The real estate sector is vulnerable to money laundering. This is due to many factors, including the high value of assets, price fluctuations and speculation within the market, difficulties in assessing the true value of a property and the fact that a legal owner is not necessarily the economic owner.
According to a national assessment of Malta’s financial crime risks made by a committee that includes the police and the Financial Intelligence Analysis Unit (FIAU), the volume of money laundering taking place through the property market could be “significant”. This assessment also argues that the FIAU’s efforts to police the banking sector effectively are being “greatly undermined” by delays in court proceedings. This assessment confirms that more needs to be done to rid Malta of the reputation of not tackling money laundering seriously enough.
Dealing in property gives the appearance of respectability, validity and normality. In the last decade, residential and commercial property development has mushroomed, raising justifiable environmental concerns and economic sustainability. However, regulatory flaws, high pricing and rich investment possibilities also make property dealing an appealing money-laundering opportunity.
Various international organisations, including the European Parliament, the Financial Action Task Force (FATF) and Transparency International, make multiple recommendations to governments on reducing money-laundering risks in the property sector. The local authorities must take these recommendations on board to confirm the commitment to fight money laundering with more determination.
An effective anti-money-laundering system must be risk-based, where the intensity of scrutiny should be proportionate to the perceived risk. It must never be a box-ticking exercise. A young couple buying their first property should not be faced with a long and bothersome process to get mortgage finance.
The red flags that the anti-money-laundering regulation gatekeepers must address should include indications of concealment of property ownership through recourse to third parties.
Another red flag is unusual income (like no income or inconsistency between income and standard of living), unusual rise in financial means, unusual possession or use of assets, or unusual debt on the part of the legal owner.
One of the most worrying weaknesses in the anti-money-laundering process is that professionals involved in the property market, such as real estate agents, lawyers, notaries and some financial institutions, may not be thorough enough in their due diligence scrutiny.
The anti-money-laundering authorities must ensure that ‘fit and proper’ tests for professionals engaging in property transactions are as rigorous as those that apply to senior risk management officials of financial institutions. The consistent supervision of professionals involved in the property market concerning money-laundering risks and the enforcement of the rules is also crucial.
The effectiveness of anti-money-laundering efforts is only as strong as the weakest link in the process of buying and selling property. Robust customer screening and transaction monitoring must be the rock base of efforts to minimise the risk of money laundering. Regulation gatekeepers must constantly understand the difference between, and identifying, the source of wealth and the source of funds.
It may also be the right time to implement a more stringent system where public officials, particularly senior public officials with their close associates, must declare their assets before and after their term of service. The declaration should be publicly accessible, allowing independent officials to verify the accuracy of the statements.
The removal of Malta from the FATF grey list was just the beginning of a process that needs to be reinforced with stricter risk-based initiatives to discourage criminals from using property deals for money laundering.