While I enjoy the Netflix original show “Ozark” and how Jason Bateman’s character Marty teaches the basics of money laundering in season one, that is not why I am writing about money laundering in a real estate magazine. Actually, I’m writing about money laundering because it’s not a new thing in real estate.

However, with the release of “Ozark,” we are reminded that real estate is one of the steps in a three-step money laundering process. 

And while money laundering often occurs in highly populated areas such as Dallas, Miami, Los Angeles and San Diego, it could still happen here in Wisconsin. 

What is money laundering? 

Simply, money laundering is the process of hiding money that was earned through an illegal activity. While the money earned through illegal activity can pay for simple and low-cost, day-to-day items, red flags are often raised when a person goes to purchase a home with a large sum of cold, hard cash. 

This is cash not held in a bank, but cash someone has “stashed” somewhere else. The IRS will become very interested if a person is buying a home with cold, hard cash that has not been held by a financial institution for a certain amount of time. Further, the IRS would be equally interested if a person opened a bank account with cash that wasn’t attributable from a legitimate source such as the sale proceeds from a home, business transaction or an inheritance. 

Money laundering offers criminals the opportunity to try and hide the money, incorporate it into a legitimate business and then eventually pay themselves from a legitimate business. The most common sources of illegal activity being laundered are fraud, organized crime, drug and human trafficking, and terrorism. 

A simple, straightforward example of money laundering could include the purchasing of a legitimate business, typically one that receives a large amount of cash, such as a bar. The bar brings in money from customers, but then illegal money slowly is added in bits and pieces. For the most part, money is “laundered.” The challenge is concealing the laundering scheme and not letting the business appear to be making so much money, otherwise, the business begins to look suspicious. If the bar should only be making $250,000 a year and suddenly it makes $1,000,000, suspicion begins.

Three steps of money laundering 

Money laundering involving real estate is often complex. As mentioned previously, there are generally three steps to money laundering — those steps do not include wash, dry and fold. 

Step 1: Placement: Deposit the criminal proceeds into the financial system. The effort under this step is to conceal the origin of the proceeds that were generated through illegal activity. 

Step 2: Layering: The process includes moving money from different accounts and between different countries. This step provides distance between the money and the illegal activity by placing the money into a legitimate business. 

Step 3: Integration: Create a “legal original” for the money. This last step involves paying the laundered money back to the criminal showing they have made the money through a legitimate business. 

And now the money is laundered. Of course, it’s not nearly as simple as it sounds.

Common examples of money laundering in real estate

1. Pay cash to buy property. Maybe that’s hard cash or a little bit of money pulled from a variety of banks so not to raise suspicion. 
2. Renovate and sell at a much higher price. For example, purchase for $200,000. Renovate and decorate with expenses of $40,000. Sell for $650,000. 
3. Using a straw buyer. For illustration, Criminal A gives cash to Criminal B. Next, Criminal B buys the property under Criminal B’s name. Criminal A is the actual owner. 
4. Buy with a mortgage or loan and pay off quickly. The criminal uses a mortgage from a bank to buy the property but pays it off in a very short amount of time from the time of purchase. 
5. Leasing as a front. For example, the criminal owns a rental property and rents the property to generate rental income. However, the criminal offers to pay the rent to the tenant secretly and have the tenant pay the criminal that money as rent each month. 

While shell companies are often created for legitimate business purposes, a large number of criminals exercise these money laundering practices through their shell companies. The advantage of a shell company is that it’s difficult to ascertain ownership of the entity. 

Real estate red flags 

You may be asking yourself: how do I know if the real estate transaction is involved in money laundering? The following are just some of the more common red flags: 

• The purchase price is substantially higher or lower than the market value. 
• The property is being purchased in the name of a third party, such as a shell company. 
• Location, location, location. Typically, large cities such as San Antonio, San Diego, Los Angeles and Manhattan are common areas where this type of situation occurs.
• Where is the buyer from? Out of the country? The British Virgin Islands? 
• Where is the money coming from? Look to the origin of the wire transfers. For example, if an international company sends money to a bank in the British Virgin Islands for a purchase of a property in Miami, this transfer seems suspicious.
• Large sums of money are involved in the transaction.
• The buyer is uninterested in trying to get a better price.
• The buyer requests an aggressively fast transaction.
• Cash deal, no mortgage. 
• Immediate resale of the property for a significantly higher or lower price without explanation. 

The U.S. Treasury Department’s “Advisory to Financial Institutions and Real Estate Firms and Professionals” provides helpful information and examples of money laundering utilizing real estate from the Financial Crimes Enforcement Network . See that advisory at www.wra.org/TreasuryAdvisory. 

This information also provides a discussion on how shell companies are used in money laundering activities in real estate transactions. 

Interested in learning more about money laundering and the relevant statutes? See 18 U.S.C. § 1956 and § 1957. 

What does money laundering mean for your real estate business?

The USA Patriot Act, the Bank Secrecy Act, and Executive Order 13224 have increased the level of the government’s scrutiny of financial transactions in an effort to prevent money laundering and block the financial dealings of terrorists. Under the USA Patriot Act, financial institutions are required to create anti-money laundering (AML) and customer identification programs. The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and individuals. OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries collectively called Specially Designated Nationals (SDNs).

The laws impose the following duties on real estate professionals:

Real estate brokers and agents must report, using IRS form 8300, any single or series of related transactions in which they receive cash in excess of $10,000.

SDN assets are blocked, and all businesses (including real estate agents and brokers) have a responsibility to ensure that they are not dealing with any SDN by checking the list provided by OFAC. The SDN list can be found at www.treasury.gov/sdn.

Source: www.nar.realtor/money-laundering-and-terrorism-financing.

Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.