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Money laundering methods

An examination of domestic and international money laundering cases reveals some common methods of money laundering through real estate:

In Australia, criminals are known to use a combination of these methods to launder illicit funds through real estate.


Method 1 – Use of third parties

To avoid direct involvement in the money laundering process, criminals may seek to buy property using a third party or family member as a legal owner. Criminals provide illicit funds to a third party to purchase real estate on their behalf. In some cases, third parties may be 'cleanskins' – complicit third parties who have no criminal record.

Criminals may use a third party's bank account to deposit and withdraw illicit funds to buy property. Alternatively, criminals may use third parties to transact on their behalf. The use of third parties distances criminals from the illicit funds, disguises ownership and complicates asset confiscation efforts by authorities.

Case study 9 in the AUSTRAC typologies and case studies report 2010 provides an example of the use of a third party to buy property.

Instances have been reported of individuals providing false employment and income documentation to financial institutions in support of home loan applications.(8)

Case study 39 in the AUSTRAC typologies and case studies report 2007 highlights the use of false documents and references in support of loan applications to buy real estate.

Method 2 – Use of loans and mortgages

Criminals use loans or mortgages to layer and integrate illicit funds into high-value assets such as real estate. Loans or mortgages are essentially taken out as a cover for laundering criminal proceeds. Lump sum cash repayments or smaller 'structured' cash amounts are used to repay loans or mortgages (9). This allows illicit funds to be commingled with legitimate funds. 'Loan-back' schemes are an example of this method.

Loan-back schemes involve criminals borrowing their own illicit funds. Foreign offshore companies controlled by criminals are used as an apparently 'arms-length' lender. The loan is then used to buy real estate and repayments are made using illicit funds. This process hides the true nature of the funds and gives the loan repayments an appearance of legitimacy.

Case study 28 in the AUSTRAC typologies and case studies report 2009 illustrates the use of a mortgage to launder money through real estate.


Method 3 – Manipulation of property values

Manipulation of property values involves criminals buying and selling real estate at a price above or below market value. Buyers, sellers and/or third parties (for example, real estate agents) collude to under or overestimate the value of a property. The difference between the actual and stated values is settled with undisclosed cash payments.

Part A – Under-valuation

Under-valuation involves recording the property value on a contract of sale which is less than the actual purchase price. The difference between the contract price of the property and its true worth is paid secretly by the purchaser to the vendor using illicit funds. The criminal (purchaser) is able to claim that the amount disclosed in the contract as having been paid is consistent with their legitimate financial means. If the property were sold at the market or higher value, the apparent profits would serve to legitimise the illicit funds. This method is also used to pay less stamp duty. The lower a property value, the less stamp duty payable.

Case study 9 in the AUSTRAC typologies and case studies report 2012 illustrates the under-valuation of real estate.

Part B – Over-valuation

Criminals may overvalue real estate with the aim of obtaining the largest possible loan from a lender. The larger the loan, the greater the amount of illicit funds that can be laundered to service the debt. When applying for a loan, criminals may submit false documentation about the true value of the property. The loan and interest is then repaid, either as a lump sum payment or in instalments, using illicit funds.

Part C – Successive sales at higher values

Criminals may further confuse the audit trail by reselling property in quick succession. The property is sold at a higher value, either to related or acquainted third parties, or to companies or trusts controlled by the criminal. This gives an appearance of seemingly legitimate profits while the criminal maintains ultimate control over the property.

Case study 39 in the AUSTRAC typologies and case studies report 2007highlights the use of this method.


Method 4 – Structuring of cash deposits to buy real estate

The deliberate structuring of cash deposits has been observed in money laundering through real estate (10). Criminals deposit cash below the AUD10,000 reporting threshold, often at different banks or bank branches, to avoid triggering threshold transaction reports to AUSTRAC. This method often involves high volumes of transactions to numerous accounts to avoid detection. The funds are then used to obtain bank cheques to buy real estate.

Case study 9 in the AUSTRAC typologies and case studies report 2012involves the buying of property partially financed through a series of structured cash deposits.


Method 5 – Rental income to legitimise illicit funds

Criminals lease out properties to generate rental income. In an effort to legitimise illicit funds, criminals provide the tenant with illicit funds to cover rent payments, either partially or in full. Criminals can also deposit their illicit funds into an account as 'fictitious' rent which gives the appearance of legitimate rental income. These illicit funds disguised as 'rental payments' are deposited on a regular basis or in advance. In doing so, criminals commingle legitimate rental income with illicit funds and successfully integrate illicit funds into the financial sector.

Criminals may also buy property in a third party's name and pay that third party rent using illicit funds. By 'renting' their own property via a third party, criminals can disguise illicit funds and ownership. 


Method 6 – Purchase of real estate to facilitate other criminal activity

Criminals may buy property using illicit funds with the intention of conducting criminal activity at the property; for example, cultivating cannabis or producing synthetic drugs. Funds generated from this criminal activity may then be used to buy additional properties. By investing illicit funds in real estate, criminals aim to disguise the original source of the funds.

Case study 1 in the AUSTRAC typologies and case studies report 2010 highlights the purchase of property to facilitate criminal activity.


Method 7 – Renovations and improvements to property

Criminals use illicit funds to pay for renovations, thereby increasing the value of property. Additionally, contractors and tradespeople may not declare cash payments received for the renovations, to evade tax. The property is then sold at a higher price. The use of illicit funds to pay for property renovations enables layering and integration.(11)

Case study 28 in the AUSTRAC typologies and case studies report 2009 shows how illicit cash was used to pay for property improvements.

Method 8 – Use of front companies, shell companies, trust and company structures

Front companies, shell companies, trusts and company structures established domestically or offshore are used to launder money through real estate (12). Property titles held in the name of a company or a shell company distance the criminal from ownership, with control vested in the hands of third parties to avoid any obvious links to criminals.(13)

Case study 28 in the AUSTRAC typologies and case studies report 2009 illustrates the use of a front company to buy property using company accounts.

Method 9 – Use of professional facilitators or 'gatekeepers'

The process of buying real estate in Australia usually involves the services of professional facilitators such as real estate agents and a conveyancer or solicitor.

Professionals such as lawyers, accountants, real estate agents, financial advisers and trust and company service providers are known as 'gatekeepers' because, either wittingly or unknowingly, they can provide an entry point for those seeking to misuse legitimate financial and corporate systems for money laundering.

Services provided by professionals may assist criminals to launder money through real estate by:

  • establishing and maintaining domestic or offshore legal entity structures – for example, trusts or companies
  • facilitating or conducting transactions on behalf of the criminal
  • receiving and transferring large amounts of cash
  • establishing complex loans and other credit arrangements
  • introducing criminals to financial institutions
  • facilitating the transfer of ownership of property to nominees or third parties.

Criminals may use multiple professionals or gatekeepers to further complicate the money laundering process in an effort to avoid detection.

The use of a professional provides a veneer of legitimacy to criminal activity and a buffer between criminals and their financial activities and assets.

Case study 49 in the AUSTRAC typologies and case studies report 2007 is a case where criminals used the services of an accountant to buy real estate.


Method 10 – Overseas-based criminals investing in Australian real estate

Overseas-based crime groups and individuals may buy real estate in Australia using illicit funds to conceal assets from authorities in their home jurisdiction. Criminals may seek to integrate their funds into Australian assets in an attempt to avoid confiscation in their home jurisdiction. Purchases may be funded through overseas-based personal, company or trust accounts. Criminals may also use third parties to buy and sell property to further conceal ownership.


Footnotes

  1. Crime and Misconduct Commission (CMC) (2009), 'Money laundering and organised crime in Queensland', Crime Bulletin Series, no. 11, December 2009, p. 23.
  2. 'Structuring' is a money laundering technique which involves the deliberate division of a large amount of cash into a number of smaller deposits to evade threshold reporting requirements. Under section 142 of the AML/CTF Act, structuring is punishable by up to five years imprisonment and/or fines of up to 300 penalty units. Structuring can also involve the layering of funds for international funds transfers in an effort to avoid the transfers attracting undue scrutiny from authorities.
  3. See fn. 9 for a definition of 'structuring'.
  4. Layering – Moving, dispersing or disguising illegal funds or assets to conceal their true origin (for example, using a series of complex transactions involving multiple banks and accounts, or corporations and trusts).
    Integration – Investing these now distanced funds or assets in further criminal activity or legitimate business, or purchasing high-value assets and luxury goods. At this stage the funds or assets appear to have been legitimately acquired.
  5. Shell company – a company that, at the time of incorporation, has no significant assets or operations. Shell companies can be set up domestically or offshore and the ownership structure of a shell company can take several forms. Shell companies have no physical presence, employees or products and may be owned by corporations, nominee owners and bearer shares, obscuring financial ownership.
  6. Europol has found that shell companies are used to integrate laundered funds through the purchase of real estate. See Europol, EU Organised Crime Threat Assessment: OCTA 2011, May 2011, p. 43.
Last modified: 02/06/2015 10:09