out to be unfounded. The EAAB has been working to reassure estate agents that the process is confidential and that other parties involved in the same transaction (e.g. the lawyers and banks involved) are also required to report any suspicions.

The latest Eastern and Southern Africa Anti Money Laundering Group (ESAAMLG) evaluation report on South Africa noted that to date, estate agents have filed 48 STRs. However, the EAAB has detected some unreported activity, especially in the Western Cape Province, which is suspected to relate to money laundering. As the statutory regulator for all estate agents in South Africa, the EAAB is working with the Financial Intelligent Centre to combat economic crime and money laundering. It requires statistics concerning the number of STRs being filed by the industry on a province-by-province basis, to enable it to focus its inspections on the provinces where there is the most risk. The EAAB is not aware of any terrorist financing through the real estate sector.

According to the registration office of the EAAB, there are 96 504-registered estate agents. Estate agents are required to be licensed by the EAAB in terms of the EAA Act and be issued with a valid fidelity fund certificate. To qualify as an estate agent, applicants must undergo training, pass a board exam and do an articling period. They then have to show that they have not been convicted of a crime involving dishonesty, are not insolvent and are able to pay the registration fees. These latter requirements must be re-established on every annual renewal of registration. The EAAB has access to information from the South African Police Service (SAPS) on criminal convictions.

Where information is received (either from the SAPS or another person) about a licensed agent being convicted of a crime or being otherwise inappropriate, the license can be withdrawn immediately. About ten percent of lawyers in South Africa are involved as ‘conveyancers’ in the transfer and registration of real estate. Except in the case of attorneys, the EAAB board inspectors have extensive powers to enter premises, inspect documents and generally make any enquiries necessary to determine whether the provisions of the EAA Act are being complied with. Failure to co-operate with an inspector in the performance of his/her lawful duties is an offence. Since 2006, the EAAB and the FIC have jointly inspected 23 estate agents for compliance with the Financial Intelligence Centre (FIC) Act. Each team consisted of two members of the EAAB legal department who focused on compliance with the EAA Act and two members of the Centre who focused on compliance with the FIC Act. The joint inspection process was useful in educating the EAAB on how to inspect for compliance with the FIC Act. It also facilitated the development of a common inspection method.

Two rounds of inspections were conducted. In its first AML inspection cycle, the EAAB focused on the 17 biggest firms in all provinces. The results of that inspection cycle showed an overall low level of compliance. After a period of time to allow for corrective action to be taken, these firms were re-inspected. The second inspection cycle showed significant improvement. Compliance in the real estate sector is however still very low, irrespective of the location or size or the firm. The EAAB is expected to establish its own inspectorate division, to do inspections on its own.

In its next round of inspections the EAAB will focus on medium or smaller firms, which have not yet been inspected for AML/CFT compliance. Firms are selected for inspection on the basis of perceived risk. An estate agent, against whom there is an excessive number of complaints; or pending charges, or suspicion of improper management, is likely to be singled out for inspection. By the end of the second round, about 19 000 firms will have been inspected. The FIC Act will soon be amended to give the EAAB comprehensive powers to sanction for violations of the Act. . Resources have already been allocated to support the inspectorate division.

Thobani Matheza: Researcher, Organised Crime and Money Laundering Programme, ISS Cape Town