Strengthening Anti-Money Laundering Efforts in the Real Estate Sector

The real estate industry is set to face tighter regulations with the introduction of the new Anti-Money Laundering Regulation (AMLR). As one of the sectors considered highly vulnerable to money laundering (ML) and terrorism financing (TF), real estate businesses in Malta and across the EU will be required to implement enhanced compliance measures.

The new Anti-Money Laundering Regulations (AMLR) recognises both the vendor and purchaser as ‘customers’ in property transactions. This classification brings with it the requirement to conduct customer due diligence (CDD) to verify identities, sources of funds, and beneficial ownership. The regulation extends to lettings where the monthly rent exceeds EUR 10,000, regardless of the payment method. Importantly, CDD must be carried out after an offer is accepted but before any funds or property are transferred, ensuring that risks are adequately managed early in the transaction process.

For high-value transactions exceeding EUR 5 million, specific enhanced due diligence (EDD) measures will be required, targeting higher-risk scenarios with more stringent checks. One of the key changes for the EU will be the harmonisation of the definition of beneficial ownership across EU Member States, reducing the ownership threshold to 15% in high-risk situations. Additionally, the definition of politically exposed persons (PEPs) will be broadened to include siblings of PEPs, recognising their potential influence and risk.

The Supranational Risk Assessment (SNRA) and Malta's National Risk Assessment (NRA) identify the real estate sector as having a very-high risk for both ML and TF. The main ML typologies for the sector include the use of cash in mortgage payments, leasing, renovation costs, and laundering money through property transactions. According to Malta's NRA, the residual ML risk level for real estate is categorised as Medium-High, reflecting persistent vulnerabilities despite ongoing compliance efforts.

The Financial Intelligence Analysis Unit (FIAU) conducted a thematic review in 2023, focusing on the sector's adherence to anti-money laundering and counter-terrorism financing (AML/CFT) standards. The review evaluated risk management practices, particularly the application of the risk-based approach (RBA), CDD, and measures taken by notaries and real estate agents.

A number of areas for improvement emerged from the findings:

While most entities had CRA procedures, 40% lacked clarity on when the assessment should occur, with 83% conducting the CRA between the promise of sale and the final deed. Notably, 18% of the reviewed CRAs assigned inappropriate risk ratings, often underestimating risks associated with factors like high-value properties or PEP involvement.

Generally, compliance with customer identification requirements was satisfactory. However, two cases highlighted a lack of awareness regarding the need to verify all parties' identities, including vendors. Some entities went beyond necessary measures, collecting extra identity documents not required by the risk profile, while one failed to apply sufficient measures.

The review found that SOW and SOF documentation was often adequate. Yet, 28% of cases collected excessive information that did not address specific risks, and 11% had insufficient documentation, leaving vulnerabilities in mitigating ML/FT risks. Common issues included vague descriptions of funding sources, such as stating "self-employed" without specifying the industry or failing to document third-party contributions.

All reviewed entities had formal AML/CFT policies; but these were sometimes too generic, and did not clearly explain the measures, policies, controls and procedures to be implemented to address the risks identified in the BRA.

Some notaries and agents who relied on consultants struggled to show a deep understanding of the measures and their application.

While 80% of subject persons had measures for identifying PEPs, only 60% had written procedures for managing PEP-related risks. In 23.5% of transactions involving PEPs, EDD measures were insufficient, indicating a need for greater vigilance.

The thematic review highlights the need for real estate professionals to strengthen their AML/CFT frameworks, particularly in high-risk scenarios. Proportionate CDD measures, better-targeted risk assessments, and ongoing training are essential to protect the sector from misuse for illicit purposes. Real estate agents, notaries, and other sector stakeholders must refine their practices continuously to meet evolving regulatory expectations and safeguard against ML/TF threats.

The adoption of AMLR will bring significant changes to the real estate sector, emphasising the importance of risk management and compliance. By adapting to these new requirements, the industry can contribute to a more secure and transparent property market.

To help you navigate the new AMLR requirements and address the findings from the FIAU’s thematic review, we offer a comprehensive suite of AML/CFT services. These include gap analysis assessments on existing AML/CFT frameworks, advisory services, updates to policies and procedures and training.

We are also able to aid your staffing needs by providing additional professional experience and resources to your AML/CFT and financial crime teams and drive the necessary change within your teams.