Money laundering through real estate is one of the common methods to launder money. From using third parties with no criminal records to using credit and mortgage as collaterals to launder crime proceedings – there are many ways to commit real estate money laundering. Here we discuss frequently asked questions on real estate money laundering and their answers.
Question 1: What are the different stages of real estate money laundering?
Answer: Real estate sector has long been described as one of the oldest known ways to convert ‘dirty money’ that is derived from criminal activities to ‘clean’ money. It usually involves three stages:
- Placement: This is the first stage in the money laundering process where the ‘dirty’ money is introduced into the legal, financial system. Criminals can introduce their ‘’dirty’ or ‘black’ money into the system through many ways such as by giving someone a loan or investing in cash-only businesses.
- Layering: In this stage, the money switches hands and even countries. A myriad of transactions are made in this stage – as a result, it becomes almost impossible to trace the origins of the money.
- Integration: In this stage, the black money is absorbed into the economy by purchasing real estate. Also, in this stage, the illegally derived money is returned to the criminals concerned.
Question 2: How is money laundered through real estate?
Answer: Some of the common methods used by criminals include:
- Criminals do not directly buy real estate property, but they use a family member or a third party with no criminal record as the legal owner. The ‘dirty’ money is deposited into the bank account of the third party to make the purchase appear as a legal transaction.
- When laundering dirty money, criminals can misuse loans or mortgages. Methods such as lump-sum cash repayments or smaller cash amounts are used for repaying the loan or mortgage and in the process legitimize their ‘dirty’ money.
- Manipulation of property values is done to under or over value the property.
- Criminals can rent their properties and then provide the ‘dirty’ money to the tenants for the rent to legitimize the funds.
- Criminals can deposit cash below the reporting threshold at different banks or branches. Usually high volumes of transactions are done and numerous accounts are involved to avoid detection. The money is then used to obtain bank cheques to purchase real estate.
Question 3: What is overvaluation?
Answer: To obtain the largest possible loan from a bank, criminals may overvalue the real estate property. The more the amount of loan they get, the greater the amount of funds that can be laundered to clear off the debt. The loan can be paid as lump-sum payment or in installments.
Question4: What is undervaluation?
Answer: It is underestimating a property’s value. The difference between the price of the property mentioned in the contract and its real value is paid secretly by the criminal to the vendor using illicit funds.
Question5: Why are sales in quick succession at higher values considered as a warning sign?
Answer: Criminals often resell a property at a higher value in quick succession to obscure the audit trail. The property is sold to people who are related to the criminals or to businesses or trusts controlled by the criminals. The illicit funds can be shown as legitimate profits and the criminal enjoys the control over the property.
We hope you found the read useful. If you are looking for a real estate attorney in California, get in touch with David L. Fleck.