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
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:
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The identity of the client / client`s agent / client`s client;
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The manner in which identity was established;
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The nature of the business relationship or transaction;
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The parties to the transaction and the amount involved;
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All accounts involved;
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The name of the person who obtained the information
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Copies of documents obtained by the institution
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