Across many Asian countries, ownership of luxury apartments in New York or Sydney can be a sign of status and prestige.
It can also be a means by which to hide money from tax authorities and criminal investigators, or to conceal ill-gotten gains. In all these cases, property investment enables the tucking away of large sums which can subsequently come out appearing to be legitimate gains from real-estate investment once the property is sold.
The significance of this issue should not be underestimated. Data from the Foreign Investment Review Board indicates that the amount of foreign money being pumped into local residential real estate increased more than threefold in just two years from 2012/13 to 2014/15. In light of a domestic crackdown on corruption in China, a sixfold surge in Australian property investment from Chinese sources between 2011/12 and 2014/15 raises eyebrows.
Given this, one would think Australia would have robust controls in place to prevent our real-estate market being used as a conduit to hide or launder money.
Alas, this is not the case. A report in March by Transparency International (TI) found that Australia was the only one of four countries reviewed (the others were the United Kingdom, the United States and Canada), which failed all 10 of TI’s criteria for good governance when it comes to anti-money laundering efforts in real estate. Despite real estate agents and support professionals such as lawyers and accountants having some visibility with respect to property transactions, none of them are yet subject to the Anti-Money Laundering and Counter Terrorism Financing Act 2006. TI reports that in Australia, we rely almost entirely on banks and financial institutions to detect and prevent money laundering efforts in real estate. Effectively, this means property can be bought and sold without any due diligence on the parties involved, it said.
Unlike the United Kingdom and Canada, TI said Australia does not require its real estate professionals to report suspicious transactions where they suspect that money laundering or terrorism financing is involved. Nor are these professionals required to verify whether or not customers have close political connections and therefore need to be treated with heightened caution.
Finally, whilst Australia is the only one of the four countries that does checks on foreigners wishing to purchase real estate (which is done through the Foreign Investment Review Board’s controls), these checks are not targeted at money laundering. While details of the acquirer are required, there isn’t a requirement to disclose the identity of individuals or beneficial owners behind foreign companies purchasing property in all cases.
In short, TI said, Australia is ‘not in line with any of the commitments to tackle corruption and money laundering in real-estate made in international forums.’ For all countries, TI recommends that governments require all middlemen (including real estate agents, accountants, lawyers and conveyancers) be required to identify and keep records of beneficial owners of property; that governments require real estate agents as well as lawyers, accountants and others who engage in real estate deals to register with a designated authority for anti-money laundering supervision and for additional measures to be required for ‘politically exposed persons.’
Specifically relating to Australia, a federal government review into the Anti-Money Laundering and Counter Terrorism Financing Act last year recommended that models be developed to subject professionals who deal in high risk industries (including real estate) to some form of regulation under the legislation and that a cost benefit analysis be performed as to whether or not this would be a good idea.
Katherine Shamai, senior manager in forensics at advisory firm Grant Thornton, said property as a sector involves high dollar value transactions and therefore offers an attractive way in which to hide and launder large sums of money. With agents not needing to enquire about the origin of funds or perform due diligence on the identities of the purchaser, it is not difficult to invest money from ill-gotten gains into the sector and have these come out appearing to be legitimate profits from real estate investment on the other side.
Shamai says money laundering typically occurs either to hide money from revenue authorities or to ‘clean’ funds from illicit activities, giving money the appearance of having been derived from legitimate forms.
To illustrate, she cites an example of an illicit drugs operation in the United Kingdom and United States, where money raised through the narcotic sales was used to purchase luxury cars from Germany, which were then exported and sold in Mexico. By virtue of this operation, she says the money looked like it was being derived from luxury car sales. Rarely, she said, would further questions be asked about where money to purchase the vehicles came from. Likewise, similar arrangements could be used to make ill-gotten gains appear to be genuine money earned through real estate, Shamai said.
Whilst specifics about the outcome of the government’s anti-money laundering review remain to be seen, Shamai says it is likely that real-estate agents and other professionals will be subject to a lighter form of regulation than what currently applies to banks. Nevertheless, she says, it is likely that real estate agents will have to go to at least some effort to understand who their customers are, particularly when they are non-residents.
Sian Sinclair, global head of real estate and construction at Grant Thornton, said Australia’s real estate sector is exposed to money laundering.
“I believe that Australian property is vulnerable and if you look at the AUSTRAC reports, it’s quite clear that Australia has been used as a method of laundering funds when you can purchase property with cash,” Sinclair said.
David Lehmann, a partner at governance, forensic and investment firm KordaMentha, said risks within the real estate sector had increased following the aforementioned corruption drive in China and subsequent surge in Chinese money coming in to Australian real estate.
Lehman said money that is derived from corruption or fraud is a predicate offence of money laundering. Where they do not have due diligence procedures in place, those who receive these funds are at risk of unwittingly facilitating money laundering activity, he said. This is especially the case amid the emergence of agencies which primarily service Asian buyers.
Lehman says the absence of real estate as a designated service under anti-money laundering legislation means the sector is not policed and that agents therefore see little need to enquire about the origins of client money.
He agrees that real estate agents and others should be brought in under anti-money laundering legislation, which he says will force people to think carefully about governance issues in terms of who they are dealing with.
It is also important, he said, to educate people not just to take money without asking questions.
Sinclair is cautious about the impact on agents and other professionals under money laundering legislation, which she saids would effectively turn these professions into policing agencies with little training and resources at their disposal.
Moreover, she said, the transactional nature of real estate means real estate agents may not have the same ongoing relationship with their clients as do banks. She said creating a register of beneficial owners would require considerable effort and may be easily worked around by people. For example, individuals could simply put names of family members or friends as the beneficial owner rather than themselves.
Rather, she says, it is important for the topic to be socialised so awareness about the problem takes hold and for agents, lawyers and accountants to clearly understand their duty of care and their options. A government agency to whom real estate agents could anonymously report suspicious transactions would help, she said. She added that the introduction of the 10 per cent withholding tax for foreign residents from any property transactions worth $2 million or more (now being reduced to $750,000 following the budget announcements) will also help to deter the use of Australian real estate for money laundering, given the additional information required to be captured on the seller prior to settlement.
The real estate sector in Australia is exposed to money laundering.
In order for this to be addressed, sensible reforms are needed.