Money laundering is often thought of as a modern-day white-collar crime, helped along by recent advances in technology. But the methods of concealing the proceeds of crime and keeping them out of reach of law enforcement authorities are far from new.
Indeed, real estate has long been the preferred choice of criminals for hiding ill-gotten gains, and manipulating property prices is one of the oldest known ways to transfer proceeds illegally between parties to a deal. Tax fraud schemes are often closely linked with these activities.
The OECD surveyed 18 countries in mid-2006 to look at how widespread these illegal practices are within the real estate sector and explore possible ways to combat them. The main findings confirm that this sector has been used as a conduit for fraud or illicit financial deals in most of the countries surveyed.
The actual extent of the problem in these countries remains unclear, however–even in those that have processes to systematically identify cases where money laundering and tax fraud are going on in their real estate sectors. None of the countries were able to report official statistics on these activities, despite information on transactions in real estate usually being more readily available than in other sectors. This may be explained by the rapid rise in these transactions overall over the past decade, with many countries having experienced a property boom.
Aside from manipulating transaction prices, the most common ways that these nefarious activities are carried out also involve using false IDs, not declaring transactions or gains, and using corporations to disguise the identity of those benefiting, according to the countries surveyed. Some combination of these methods is also sometimes used and can even extend out to a wide circle of individuals.
Take an example. An individual might use cash gained in the first place from illegal activities to buy an urban plot on which to build an apartment block. If, in the agreed deal, the price of the plot is undeclared, the sellers, who may have other projects in construction elsewhere, may use the undeclared cash in a further chain of undeclared or under-invoiced deals involving other parties. To further obscure the transaction, the original sellers might also conduct their dealings via a company owned by “straw men” to disguise real ownership. The buyers might also try to illegally reduce their tax bill by reporting artificial losses to offset the gains from the under-valued sale, all the while hoping that the complexity they have added would reduce the risk of detection.
Real estate is typically a high-value, high-yield investment. This characteristic helps drive the vulnerabilities most often reported by the countries surveyed: the ease with which the value of real estate can be over or under-estimated, its attraction to criminal money, and its potential for hiding actual ownership. Ways of hiding ownership include using offshore companies or complicated ownership structures to make acquisitions, or acquiring properties overseas without reporting them. Another common way to disguise the true owner, especially in a booming market, is “property flipping”, which is basically where property changes hands rapidly in a chain of buying and selling.
Some countries reported examples involving the use of offshore financial jurisdictions. In this case the illicit cash is deposited in a bank account opened in a tax haven. A loan to finance the acquisition of real estate is made by the offshore bank through its correspondent in the country where the purchase is made. The loan is guaranteed by deposits abroad. This means the criminal uses illegal funds under the guise of a loan and may even be able to deduct the interest on that loan from any taxable income.
National authorities tend to use some combination of strategies to uncover tax fraud and money laundering in the real estate sector rather than any single method, the survey found. In fact in a number of countries surveyed, more advanced tools such as data mining–sorting through large amounts of information in databases and picking out relevant information–are used alongside risk analysis. Somewhat surprisingly, none of the 18 countries said that they use electronic tools to search the Internet as a technique for spotting suspicious transactions.
Because the full scope of the problem is not known, an evaluation of the results achieved from the various detection strategies is not always possible. However a number of countries, including Ireland, Mexico and the United States, report that a steady rise in the number of cases investigated can be attributed to the results obtained from previous detection efforts.
The report also covers the “red flag” signs that national tax authorities use to spot tax fraud and money laundering in real estate deals, grouping these in three categories: discrepancies between apparent and reported or recorded data, movement of large amounts of money, and individual behavior. Many of these red flags are waved when a payment happens. Several other red flags are more subtle, reflecting certain attitudes, or simply unusual transactions, such as luxury houses in non-prime locations.
Most of the countries find co-operation across multiple national agencies to be highly important in investigating cases where money laundering and tax fraud are detected, the report says. Automatic exchange of information and data between national tax authorities on real property transactions is still rather new but is growing.
The OECD report gives practical tips to tax authorities on proactive responses to risk management. Many national tax authorities have taken action to promote better tax compliance associated with real estate transactions. This has been done through forums for compliance staff and other educational campaigns, making new information sources available, including databases of real estate transactions; setting up specialised tax teams and other organisational changes; and taking an inventory of properties. It is too early to measure the results of these initiatives, the tax authorities acknowledge. However, combating the abuse of real estate for tax crime and money laundering will continue to be a big priority for them.*The OECD Centre for Tax Policy and Administration co-operates with the Financial Action Task Force, which is the leading international regulatory body on anti-money laundering and counter-terrorist financing, reflecting the substantial similarities between the techniques used to launder the proceeds of crimes and to commit tax crimes.
OECD (2008), Tax Fraud and Money Laundering Vulnerabilities Involving the Real Estate Sector, working paper, forthcoming at www.oecd.org/taxation.©OECD Observer No 266 March 2008