Money laundering is the process by which criminals transform their ill-gotten gains into legitimate-looking funds. It is widespread and wide-reaching, making it a significant corrupting influence on financial systems, governments, and certain professionals.
Criminals use many different types of businesses to ‘wash’ their dirty money, but some are more useful than others. Given its high dollar value and availability of inventory, real estate is one of those favored industries.
The typical money laundering scheme involves three phases:
- Placement. Here the proceeds of criminal activity enter the financial system.
- Layering. This is where the money launderer conducts a series of transactions to distance the money from its criminal source.
- Integration. Finally, the criminal uses the money, which now appears legitimate and divorced of any crime.
Executing money laundering operations effectively is critical if crooks are to engage in complex organized crime operations and long-running fraud schemes. Not surprisingly, law enforcement has prioritized breaking up money laundering operations.
Many laws exist to prevent it, including the Bank Secrecy Act, the USA Patriot Act, and the Intelligence Reform and Terrorism Prevention Act. Yet given the vast number of transactions taking place within the U.S. financial system, detecting money laundering schemes remains a challenge, particularly when perpetrated by experienced crooks.
The size of many real estate deals allows money launderers to clean large sums of money quickly, and because real estate involves so many routine transactions, it can be easy for criminals to avoid detection. Probably the most attractive aspect of the real estate market from a launderer’s perspective is that there are few, if any, reporting requirements for suspicious activity.
To avoid raising red flags, money launderers may use illegal shell companies — companies that exist in name only and whose primary purpose is to process illegal funds. Shell companies usually grant a real estate buyer anonymity. Depending on the sophistication of the scheme, criminals may use overseas financial systems to make tracing the source of funds nearly impossible.
Nevertheless, to expose a dirty real estate deal, transaction participants need to ask questions about the source of a buyer’s money. Difficult-to-trace funds are a red flag for criminal involvement. Other suspicious signs are when a buyer offers to pay significantly above market or a seller tries to dispose of property quickly — even if it means taking a loss.
The upshot is that, if a property transaction seems ‘off’ and you do not receive adequate answers to reasonable questions, walk away from the deal. Someone who knowingly sells to a money launderer could be indicted as a conspirator. For this reason, make sure you work with reputable and experienced real estate brokers and attorneys.