Real estate transactions top a global list of financial activities deemed most likely to provide cover for money laundering or terrorist financing. Recently released guidance from the Financial Action Task Force (FATF) — the intergovernmental entity that has developed recognized global standards for anti-crime vigilance in the financial system — focuses on the role legal professionals can play in either enabling or disrupting criminal efforts, and offers advice for interpreting and responding to clues that clients have nefarious intent.
Some of the identified suspicious real estate antics include: cash, crypto currency payments or other unusual means of payment, such as precious metals or gems; repayment of mortgages significantly in advance of maturity dates; transfer of assets between parties within a short time period for no discernible reason; or acquiring an asset then rapidly using it as collateral for a loan. However, many other hints of potential malfeasance are not obvious and/or appear more ominous when they are part of a pattern of questionable conduct.
A representative from Canada’s Department of Finance was among FATF members from nine nations and two multinational organizations involved in drafting the document, which outlines an approach to manage and mitigate risk. A six-step checklist — recommended as particularly pertinent for small law firms and sole practitioners — urges legal professionals to: scrutinize their clients; clarify clients’ commercial or personal reasons for requesting action; be aware of actions that have the potential to facilitate money laundering; look for obvious red flags; have a response protocol if red flags arise; and document everything.
“Due to the nature of services that a legal professional generally provides, automated transaction monitoring systems of the type used by financial institutions will not be appropriate for most legal professionals,” the FATF guidance acknowledges. “Although individual legal professionals are not expected to investigate their client’s affairs, they may be well positioned to identify and detect changes in the type of work or the nature of the client’s activities in the course of the business relationship.”
A shorter list of 23 dubious activities characterized as red flags is annexed to the guidance document, but it follows after extensive chronicling of several dozen potential signals of risk. “Any one of the factors discussed in this Guidance alone may not itself constitute a high-risk circumstance, but the factors should be considered cumulatively and holistically,” it reiterates.
Country/geographic risks relate to the origin and destination of the funds and assets in a transaction. These include: countries credibly believed to provide support for terrorist activities or a haven for corruption and organized crime; countries with notably weak regulatory regimes; or countries subject international sanctions or embargoes.
Client risks arise when the beneficial owner of an asset is unclear. Legal professionals are advised to be wary of: unusual or irrational instructions; lack of transparency; deals that seem disproportionate to purchasers’ resources or inconsistent with their stated business concerns; reliance on financial intermediaries or alternative financing; and demands for an unduly rapid transaction, reluctance to obtain required regulatory approvals or other indications of attempts to avoid oversight.
Transaction/service risks are tied to the specifics of the deal. Much of this flagged suspicious activity overlaps with client risks. In both cases, the guidance document underscores the risk of inadvertently providing a guise of propriety. “Legal professionals may in practice represent or assure the client’s standing, reputation and credibility to third parties without commensurate knowledge of the client’s affairs,” it warns.
The guidance document also provides a breakdown of standard, simplified and enhanced processes for vetting clients. That calls for consideration of risks and associated mitigating factors before taking on the client’s business, as well as throughout a continuing business relationship if or when scrutiny is considered necessary. Each step of the process should be documented and kept in the client’s file.
“Where the legal professional is unable to comply with the applicable client due diligence requirements, they should not carry out the transaction nor commence business relations, or should terminate the business relationship and consider filing a suspicious transaction report in relation to the client,” the guidance document states.