Upholding integrity: Anti-money laundering compliance imperatives in real estate

Source: Supplied. Paul Badick, head of real estate and construction at BDO.

Source: Supplied. Bianca Neethling, compliance manager at BDO.

However, the amount of money to be made in both residential and commercial real estate creates temptations for fraud and money laundering, says Bianca Neethling, compliance manager at BDO South Africa and Paul Baddrick, head of real estate and construction at BDO South Africa.

Here they share their insights around the pressing responsibility the real-estate sector holds in ensuring that transactions adhere to the highest standards of integrity.

According to the Global Financial Integrity report, South Africa loses approximately US$10bn per year to illicit outflows, a substantial portion of which can be attributed to money laundering. In fact, the country ranks 7th in the top worst-offending countries for anti-money laundering (AML) events in the last decade.

As we reach the middle of 2024, the landscape of Anti-Money Laundering compliance in real estate has taken centrestage, punctuated by the Financial Intelligence Centre's (FIC) issuance of fines totalling R900,000 – within the first three months of the year. These penalties underscore a critical need for vigilance and precision in navigating the regulatory landscape, particularly concerning three pivotal sections: 21, 42, and 28A of the AML framework.

Section 21: Unveiling the ultimate beneficiary

At the core of AML compliance lies the imperative to determine the Ultimate Beneficial Owner (UBO) of real-estate transactions. Section 21 serves as the lodestar in this endeavour, demanding meticulous scrutiny to unveil the true actors behind corporate entities.

Failure to adhere to these standards not only exposes vulnerabilities to money laundering but also undermines the transparency essential for building trust in the real-estate market.

Section 42: Develop RMCP

In the realm of financial integrity, robust risk management and compliance protocols are the bulwarks against illicit activities. Section 42 mandates the development and implementation of Risk-based Compliance Programmes (RMCP), tailored to the unique contours of the real-estate sector.

Neglecting this imperative not only leaves firms vulnerable to regulatory sanctions but also compromises their ability to detect and deter money-laundering activities effectively.

Section 28A: Combat terrorist financing

The fight against money laundering extends beyond financial crimes to include the critical task of combating terrorist financing. Section 28A underscores the obligation to scrutinise clients against the Terrorist Financing Suspect List (TFS List), erecting a crucial barrier against the proliferation of illicit funds to fund nefarious agendas.

Failing to uphold this obligation not only jeopardises national security but also undermines the integrity of the real-estate sector as a whole.

So what measures can be taken to protect real estate professionals?

• Conduct a business risk assessment specific to the real estate business. This identifies vulnerabilities in transactions that criminals might exploit.
  It evaluates factors such as large cash purchases of high-value properties, complex ownership structures involving shell companies, unexplained cash or rapid wire transfers and identifying areas known for money-laundering activity.
• Develop/enhance the business RMCP. An RMCP acts like a personalised security system. It starts with a thorough assessment of your business's vulnerabilities and then, based on the identified risks, enables the development of tailored procedures. This targeted approach ensures efficient regulatory compliance, while safeguarding the business from illegal activities.
• Conduct quality due-diligence procedures on clients This acts as a background check on clients and transactions, and includes client identification, understanding the origin of funds, transaction monitoring, and screening of clients.
• Provide employee training Real-estate employee training for Anti-Money Laundering (AML) compliance equips employees to be vigilant watchdogs. It educates them on red flags like high-value cash purchases, complex ownership structures, and unusual payment methods.
  Training also covers reporting procedures for suspicious activity, ensuring employees know how to escalate concerns and protect the company from money-laundering risks.

Navigating the way forward

As the regulatory landscape evolves, real-estate professionals must embrace a proactive stance towards AML compliance. This entails investing in robust due-diligence mechanisms, leveraging advanced technologies for enhanced screening capabilities, and building a culture of compliance that permeates every facet of operations.

Collaboration across industry stakeholders, regulatory bodies, and law-enforcement agencies is paramount in fortifying the defences against money laundering and terrorist financing.

By embracing these mandates with diligence and determination, we not only safeguard the integrity of our transactions but also uphold the broader principles of financial integrity and trust that underpin our industry's vitality.