Real Estate Spotlight Series: Addressing financial crime concerns for DNFBPs in Singapore and Hong Kong

A new focus: Designated Non-Financial Businesses and Professions(DNFBPs)

In March 2018, Hong Kong’s Financial Services and the Treasury Bureau (FSTB) extended its AML and counter-terrorism financing regulation to include Designated Non-Financial Businesses and Professions (DNFBPs), as defined by the Financial Action Task Force (FATF). This is a significant change and means that solicitors, accountants and estate agents who are involved in real estate transactions are now subject to various AML obligations. Hong Kong is not alone in making this kind of development – any country that subscribes to the FATF rules will eventually follow this lead.

Not all businesses and professions in the non-financial sector are included in the FATF’s definition of DNFPBs. Instead, the FATF gives countries the flexibility to include professions and businesses based on risk. The FATF recommendations for DNFPBs requires countries to ensure that DNFPBs apply certain preventative measures, which include:

  • Carrying out money laundering and terrorism financing (ML/TF) risk assessments and client risk profiling
  • Carrying out customer due diligence for higher-risk situations (such as politically-exposed persons)
  • Conducting ongoing monitoring of clients’ transactions
  • Assessing and mitigating the ML/TF risks associated with new technology
  • Putting in place specific measures when relying on due diligence performed by third parties
  • Promptly reporting suspicious transactions or activity
  • Keeping detailed records.

FATF’s latest evaluation, though, found that only five countries were assessed as ‘compliant’ or ‘largely compliant’ with its DNFPB recommendations. Singapore was assessed as ‘partly compliant’ in 2016, mainly because some of the due diligence requirements were self-regulatory and did not qualify as ‘law’ as required by the FATF. Since then Singapore has taken extra steps to address compliance in the real estate sector. The number of Suspicious Transactions Reports received from non-financial businesses has increased significantly (34,129 in 2016, an increase of 12% on the previous year)[1], reflecting a higher level of AML/CFT awareness in Singapore. A FATF evaluation visit is planned for Hong Kong this October or November[2].

Tackling financial crime with technology

The new AML compliance requirements that real estate professionals in Singapore and Hong Kong face are only the beginning of a concerted effort by regulators to tackle financial crime associated with real estate. The requirement for real estate professionals to carry out detailed checks on customers and transactions, and to keep detailed records, is here to stay and the penalties for compliance breaches could be severe. DNFPBs must accept responsibility for protecting their own business, but these new requirements also bring benefits in the sense that they provide peace of mind to legitimate customers that the right due diligence practices are in place.

“Compliance with these new regulations for the DNFBP sector is not just about meeting the expectation of regulators, but more importantly, it serves as the defense to combat crimes such as money laundering and terrorism. To combat such financial crimes, businesses must go beyond an approach of just ticking the checklist boxes. Leveraging data and technology will ensure that AML/KYC compliance is both effective and efficient”, said Bharath Vellore, Managing Director – APAC.

But better systems alone will not be enough – they need to be backed up with good processes, and solid education for employees about the new requirements. Real estate professionals everywhere need to quickly accept that this is the ‘new normal’ for the sector – greater regulatory oversight and more stringent compliance requirements are here to stay. Change is happening and real estate professionals must accept that, or suffer the consequences.

Why is the Real Estate Industry at risk?

Concerns about money laundering through real estate have been growing in major markets in the past two years, not least in Singapore and Hong Kong. According to data from Real Capital Analytics, Singapore-based investors spent a record S$37.2billion in overseas real estate in 2017, making the country the fifth-largest source of capital globally. Inbound real estate investment in Singapore is also increasing rapidly, currently pegged at US$2.3bn[3].

Regulators have taken an interest in designated non-financial businesses and professions (DNFBPs) that could be targeted by money launderers because of the fear that their services could be unknowingly exploited. But regulators also see these businesses as potential gatekeepers in the fight against money laundering and terrorism finance – and real estate professionals in particular can play a crucial role in detecting and preventing money-laundering activities.

The rise in money laundering and other financial crimes involving property has attracted the attention of regulators. Our recent report, Money Laundering and Real Estate, highlights how anti-money laundering (AML) requirements, similar to those applied to banks, are beginning to be applied to real estate transactions. Real estate professionals who fail to adhere to more stringent AML rules will risk the consequences.

Singapore’s red-hot real estate

The Singapore red-hot real estate market has exacerbated concern that property transactions have been used to ‘clean’ the proceeds of crime. The region is familiar with real estate crime – in November, businesswoman Leong Lai Yee was charged with 84 counts of deceiving investors as part of an alleged $60m Ponzi scheme involving the buying and selling of properties in the city[4].

In October 2017, Singapore’s Council for Estate Agents (CEA) published a practice guideline for estate agents and other salespeople[5]. The guidelines, which came into effect on 1st December 2017, require estate agents to submit a complete checklist for Anti-Money Laundering (AML) and terrorism financing to the CEA as and when required, and to conduct self-assessment using the checklist periodically. Those selling property must also complete customer due diligence for each transaction for the client they represent, and the CEA will undertake regular checks to assess compliance[6].

Navigating the CEA guidelines : Salespersons Guide on Prevention of Money Laundering & Countering the Financing of Terrorism

The guidelines state that salespersons should first verify their client’s identity and ask them to complete a ‘Customer’s Particulars Form’ for all transactions. Based on the customer particulars obtained and whether the salesperson has encountered any suspicious indicators in their dealings with the client, they can make an assessment of the potential risk of money laundering or terrorist financing activity.

Salespersons have to undertake customer due diligence (CDD) measures on their clients when any one of the following occurs:

a) Their client in a property purchase transaction is a foreigner;
b) Physical cash is used in the property transaction, for example down payment;
c) There is suspicion of money laundering or terrorist financing activity;
d) There are doubts about the customer particulars obtained.

CDD Flowchart
Salespersons have to lodge a suspicious transactions report (STR’s) when there is suspicion of money laundering or terrorist financing activity. The information gathered from CDD checks and submitted to the authorities through the suspicious transaction report will help in the subsequent investigation. Under Singapore law it is mandatory for a person, in the course of his business or employment, to lodge a suspicious transaction report if he knows or has reason to suspect that any transaction may be connected to financial crime.

Failure to disclose such knowledge, suspicion, or other related information constitutes an offence, which is punishable by a fine or imprisonment.

Similar trends in Hong Kong

Significant further concern to Hong Kong, the Estate Agents Authority of Hong Kong (EAA) has recently released a new practice circular[7] detailing the guidelines on compliance to AML and counter-terrorist financing requirements by estate agents. This practice circular came into effect on 1 March 2018[8]. There are concerns that the rapid increase in property prices in the region will encourage more fraudulent and criminal activity. According to Wealth in Asia, four of the five most expensive homes sold in Asia in 2017 were in Hong Kong[9].

Property prices in both Hong Kong and Singapore are predicted to rise by around 10% during 2018, with no sign of any slowdown. And along with most other major global financial centres, Hong Kong and Singapore have both suffered an increase in money laundering activity. In 2017, financial institutions in Hong Kong, for example, reported 92,115 suspicious transactions to the Joint Financial Intelligence Unit, a body run by the city’s police and customs, up from 76,590 cases in 2016, and 42,555 in 2015[10].

The Panama Papers revealed that at least one-third of the offshore company registrations arranged by the law firm at the centre of the investigation, Mossack Fonseca, originated in Hong Kong[11]. An increase in financial crime is no longer unique to this region – almost every major financial centre has also seen financial crime rise – it is more than larger volumes of financial transactions are flowing around the world than ever before, at a more rapid rate.