Pub. 13 2023-2024 Issue 1

Dirty Deals: Uncovering Money Laundering in Real Estate

Real estate money laundering is a serious issue that has become increasingly prevalent in recent years. It is no secret that criminals use real estate to clean money derived from illegal proceeds; it’s one of the oldest forms of money laundering. The subjective nature of real estate pricing makes for easily manipulated transactions.

According to a Global Financial Integrity (GFI) study, an estimated $2.3 billion was laundered between 2015 and 2020 through the U.S. real estate market alone. With heightened Russian sanctions globally, it is more important than ever to understand the typologies associated with money laundering through real estate and to be prepared to detect this activity within your financial institution.

Criminals use real estate, usually higher-end residential or commercial property, to hide and launder their illegally gained money by purchasing properties directly or through shell companies. Once the illicit funds have been placed into a real estate purchase, money can be laundered in a variety of ways, such as:

  • Renovating a property and reselling with exaggerated construction costs
  • Selling at a higher price from appreciated value over time
  • Renting a recently purchased property for a “clean” stream of income
  • Obtaining a loan against the real estate to have access to clean funds

Geographic Targeting Orders and Real Estate

Many countries have enhanced laws to prevent real estate money laundering, also known as REML. However, the U.S. has lagged in passing laws and regulations preventing criminal proceeds from flowing into real estate. Since 2016, the Financial Crimes Enforcement Network (FinCEN), as authorized under the Bank Secrecy Act (BSA), has issued Geographic Targeting Orders (GTOs) to detect money laundering and other illicit activity through real estate purchases.

GTOs require U.S. title insurance companies, their subsidiaries, and agents to determine the beneficial owners (i.e., the individual human beings) behind certain entities involved in “covered” residential real estate transactions. The GTOs cover numerous types of real estate transactions, including those using cashier’s checks, certified checks, traveler’s checks, personal checks, business checks, money orders, funds transfers, or virtual currency. Previous GTOs have provided valuable information to law enforcement by following the funds used for various criminal activities, including foreign corruption, organized crime, and drug trafficking. However, GTOs have been insufficient in stopping these transactions from occurring.

At the end of 2021, the Biden administration announced they would pay closer attention to corruption in the real estate market, focusing on the all-cash transactions in commercial and residential real estate. The Treasury Department is working on a new rule to identify better who is behind all-cash real estate transactions and to see if those purchases are being used to shelter illegal profits. In a statement, the Treasury said, “The ability of illicit actors to launder criminal proceeds through the purchase of real estate threatens U.S. national security and the integrity of the U.S. financial system.”

Rules and Red Flags to Monitor Real Estate for Money Laundering

In February 2022, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) for certain persons involved in real estate transactions to collect, report, and retain information. The comment period for the proposed rule, Anti-Money Laundering Regulations for Real Estate Transactions, ended in February 2022, but a final rule has yet to be issued. FinCEN’s focus has been on the Corporate Transparency Act, and rightly so. Tightening the loopholes for lack of transparency in beneficial ownership will help detect money laundering, including money laundering through real estate.

FinCEN has also issued several red flags and SAR instructions to detect and report money laundering through commercial real estate properties. The January 2023 alert to financial institutions, Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies was a start to following up on Biden’s promise. FinCEN highlighted some of the common risk factors associated with money laundering through real estate. These REML risk factors include:

  • Multiple real estate transactions in a short period
  • Obvious property over- or undervaluation
  • Cash purchases
  • Unknown source of funds for purchases
  • A large disparity between the buyer’s income and the value of the property
  • Owner has no known ties to property jurisdiction
  • Use of straw buyers and proxies
  • Use of front companies and complex corporate vehicles

Prevent and Detect REML

REML can be complex, but financial institutions can implement several measures to help prevent and detect illicit activity and comply with anti-money laundering (AML) regulations:

  • AML Enhanced Due Diligence (EDD): Implement robust know-your-customer (KYC) procedures to verify the identities of buyers, sellers, and beneficial owners involved in real estate transactions. This includes obtaining detailed information, such as proof of identity and source of funds.
  • Transaction Monitoring: Establish systems to monitor real estate transactions for suspicious activities. This can involve setting thresholds for reporting large cash transactions and tracking other unusual patterns using anti-money laundering software.
  • Training and Awareness: Provide education and training programs for mortgage lenders and other front-line staff to raise awareness about money laundering risks, red flags, and reporting obligations. This will help them identify suspicious activities and comply with AML requirements.
  • Public-Private Partnerships: Foster collaboration between government agencies, law enforcement, and the private sector, including real estate industry professionals. Sharing expertise, information, and best practices can help create a united front against REML.

Real estate money laundering poses a significant threat to the integrity of financial systems and the stability of property markets. However, implementing robust EDD and monitoring programs can curb these illicit activities. By staying vigilant, raising awareness, and adopting a proactive approach, financial institutions can create a more transparent and secure real estate environment that safeguards against money laundering and upholds the integrity of the global financial system.

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Picture of By the Colorado Bankers Association

By the Colorado Bankers Association