Industries: Real estate agents

Real estate agents will be subject to a number of anti-money laundering (AML) and counter-terrorism financing (CTF) measures under the second stage of the Federal Government's new AML legislation.

• Vulnerability of real estate agents to money laundering
• The Anti-Money Laundering and Counter-Terrorism Financing Act 2006
• Industry concerns

Vulnerability of real estate agents to money laundering

According to the Financial Action Task Force (FATF), the growth of AML regulation and advances in technology have led to money launderers using increasingly complex commercial arrangements that require the services of professionals outside the financial services industry, including real estate agents. In order to prevent launderers and financiers of terrorism from targeting unregulated businesses, the FATF's Forty Recommendations on AML and its Nine Special Recommendations on counter-terrorist financing (collectively the FATF Recommendations) impose significant obligations on real estate agents.

By the nature of the services they provide, FATF considers real estate agents vulnerable to money laundering and terrorism financing. It has, for example, identified investment of illicit capital in real estate as a classic method of laundering. This investment is often made by way of chain transactions in real estate to disguise the source of funds or by investment in tourist or recreational real estate complexes that provide the appearance of legality.

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The Anti-Money Laundering and Counter-Terrorism Financing Act 2006

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the Act), which came into effect in December 2006, represents the first tranche of the Government's AML/CTF reforms (which are intended to bring the Australian AML/CTF regime into compliance with the FATF Recommendations).

The Act sets out the primary obligations of providers (these are known as reporting entities) of certain activities (known as designated services). The Act lists more than 70 types of designated services which cover the financial services, gambling and bullion sectors.

The second tranche of the reforms will introduce radical changes for the real estate industry by applying the Act to real estate agents.

The Act (the first tranche of which will be implemented in stages over a two-year period) will be supplemented by Regulations (mainly technical in nature), AML/CTF Rules (which will contain the practical operational detail of the AML/CTF regime and have legislative force), and Guidelines (which will not be legally binding and which are intended to assist those businesses affected by the Act to interpret their obligations and are anticipated in time to represent a 'best practice' approach for reporting entities).

Generally, the Act and AML/CTF Rules implement a risk-based approach to compliance. This approach recognises those businesses affected by the Act are best placed to assess and mitigate their money laundering and financing of terrorism (ML/TF) risk and should allow those businesses to concentrate their resources on areas where their ML/TF risk is higher.

The timetable for the second tranche is not yet settled, although the Government did indicate in November 2006 that work on the second tranche would start after implementation of the first tranche had commenced (that is, in December 2006). It is understood that drafting on the second tranche had commenced by January 2007.

Who is affected?

The FATF Recommendations apply AML/CTF obligations to real estate agents when they are involved in transactions for clients in the sale or purchase of real estate. This would exclude certain categories of real estate business such as leasing arrangements. The Government did indicate¹ that it might take a broader view of real estate activity and extend the AML/CTF regime to other real estate activities (but subject to the application of a risk-based approach).

The real estate industry has been asked to comment on the scope and application of AML requirements to real estate activities. 

Core requirements

Core requirements that will affect real estate agents are likely to include customer due diligence (CDD), suspicious matter reporting, development of – and compliance with – an AML/CTF program and record keeping.

AAR has commented in detail on some of these core requirements in Focus publications (22 December 2005, 27 July 2006, 3 August 2006, 2 November 2006, 17 November 2006, 8 December 2006 and 14 December 2006).

Customer due diligence

Under the new regime it is likely that real estate agents will be required to:

• identify and verify clients when establishing business relations using reliable and independent source documents, data or information (including, where appropriate, electronic verification);
• re-verify identity where there is a suspicion of money laundering or terrorism financing or doubts about whether the client is who they claim to be;
• in some cases identify beneficial ownership arrangements involving corporate clients and take reasonable measures (including the use of disclosure certificates) to verify their identity; and
• where appropriate, conduct ongoing due diligence and transaction monitoring throughout the business relationship to ensure transactions are consistent with the business' knowledge of the client.

Consistent with a risk-based approach, the level of CDD required may be less where the risk of money laundering or terrorism financing is lower; the information on clients or beneficial owners is publicly available; or where adequate checks and controls exist elsewhere.

Record keeping

Real estate agents will be required to collect information concerning, and retain records of, their clients' identity and their ongoing activities. The Government has said that this information will need to be kept in a consistent format to allow ready access by regulatory agencies, but has indicated that consistent record keeping format requirements will be developed in consultation with industry.

Reporting

It is anticipated that the suspicious matter reporting regime in the Act will be extended to real estate agents. Real estate agents will be required to make a report to the Australian Transaction Reports and Analysis Centre (AUSTRAC) if they suspect on reasonable grounds that a client is not who they claim to be or that information about the provision (or prospective provision) of a designated service may be relevant to tax evasion, a criminal offence, proceeds of crime or a money laundering or terrorism financing offence.

What is suspicious in one transaction may not be suspicious in another. The use of large cash payments to settle a sale or purchase is an example of a suspicious cash transaction. The payment of a cash deposit under a contract and then the cancellation of the contract for no apparent reason would be another. The real estate sector has been asked to comment on the scope for risk-based suspicious activity reporting based on particular patterns of behaviour.

It will be an offence to tip off a client to the fact a report has been made.

AML/CTF program

The Government has indicated that real estate agents will be required to develop internal AML/CTF procedures and guidelines and ensure adequate AML/CTF staff training.

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Industry concerns

In its submissions to Government on the proposed reforms, the Real Estate Institute of Australia (the Institute) supported the development of a regulatory model that would:

• build upon the extensive regulatory framework already in place for real estate agents;
• meet AML/CTF requirements; and
• allow the industry to conduct business within a risk-based environment of reasonable business practices.

It expressed concern, however, that the real estate industry does not have the resources to develop, implement and enforce an industry AML/CTF code.

The Institute also took the view that extending coverage of AML/CTF obligations to all clients and transactions would be unduly onerous and impractical. The implementation of risk-based procedures would be more reasonable but the Institute has pointed out that the real estate sector has neither the resources nor the information base to identify those individuals or transactions who might pose a money laundering or terrorist financing risk.

Specifically, it has suggested that CDD requirements should apply only to high-risk clients. It has recommended the real estate agency rather than the individual real estate sales person should have responsibility for reporting suspicious transactions.

The cost of compliance is also a matter of serious concern for the real estate industry, particularly for smaller businesses. Specifically, the Institute has said that with 73 per cent of real estate agencies employing less than ten people, it is essential that a balance be achieved between the requirements for financial reporting and the operational capacity of small businesses to fulfil those requirements.

The Government appears to have recognised this in that it has indicated that the second tranche will be tailored to meet the particular needs of the small business sectors to which it will apply.

The Institute's submissions to the Government on the proposed reforms can be found at http://www.reia.com.au.

Footnote

1. In its issues paper on AML reform for the real estate industry.

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