Money Laundering Prevention in Real Estate: Why, How and When?
As is known, due to legislation, brokers and real estate agencies also need to investigate the origin of funds related to transactions more thoroughly than before. What does the money laundering prevention process entail, to what extent are the rules being followed, and how should a broker verify a client's background – these and other questions were addressed by Urmas Pai, head of the supervision department at the Financial Intelligence Unit (FIU).
Why and when do brokers and notaries need to identify individuals and clarify sources of income?
This obligation is imposed on individuals by the Money Laundering and Terrorist Financing Prevention Act (MLTFPA). The broader purpose of the law is to ensure the transparency and reliability of Estonia's financial system. In simpler terms: compliance with the law's requirements should reduce the risk that Estonia's financial system would be used for money laundering or terrorist financing. To achieve this, the law establishes certain obligations for various persons, including the obligation to verify personal identity and establish the origin of assets, as already mentioned by you. These and other due diligence measures generally apply when establishing a business relationship, conducting individual transactions (outside a business relationship) exceeding 15,000 euros, updating data, or in case of suspicion of money laundering or terrorist financing (the law provides for several exceptions, but the above constitutes the general principle).
What does the money laundering prevention process look like in the real estate sector?
To prevent money laundering, the legislator has foreseen at least two groups of obligated entities with certain obligations in conducting real estate transactions. These entities are real estate transaction intermediaries and notaries. Understandably, not every real estate transaction involves an intermediary, but every transaction is certified by a notary (in case of sales). To prevent money laundering, both persons must take certain measures as required by law in specific cases, and most importantly, this process must be carefully considered in the entity's or notary's internal procedures (designating responsible parties, actions, principles, etc.). Based on their different positions, they must also comply with the law's requirements, which have certain differences.
What are the respective roles of the broker, client, and notary in this regard?
The roles of the real estate intermediary and notary are different already because one performs their activities in the form of official actions, while the other provides a free market service. Nevertheless, it must be kept in mind that the obligations arising from the law must be fulfilled regardless of whether any other obligated entity is already doing so. It is natural to assume that if a money laundering suspicion is detected by the real estate broker, such a transaction would not reach the notary for certification purposes (sales transactions). However, in the case of rental transactions, where notary participation is not required, the effective actions of the real estate intermediary in fulfilling the law's requirements are particularly important to achieve the law's purpose (detecting suspicion, verifying it, and if necessary, applying risk measures).
How should a broker verify a client's background and data?
To verify a client's background (applying due diligence measures), there are generally three options: verify submitted documents, obtain explanations from the individual directly, and use publicly available sources (usually the internet).
To what extent are money laundering prevention rules actually being followed in the real estate market?
The FIU would like to believe that this is done carefully, but during the supervision proceedings we have conducted, we have identified numerous deficiencies and have been forced to prosecute offenses due to violations in this sector.
How and to what extent does the Financial Intelligence Unit supervise real estate agencies?
The FIU conducts its supervision proceedings according to a risk-based supervision plan, but there can always be situations where an extraordinary supervision proceeding needs to be initiated. We have conducted supervision proceedings in larger real estate mediation offices, and as mentioned, we have identified deficiencies in several offices. Whether and to what extent their activities have been improved, we can determine after conducting additional supervision proceedings. However, we can say that the sector shows a desire to become familiar with the regulations and bring their activities into compliance with the requirements.
Is there a plan to assist brokers and real estate companies more than before from a money laundering prevention perspective? In other words, do you see any opportunities to reduce the administrative burden on brokers and real estate companies in this regard?
I must admit that assistance with complying with the law's requirements has been repeatedly sought from us in the sector, and of course we have been happy to provide it. We have met with umbrella organizations to discuss these issues, have conducted sector-specific training at their request, responded to numerous clarification requests, appeared on the radio, etc. Rather, we see that such intensive sector assistance cannot continue due to resource constraints, as other groups of obligated entities also require attention. But regardless of this: we assist as much as possible.
What do you recommend to brokers regarding their contribution to money laundering prevention?
Part of an obligated entity's necessary diligence involves keeping up to date with applicable regulations and carefully considering and documenting the procedures of one's enterprise or official activities by designating activities and responsible parties in relation to the various obligations set out in the law. From time to time, it is worthwhile to look for more recent information about money laundering risks that may be circulating in the sector.
Article source: Kaanon
