The Real Estate Institute of Australia (REIA) is urging policymakers to consider homebuyers, tenants, and small businesses in targeting sophisticated money launderers.

REIA president Adrian Kelly addressed the claims made by some institutions that money laundering practices are driving up house prices.

"Low supply, high demand, high taxes, a greater demand for houses over units and uncertainty of vendors to list new properties created by the ongoing COVID-19 pandemic are all major factors in the current market," Mr Kelly said.

Mr Kelly said that from a market's point of view, these well-documented factors drive up high property prices.

"The overwhelming majority of demand is being experienced domestically and by repatriating Australians.”

According to submissions from Transparency International Australia (TIA) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) to the Senate Committee Inquiry into the adequacy and efficacy of Australia's Anti-Money Laundering and Counter-Terrorism (AML/CTF) Regime, the real estate sector has been exploited by money launderers, given the sector's weak spot and large compliance holes in the regime.

Here's an excerpt from TIA's submission:

Criminals may be drawn to real estate as a channel to launder illicit funds due to the ability to buy real estate using cash, to disguise the ultimate beneficial ownership of real estate, the relative stability and reliability of real estate investments, and the opportunity to renovate and improve real estate, thereby increasing its value.

To avoid direct involvement in ML processes, criminals may seek to buy property using a third party or family member as a legal owner, usually a ‘cleanskin’ with no prior criminal record. They may use loans or mortgages to layer and integrate illicit funds into high-value assets such as real estate.

The AUSTRAC said in a 2015 report that the laundering of illicit funds through real estate was "an established money laundering method in Australia", with $1 billion in suspicious transactions coming from Chinese investors into Australian property in 2015-2016.

AUSTRAC acting national manager Bradley Brown have confirmed in his testimony to the Senate Committee that there is no agreed evidence to correlate criminal activity to a strong property market.

“I just want to make the notation that it is important to recognise that the consequences sections of our risk assessment that are being done describe the potential impacts of activity, not necessarily the actual impact or what is occurring,” Mr Brown said.

“We note that widespread, concentrated real estate purchases with proceeds could drive prices up. And the word is could.”

Mr Kelly said it is crucial to put into context the claims being made about money laundering and its impact on the residential property market.

For instance, while $116m of the $187m worth of assets seized by authorities in the 2021 financial year was from the real estate sector, the scale compared to the overall market needs to be considered.

“To put this in context, the Australian commercial sales market alone over this period recorded more than $50bn in sales and the residential sector recorded a massive 598,000 transactions,” he said.

Mr Kelly is urging the Senate Committee to deliver “practical recommendations” that target sophisticated money launderers without creating a financial burden on homebuyers, tenants, and real estate agencies.

Additional Tranche Two or Gateway reporting to intercept money launderers could potentially have small businesses and real estate agencies to shoulder costs of up to $120,000.

“If the anticipated activities for Tranche Two reporting are implemented, the cost to the sector could easily reach billions,” he said.

“A cost-benefit analysis led by the Commonwealth would be needed to qualify the cost to real estate agencies versus the projected benefits of additional reform and how additional reporting will actually detect more criminal activity.”

“We stand ready to play our part in stamping out criminal activity and protecting our clients.”

How the real estate sector is being used for money laundering

AUSTRAC’s analysis published in 2015 analysed 10 methods in which money laundering was carried out in the real estate market.

One of the interesting methods was through manipulation of property values, which involve criminals buying and selling real estate at a price above or below market value.

“Buyers, sellers, and third parties like real estate agents collude to under or overestimate the value of a property. The difference between the actual and stated values is settled with undisclosed cash payments,” the AUSTRAC report said.

Another interesting method was through rental income.

The AUSTRAC report said this method involves criminals leasing out properties to generate rental income.

To legitimise illicit funds, criminals provide their tenants with funds, which would be accounted as “fictitious rent”, making it appear as a legitimate rental income.

Criminals may also buy a property under a different name and pay rent using illicit funds.

Here are some of the other common methods criminals use to launder money through real estate:

  • Use of third parties
  • Use of loans and mortgages
  • Structuring of cash deposits to buy real estate
  • Purchase of real estate to facilitate other criminal activity
  • Renovations and improvements to property
  • Use of front companies, shell companies, trust and company structures
  • Use of professional facilitators or 'gatekeepers'
  • Overseas-based criminals investing in Australian real estate

Photo by Clint Patterson on Unsplash