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Money For Corruption and Homes Scott Free

Money For Corruption and Homes Scott Free

Money from corrupt players in Latin America, China and the Middle East are flooding into the US real estate market. Now to be sure, while a lot of the purchases of real estate here by non-US buyers are perfectly legitimate, there is also a quotient of purchases that are being made by narcotics traffickers, parties with suspected ties to terrorism, and other criminals. And whether the purchaser is criminal or not, it’s easy to understand the lure of buying property here in the US based on favorable exchange rates alone.

However, real estate is rife with Due Diligence Failures, particularly concerning source of funds and proper risk management of the parties involved. This is partially true because of a myopic over dependence on credit due diligence as an overriding reliance by mortgage lenders and assumptions that this is an ultra low risk area.   Bankers and lenders are required to file SARs but not so title companies or title or escrow companies.  Add to this buyers coming through lawyers offices and closing through an LLC – and there is NO EFFECTIVE DUE DILIGENCE OR MONITORING.  Sure there are due diligence failures – but is this last case there is no due diligence.

While domestic mortgage is a lower AML risk than let’s say correspondent banking, it is by no means a no-risk issue. Both Domestic and International buyers, with limited or non-existent Due Diligence performed on them, their source of funds, etc. are a particular risk issue we will leave you with three examples:

  1. We have seen several real estate cases where a “seller” faked (forged) documents to enable sale of properties that he did not actually own (we are sure this has never happened before with fake documents, or fraud at a title company or by other parties to a real estate transaction).  In one such event, the fraudster “sold” the properties and promptly converted proceeds into alternative investments (jewelry and/or precious metals) incredibly before the source of funding for such alternative investments were found out. (more on this in the next section of this edition of the Aegis Journal)
  1. We know of several financial institutions that were (and in some cases still are) offering what are referred to low doc or no doc loans – loans which by their nature, limit a financial institution’s ability to perform authentic due diligence on the source of funds, the proper verification of buyer and their employment, and/or the verification of who the parties to the transaction really are and if they are actually who they represent themselves to be. In one instance, between 2%-4% of the cases reviewed in a limited sample of all loan cases issues by a financial institution had “questionable” examples of sources of funding issues (some might even say these were “abnormal” or even “suspicious”).
  1. Over the past several years, there has been an influx of cash buyers from outside of the US where again the source of funds should be examined more closely than actually occurs. I just literally had a friend of mine (who is a real estate agent) advise me that he had a potential buyer from Mexico recently come into his office purporting to have USD $80,000 in cash as a down payment for a property (the buyer literally had the cash on them as I understand the story to be)… now this could be very legitimate or perhaps not, but either way it does indicate the need for more sufficient due diligence.

Add in the risks associated with monies coming into the US banking arena from sanctioned entities through layers of transactions that are designed to obfuscate the true source of funds and/or the growing risks associated with Transnational Criminal Organizations looking to park funds into vehicles like real estate because they don’t need immediate access to such funds, and this becomes a painfully realistic threat. And when you include the complexities of international due diligence and information privacy laws (and the sometimes faulty use of such laws as an excuse not to share information), additional colorful dynamics are constantly being added to the transactional puzzle.

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