Money laundering, in its simplest form, is the process whereby criminals try to disguise the origins of money obtained through illegal activities so it looks like the money came from a legitimate source. That way law enforcement cannot simply connect them to criminal activity by “following the money.”

History of Money Laundering 

Money laundering was not invented during the Prohibition era in the United States, but many techniques were developed and refined during the Roaring Twenties and the 1930’s for disguising the origins of money generated by the sale of then-illegal alcoholic beverages. Following Al Capone's 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from Florida “carpet joints” (small casinos) to accounts overseas. After the 1934 Swiss Banking Act legitimized client confidentiality and anonymous banking, Lansky bought a Swiss bank to which he would transfer illegal funds through a complex system of shell companies, holding companies and offshore accounts.

While some say the term “money laundering” derives from Al Capone’s use of laundromats to hide ill-gotten gains, others say the term was first used during the Watergate scandal when President Richard Nixon’s Committee to Re-elect the President moved illegal campaign contributions to Mexico, then back through a company in Miami. Today the illegal activity of money laundering is practiced by individuals, small and large businesses, corrupt officials and members of organized crime (such as drug dealers or the Mafia), and cults through a complex network of shell companies and trusts based in offshore tax havens.

Laundering Process 

Money laundering is a carefully planned activity occurring in three stages:

• Placement: the initial point of entry for funds derived from criminal activities.
• Layering: the creation of complex networks of transactions that obscure the link between the initial entry point and the end of the laundering cycle.
• Integration: the return of funds to the legitimate economy for later extraction.

Structuring, also known as “smurfing,” is often associated with money laundering. Smurfing entails breaking up large amounts of money into smaller, less-suspicious amounts below $10,000. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time. The amounts must be below $10,000 because banks, real estate brokers and others in a trade or business who receive more than $10,000 in cash in a transaction or related transactions must file IRS Form 8300, which the government uses to try to trace laundered money (see Pages 5-6 of the August 2005 Legal Update, “Federal Laws Impacting REALTOR® Practice,” online at www.wra.org/LU0508, or www.irs.gov/publications/p1544/index.html for additional information).

So what does this have to do with residential real estate?

The United States Treasury Department Financial Crimes Enforcement Network recently conducted a Suspicious Activity Reports (SAR) assessment to identify suspected money laundering associated with the residential real estate industry. The report describes the relative ease with which money launderers engage in mortgage loan fraud or employ straw buyers to fraudulently secure mortgage loans to implement real estate money laundering.

Straw Buyers 

In transactions involving money laundering, straw buyers allow their names, identifiers and credit ratings to be used to secure real estate purchase mortgages. Straw buyers generally do not occupy the property or make the loan payments, and are paid a fee by the individual who intends to flip the property or use the loan to launder illicit funds.

A straw buyer’s bank account can be temporarily funded by the money launderer prior to application for the loan. A mortgage company will determine that the applicant is employed and has sufficient savings in the bank to qualify for the loan. Once the loan is approved and funded, the launderer moves the money out of the straw buyer’s account and may move it into another straw buyer’s account to repeat the process. The launderer makes the loan payments on a timely basis using illicit funds. Eventually, the launderer may re-sell the property, allowing for a trade-up to a more expensive property affording greater laundering and investment potential.

Some of the examples in the FinCEN report include a bank’s customer arrested for his involvement in the sale of drugs. He apparently laundered drug money through a title company and a health food store he was associated with, and through the purchase of real estate. Another bank discovered that one of its customers, whose corporation had a mortgage loan with the bank, had been paying the mortgage with funds derived from sales of pirated compact discs.

See the April 2008 report, “Suspected Money Laundering in the Residential Real Estate Industry, An Assessment Based Upon Suspicious Activity Report Filing Analysis,” online at www.fincen.gov/MLR_Real_Estate_Industry_SAR_web.pdf.

Debbi Conrad is Director of Legal Affairs for the WRA.