The Financial Crimes Enforcement Network (FinCEN)–which safeguards the U.S. financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity–last week released “Suspected Money Laundering in the Residential Real Estate Industry: An Assessment Based Upon Suspicious Activity Report Filing Analysis,” a new report that identifies several transactional typologies and associated illicit activities that may be perpetrated by individuals or groups seeking to launder funds via residential property transactions.

The study appears to confirm an increase in the number of suspicious activity reports (SARs), indicating suspected money laundering in the real estate industry which tracks closely with the past expansion of the real estate market, especially in 2004 and 2005. Previous FinCEN studies concerning mortgage loan fraud and money laundering in the commercial real estate industry confirmed similar trends. However, in contrast to criminals seeking to profit by committing mortgage fraud, those who seek to launder money through residential real estate generally intend to make timely payments and seek to make their transactions appear as unremarkable as possible in order to disguise the source of their funds.

Laundering money through residential real estate involves turning the proceeds of crime into the use or ownership of real property assets. For example, a criminal may use illicit funds to outright purchase or to make monthly rental payments on real property. Internationally, these laundering techniques are well known. FinCEN’s report shows that U.S. financial institutions have been able to identify some possible instances of money laundering through residential real estate. The report is intended to help raise awareness of the vulnerability and assist financial institutions to better recognize risk and thus provide better information to law enforcement in order to combat criminal activity.

In some cases, according to the new report, laundering money through residential real estate was found to support tax evasion, fraud and identity theft.

Though SAR narratives reporting suspicious activity associated with the residential real estate industry are relatively common, only about 20% of such filings reportedly describe suspected structuring and/or money
laundering, and of those, only about 11% described any other suspected illicit activity including tax evasion, fraud, or identity theft. Specifically, illicit activity related to tax evasion included:

• cashing checks payable to businesses and the diversion of cash business receipts in a manner possibly designed to evade taxes.
• misusing the tax exempt status of organizations to conduct real estate-related businesses and disguise the profits as contributions.

Various types of fraud and identity theft were reported, including:

• check kiting on real estate investment accounts
• real estate investment accounts used to promote a potential pyramid scheme
• fraudulently acquired state and federal tax refunds laundered through mortgage trust accounts
• mortgage loans granted on the basis of fraudulent appraisals
• identity theft employed to drain the balances of home equity line of credit accounts and to layer illicit proceeds from money laundering activities

Over 75% of the entities suspected to be involved in residential real estate-related money laundering were identified as individuals unaffiliated with residential real estate-related businesses. For example, launderers may use multiple nominees or straw buyers to secure numerous mortgages on various residential properties, thereby creating a means for the conversion of illicit cash into real property while projecting the appearance of many unrelated mortgages paid on a regular and timely basis.