Abstract: Money laundering is the process by which money obtained through illegal means, such as drug trafficking, tax evasion, etc., creates a legitimate image through investment or conversion into legal instruments. Money laundering directly or indirectly affects the sector where it took place. Key sectors like real estate, pharmaceuticals, banking, etc. are no exception. But the effect of money laundering on these sectors would affect the general public and ultimately the nation. This paper assesses the infusion of money laundering in the real estate sector in Noida, a metropolitan city in the Indian state of Uttar Pradesh with a population of approximately 1 million. Through a pre-set questionnaire, people at different levels of dealing with the real estate sector were interviewed and the responses were analyzed with regard to how knowingly and unknowingly money laundering occurs in the real estate sector. In addition to the findings, it also analyzes the legal provisions to combat money laundering in the international arena.
Introduction
Land is one of those basic commodities in the world that cannot be produced to meet the supply and demand of a growing population. The real estate industry is probably the oldest form of business in the world and has proven to be the only business that has never lost its luster since ancient times. It has a growing nature with the exception of periods of sharp economic decline. Buying or selling real estate is considered one of the biggest financial deals for the average family. Differences in property prices will impact family decisions such as where to live, children’s education and work.
Until the 19th century, the concept of real estate did not change much. Although it has undergone major changes in the last two decades that have made the industry vulnerable to money laundering, benefiting anti-social elements across the globe. Various reports produced by the Financial Action Task Force (FATF)[1] and the International Monetary Fund (IMF) over the past few years have pointed to the fact that the real estate sector can be one of the vehicles used by criminal organizations to launder their money illegally. money earned. Due to the huge amount of funds and multiple parties involved in each real estate transaction, it is extremely difficult to identify property deals and money laundering transactions.
Money laundering is the proceeds of an “illegal activity”, an illegal activity can be any activity that is directly or indirectly related to any crime or illegal activity. Money laundering is the process of making dirty money look clean. Organized crimes such as arms trafficking, smuggling, human trafficking, embezzlement, tax fraud, bribery, drug trafficking and prostitution will generate huge amounts of money. Therefore, criminals must find a way to convert the origin from illegitimate to a legitimate source before the authorities can determine the true origin of the money. Fraudsters do this by hiding resources, converting form and transferring money to different spaces where they are less likely to attract attention authorities. Money laundering has three states
1. Placement: the introduction of illegal proceeds into the fiscal system,
2. Layering: separating illicit money from its source by layers of financial transactions a
3. Integration: giving legitimacy to illicit wealth by re-entering the economy.
The Financial Action Task Force (FATF), an intergovernmental body based in Paris, defines money laundering as:
- Conversion or transfer of property knowing that it is a crime
- Concealing or concealing the true nature, source, location, disposition, movement, rights with respect to property or ownership of property.
- Acquisition, possession or use of property, knowing at the time of its acquisition that it comes from a criminal offense or participation in a criminal offence.
In 1998, the International Monetary Fund estimated the total size of money laundering to be between 2% and 5% of the world’s gross domestic product (GDP), ranging from US$590 billion to US$1.5 trillion. Money obtained from criminal activity is processed into legal forms of investment without the attention of legal authorities. One form of legal investment where there is a high probability of money laundering is “real estate”[2].
Abuse in the real estate sector has the adverse effect of political, institutional and economic destabilization. Due to the international nature of the real estate market, it is also very difficult to identify real estate transactions linked to money laundering and terrorist financing. Buying or selling real estate is one of the largest financial transactions a family or individual can make, and changes in real estate prices have a major impact on the considerations of potential real estate buyers and sellers. Fluctuations in real estate prices affect decisions about where to live and work, in addition to an owner’s net worth. Moreover, to the extent that property values affect rents, this effect is reflected in the distribution of wealth between landlords and tenants. Finally, real estate prices significantly affect the construction industry. All of these factors together suggest that house price fluctuations can affect economic activity and price stability by affecting aggregate supply and demand, income distribution, and household debt decisions.
How Money Is Laundered
Real estate is not covered by the Anti-Money Laundering Act but plays a significant role in integrating funds into the Indian economy. Although the money laundering regulations do not directly cover the real estate sector, they do cover transactions in financial institutions. Investments in real estate, joint ventures, and financing are made through the banking system.
The land is a channel for laundering dirty cash. The proceeds of corruption go largely into the land and structures built on that land. The unstructured growth of this sector has not only affected economic life and urbanization but has created environmental problems in various Indian cities. Since building construction requires no skill other than networking with vendors, all major political exposures are interested in real estate[3].
The real estate sector is often used in money laundering for the following reasons:
- real estate can be bought for cash;
- beneficial ownership can be disguised;
- real estate is a safe investment with good potential for value increase.
Money laundering occurs with large amounts of money. Criminals are trying to launder large amounts of money that cannot buy cash. Real estate is one of the sectors where big money is used the most. Some common methods include, but are not limited to:
- Investing illicit money in real estate for purchase or sale, for renovations and improvements, etc.
- Structuring cash deposits across different banks/branches to avoid triggering a threshold transaction when purchasing a property.
- Price manipulation eg overvaluation, undervaluation, reverse trading or multiple purchases and sales in a short period of time.
- Purchase of real estate to facilitate other criminal activity such as drug production, the income thus generated can then be used to purchase further real estate to disguise the original source of funds.
- Use of front companies eg shell corporations, trusts etc. to hide true ownership and criminal links.
- Using third parties or family members with no criminal record as the legal owner to avoid direct involvement in the money laundering process.
- Use of loans and mortgages (eg one-off cash payments to integrate illegal funds into the economy, money laundering method with loan repayment).
- Use of professional facilitators (eg real estate agents, lawyers, accountants, etc.) to complicate the money laundering process.
- Rental income for the purpose of legitimizing illegal funds.
- Investments by criminals living overseas to hide assets and avoid confiscation by authorities in their home countries.
- Use of offshore lenders.
A money launderer introduces his illegal wealth into the financial system during the initial stage of money laundering – or placement. This can be done by splitting large amounts of cash into smaller, less visible amounts that are then placed directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then withdrawn and transferred to accounts elsewhere[4].
The second – or layering – stage begins after money enters the financial system. A money launderer at this stage engages in a series of conversions or movements of money to separate it from its source. Money can be channeled through the buying and selling of investment instruments or simply sent through a series of accounts in different banks around the world. This widespread use of money laundering accounts is particularly common in jurisdictions that refuse to cooperate with anti-money laundering investigations. A launderer can disguise transactions as payments for goods or services, giving them a legitimate appearance in some cases.
After successfully processing its illicit wealth in the first two stages, the gingerbread man moves into the third stage, integration, where the money is reintegrated into the legitimate economy. The money could be invested in real estate, luxury property or commercial ventures by a money launderer.
Targeting the money-laundering part of illegal activity and depriving criminals of their ill-gotten wealth, on the other hand, means hitting them where they are most vulnerable. Criminal conduct ceases if there is no profit to be made from it.
Materials And Methods
Statement of the Problem: The real estate industry is one of the vital and necessary industries because it affects a wide range of people [13-30]. The price bubble and variations drive away retail investors and need-based buyers. If laundered money is invested in this sector, prices will rise more than demand, creating fictitious demand and thus a false boom in the market. Common people are also unknowingly involved in real estate money laundering through their activities like underestimating property registration costs, tax evasion etc. Money laundering awareness among people is assessed in this paper with reference to 1 million population of Noida, Uttar Pradesh state India. According to National Housing Bank India’s Residex index, real estate prices in Chennai have increased by 400% since 2007. This increase is of no fundamental importance. The causes of this increase analyzed with respect to money laundering are therefore intrusions.
Objectives of the study:
- To investigate the awareness of the people of India about real estate money laundering.
- To study the possible ways in which money laundering occurs in real estate.
- To examine the statutory provisions for combating money laundering in India and suggest measures[5].
Hypotheses:
- There is no link between education and money laundering awareness.
- There is no relationship between age level and buying and selling real estate.
- There is no relationship between tax payment method and capital gains tax awareness.
Scope of study:
Although the concept of money laundering in India is new and unknown to the common people, it indirectly affects the common people in several ways. This study insists on the urgent need to spread money laundering awareness among the common people. This study looked at the real estate sector which is a basic necessity for all people. The intrusion of money laundering into the residential sector is seriously damaging the economy of middle-class salaried people. The observations obtained from this analysis could be applied to other sectors with appropriate changes in variables.
Study restrictions:
Respondents were not required to provide truthful information on tax payments and real estate transactions as this data was sensitive.
The real estate boom of a place depends on the nature of development, local government policies, income level of local people, etc. Thus, the findings need to be modified before being applied to other cities around the world.
Anti-Money Laundering System
The Financial Action Task Force (FATF) was created at a 1989 G-7 Summit to coordinate efforts to combat money laundering, originally as part of the war on drugs approach of following the money associated with the drug dealers. Corruption and other predicate crimes were added over the years, and terrorist financing was added after 9/11. The original 16 members have now expanded to 38 countries and regional organizations, which cover most of the world. Canada is a founding member. The FATF maintains comprehensive standards for anti-money laundering and activities to combat terrorist financing. It also undertakes mutual assessments together with its members on a regular basis to evaluate compliance with standards and effectiveness of practices[6]. FATF provides an internationally agreed framework for undertaking AML activities, recognizing the legal and cultural differences among countries. Current FATF standards, last updated in 2012, are based on 40 recommendations13 that cover:
- policy setting and national coordination
- criminalizing money laundering and confiscation of proceeds
- terrorist financing
- preventive measures
- transparency and beneficial ownership disclosure
- powers and responsibilities of government agencies involved in AML
- international coordination.
How can AML officers counter real estate money laundering?
Together with gatekeepers, compliance and AML officers in financial institutions are an important line of defence for countering this phenomenon. Below are a series of tips to help them identify red flags in relation to the real estate sector[7]:
- Shell companies and similar corporate vehicles: If a company, or another corporate vehicle, is buying property, make sure you understand the structure of the entity and who is behind it. Check in the Panama Papers database, or other databases for financial data leaks, if the company, or any of its beneficial owners, appear there. Be extremely wary of shell companies and have a non-acceptance policy towards them.
- Cash: If applicable to the laws of your jurisdiction, be also wary of individuals looking to buy property using cash. Investigate where the funds come from. Is the person using their account as a funnel account? Did they receive the money from a third-party? These are all questions that need to be verified and that could trigger a suspicious activity report (SAR) towards your local FIU.
- PEPs: A similar kind of investigation should be carried out on family members or close associates of PEPs looking to buy real estate. A PEP may use a third-party to buy property under someone else’s name when in fact they are the true but hidden owners. This can also happen with shell companies owned by PEPs.
- Income vs property value: When an individual is acquiring a property, check if their income justifies the kind of real estate they are buying. If a person with a low salary is buying a luxury apartment, investigate further to understand the origin of the funds and send an SAR to your local FIU.
- Geographic distance: If an individual or a company is acquiring real estate in a country or an area of the jurisdiction they reside in where they have no business or connections, this could be seen as a red flag.
It is only through the knowledge of risks and money laundering methods that AML professionals can help to counter the criminal use of the real estate industry.
CONCLUSION-
Money laundering among ordinary people occurs knowingly and unknowingly in several ways. When registering the property, the value is listed below the actual price. This difference in price bypasses the tax and this money is spent somewhere legally, leading to money laundering at a miniaturized level. However the real estate regulation and development act 2016 has tried to regulate the real state sector it has ignore the risk of money laundering in real estate and have not paid much attention to the topic. The real state sector is also not directly under the ambit prevention of money laundering act 2002 but the act makes its reach through certain other notifications one of these notifications one is categorising real state agents as reporting agencies under prevention of money laundering act. However the fact cannot be denied that Rera has brought much documentation and standardisation in the field of real estate which is some how going to effect the scale of money laundering in the sector but there are still scope to do much better. This can also be done on regional basis by the state because registration of property is usually the business of the state. KYC from the buyers, frequent revision in circle rate according to market price to control unwanted manipulation in prices of property, ban on cash dealing, proper implementation of existing framework of real state regulation and development act are some of the methods which can be used for curbing money laundering in real estate sector.
BIBLIOGRAPHY:-
1. https://investopedia.com/terms/m/moneylaundering.asp
2. https://fatf-gafi.org/faq/moneylaundering/
3. https://indiaforensic.com/certifications/video-learning/laundering-real-estate/#:~:text=Purchase%20of%20properties%20to%20facilitate,and%20links%20to%20criminal%20activity
4. Asian Development paper, 2003.Manual on countering money laundering and the financing of terrarism.
5. https://www.scconline.com/
6. https://www.legalserviceindia.com/
7. https://www.lexisnexis.com/en-us/gateway.page
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[1] https://www.fatf-gafi.org/faq/moneylaundering/.
[2] https://www.investopedia.com/terms/m/moneylaundering.asp.
[3] https://indiaforensic.com/certifications/video-learning/laundering-real-estate/#:~:text=Purc.
[4] Asian Development paper, 2003.Manual on countering money laundering and the financing of terrarism.
[5] Asian Development paper, 2003.Manual on countering money laundering and the financing of terrarism.
[6] http://brigitteunger.nl/wp-content/uploads/2019/06/6792_Combatting_MoneyLaundering_Report_FINAL.pdf
[7] https://pideeco.be/articles/how-is-real-estate-used-money-laundering-am.
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