FATF Guidance for the Real Estate Sector

On 26 July 2022, the Financial Action Task Force (FATF) released updated guidance on how to implement a risk-based approach for the real estate sector. The report includes extensive input from private contributors gathered in the course of a public consultation that took place in March-April 2022.

The Guidance puts a spotlight on what makes the risk of money laundering and terrorism financing particularly high for real estate practitioners and explains how criminal networks can exploit vulnerabilities to launder the profits of their illegal activities. It also highlights the importance for the sector to increase its understanding of the risks it faces.

After introducing some key concepts, the 76-page document is divided into three sections:

An overview of the key principles guiding the FATF’s Risk-Based Approach to AML/CFT;
Highly actionable guidance for the private sector to improve its AML/CFT understanding and controls;
Additional guidance for supervisors to ensure the implementation of the FATF requirements is successful on a local level.

Click here to view and download a copy of the Guidance.

While all sections include highly valuable insights, the most relevant instructions for compliance experts in the Real Estate sector are to be found in the chapter dedicated to private sector players.

In particular, according to the FATF, all real estate firms should:

Have internal policies and procedures in place

It is necessary to bridge the knowledge gap that exists in real estate compared to other sectors, such as banking, to ensure stronger defences against the risk of money laundering. This starts with developing a series of internal policies, procedures and controls based on the principles of the risk-based approach, to be followed by the whole organisation. Additionally, appropriate screening and investigations should be put in place to ensure high standards when hiring professionals that may need to perform AML/CFT duties.

Always identify customers and UBOs

Before any real estate transaction takes place, firms must be able to form a reasonable belief that they know the true identity of each customer and the ultimate beneficial owner (UBO) of the property.

More specifically, to mitigate the ML risks, entities should:

Carry out all necessary measures to understand the ownership and control structure of any legal entity.
Assess the degree of verification required regarding the beneficial owners depending on the associated ML/TF risks.
Document the additional procedures to be applied and the measures taken to identify the beneficial owner.
Carry out a thorough search of relevant and available beneficial ownership information.
Have a clear and concise policy and relevant training to enable any relevant employee within the business to lodge a suspicious transaction report when the identity of the beneficial owner has not been satisfied due to a lack of CDD information.

Embrace an international regulatory outlook

While it is the local regulators’ responsibility to ensure that criminals do not take advantage of the existing legal inconsistencies across jurisdictions, real estate professionals must also be familiar with the AML/CFT requirements of the countries where clients are located or where their source of wealth or funds originates, in order to prevent legislative loopholes interfering with their controls’ effectiveness.

Be particularly vigilant if dealing with Commercial properties

Unlike residential real estate transactions, in which there are two parties – a buyer and a seller – commercial real estate transactions often involve multiple parties due to the more complex financing arrangements required to close these deals. Commercial real estate transactions are also more likely to involve legal entities as well as natural persons when compared to the residential real estate market. This presents an opportunity for their misuse and allows for obfuscation of the buyer and seller. As a result, additional controls to verify ownership structures and identify shareholders beyond a reasonable doubt are of the utmost importance.

Embrace the use of RegTech

In its updated guidance, the FATF openly encourages the use of new or innovative technological tools to facilitate AML/CFT implementation and mitigate money laundering risks across the sector. Such RegTech solutions have the power of seamlessly implementing real estate firms’ risk policies and procedures without straining available human and financial resources.

How Know Your Customer can help

By partnering with a trustworthy RegTech provider, real estate firms can easily and effectively bridge the gaps in their anti-money laundering controls.

Since 2015, Know Your Customer has been providing client due diligence and AML solutions to real estate firms and financial institutions across 18 jurisdictions worldwide. Our coverage of real-time connections to company registries is the widest in the market, making us the No. 1 provider for compliance teams globally.

Our Modular Compliance technology enables real estate firms of all sizes to:

Centralise and streamline all CDD operations within a one-stop solution for maximum efficiency
Bring the risk-based approach to life with our fully configurable risk engine
Assign the relevant risk profile and workflow journey to each counterpart automatically
Identify UBOs globally through official company data retrieved from registries in real-time
Screen against AML watchlists for PEPs, sanctions, adverse media and perform on-going monitoring
Automate internal and external reporting with business intelligence and immutable audit trail functionalities

Are you ready to embrace the Risk-Based Approach in line with the FATF Guidance?

Last updated on April 23rd, 2023 at 07:26 pm