The real estate industry (property in the form of land or buildings) is frequently used as a conduit for money laundering activities. The sector has long been seen as one of the oldest known channels to layer and integrate ill-gotten proceeds, both in politically and economically stable countries, as well as in jurisdictions with weak or absent AML/CFT oversight.
Every year, around $1.6 trillion of dirty money moves through this market – equivalent to 3% of the world’s GDP. In this article, we explore an important element within this topic – escrow (or trust) accounts.
Escrow is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction. Escrow is mainly associated with real estate transactions, though it can also apply to other situations where funds pass from one party to another, such as mergers and acquisitions or securities.
In the context of buying and selling property, these accounts are usually maintained by real estate agents, brokers and other fiduciaries, and are designed to hold funds for protection and proper disbursement after certain obligations have been fulfilled.
During the sale of a house, for example, the buyer and seller may agree to use escrow, and the buyer would deposit the amount due in the established account managed by, or in the custody of, an agent. This guarantees the seller that the buyer is able to make the payment.
Once all the conditions for the sale have been met, the agent transfers the money to the seller and the title to the property is passed onto the buyer. This approach guarantees that the buyer has the funds needed for the purchase, and that the money will be handed over once the title is transferred, thereby ensuring trust between the two parties.
Countless real estate deals are closed every day using escrow. This method is an attractive honeypot for money launderers for two main reasons:
Given the large amounts of activity that might be expected in an escrow account (paying off the mortgage, real estate commissions, taxes, satisfaction of liens and other payments), criminals could easily disguise illegal activity while appearing to operate the account in a standard manner consistent with the nature of usual real estate transactions. In this way, launderers are presented with a practical vehicle through which they can funnel funds into the financial system, making them appear legitimate.
Since they are a convenient instrument for making dirty money look clean, escrow arrangements call for careful consideration when taking part in property transactions. It is necessary for intermediaries to determine not only the source of funds that are being transferred to the accounts by the purchasing natural or legal persons, but also to identify the (ultimate) beneficial owner of the real asset, who may be shielded, for instance, behind a corporate vehicle such as a shell company or trust.
The 5th AML Directive expressly clarifies that real estate agents acting as fiduciaries are now included within the scope of obliged entities under the Directive and must thus comply with all relevant AML/CFT obligations.
Furthermore, the USA PATRIOT Act requires all financial institutions to obtain, verify and record information that identifies each person who opens any type of account within a financial institution. For example, in 2016 one of the main U.S. escrow service providers escrow.com launched a Know Your Customer (KYC) policy to ensure that all buyers and sellers are appropriately verified through documentation collection to be followed by appropriate due diligence checks.
Real estate professionals as intermediaries are involved in the vast majority of real estate transactions, thus playing a significant ‘gatekeeper’ role in detecting money laundering and terrorist financing.
The current regulatory environment obligates gatekeepers to carry out detailed KYC checks along with sanctions, PEP, and adverse media screening, as well as checking individual transactions for suspicious activity.
Without effective controls, illicit financial flows via this sector create unfair competition, and can distort market values, whilst damaging the reputation and trust of legitimate businesses. From a legal perspective, money laundering can lead to lawsuits, unenforceable contracts, fines, increased expenses, or even closure.
To help mitigate these risks, Accuity offers a suite of innovative solutions which help real estate professionals comply with the regulatory requirements and enables them to demonstrate that they have robust AML screening and compliance practices in place. Contact us to learn more.
 Study Guide: CAMS Certification Exam, a publication by ACAMS, 6th ed, 2018, p. 52.
 Study Guide: CAMS Certification Exam, a publication by ACAMS, 6th ed, 2018, p. 8.