MAURITIUS REAL ESTATE AGENTS: MANAGING MONEY LAUNDERING AND TERRORISM FINANCING (ML/TF) RISKS
Section 14C of the Financial Intelligence and Anti-Money Laundering Act 2002 (FIAMLA) requires all Reporting Persons as defined under FIAMLA to register with the Financial Intelligence Unit (FIU) within such time as may be prescribed. Reporting Persons include members of designated professions and occupations (such as estate agents) involved in specific activities. Through a communique issued on 16 October 2020, the FIU reminds real estate agents, including land promoters and property developers, that they have until 6 November 2020 in order to apply for registration with the FIU. Real estate agents, including land promoters and property developers, are strongly advised to seek professional assistance in order to effectively mitigate the possibility of their services being misused for money laundering and terrorism financing (ML/TF), thus safeguarding their reputation, avoiding criminal penalties, while nurturing client relationships and ensuring business continuity and sustainability.
Exposure to ML/TF risks
According to the United Nations, the estimated amount of money laundered globally in any one year is 2-5% of global GDP, or between USD 800 billion to USD 2 trillion. In many parts of the world, the laundering of illicit funds through real estate, both residential and commercial, is a common money laundering method. Large sums of illicit money would be disguised and integrated into the legitimate economy through real estate. Real estate constitutes relatively secure investment whose true ownership may be disguised, which may be purchased to a large extent in cash, whose value can be enhanced, and which can be used both for further profit and for lifestyle reasons. While most money laundering and terrorism financing activities are generally concentrated in the financial sectors, real estate agents, including land promoters, property developers and property managers, are finding themselves under heightened scrutiny as they are key gatekeepers who may unknowingly provide an entry point for criminals.
The Financial Action Task Force (FATF) is an international task force established in 1989 to develop international standards to combat ML/TF. The FATF has identified, in addition to the financial sector, other non-financial businesses and professions (such as the real estate agency sector, lawyers, accountants, company service providers, casinos, pawnbrokers, precious stones and metals dealers) as gatekeepers to counter the threat of ML/TF.
While Mauritius has over the years made considerable progress in the field of anti-money laundering and combatting the financing of terrorism (AML/CFT), it was nonetheless placed on 21 February 2020 on the FATF’s list of “jurisdictions under increased monitoring” due to five remaining deficiencies in its AML/CFT regime. As a consequence of the FATF listing, Mauritius was put by the European Commission on its list of high-risk third countries with strategic deficiencies in their AML/CFT regime, effective as from 1 October 2020.
Mauritius has reiterated its strong determination to address the deficiencies identified by the FATF. As such, Mauritius has taken several initiatives so
that, inter ilia, 1) gatekeepers such as real estate agents implement risk-based supervision to counter ML/TF, 2) law enforcement agencies have the capacity to conduct money laundering investigations, including parallel financial investigations and complex cases, 3) competent authorities have access to accurate basic and beneficial ownership information.
During FATF’s virtual plenary session held between the 21-23 October 2020, Mauritius was commended for the tremendous progress made with respect to putting its jurisdiction at par with best practice norms for the fight against ML/TF.
Common money laundering methods
There are several methods of laundering illicit funds through real estate. Real estate agents are advised to be aware of those methods to be in a better position to assess and manage the ML/TF risks.
- Use of third parties: The use of third parties assists in concealing ownership, may put a veil on the illicit nature of the funds, and complicates asset confiscation efforts by authorities. Criminals would buy real estate with a third party or relative as legal owner and provide the funds to settle the purchase. It is to be noted that the third party may in many cases have no criminal record.
- Use of loans and mortgages: Loans or mortgages are taken to buy real estate. Those loans or mortgages are repaid, over a period of time, using illicit funds. The true nature of the funds is hidden, with the loan repayments providing an appearance of legitimacy. Fake documents may be used to seek the loan, or in some cases, the lender may be a company controlled by the criminal and located in another jurisdiction.
- Under-valuation: Buyers, sellers and third parties collude to under-estimate the value of the real estate. The difference between the contract price of the property and the market price would be settled by the purchaser using illicit funds. The lower amount disclosed would be more consistent with the purchaser’s legitimate financial means and may also lead to a reduction in the registration duty payable. Subsequently, the real estate would be sold at market or higher value, with the apparent profits serving to make the illicit funds legitimate.
- Over-valuation: The overvalued real estate is used to obtain the biggest possible loan from a lender. The loan and interest are then repaid using illicit funds. To give an appearance of legitimate profits, the property may be resold in quick succession at even higher valuation to acquainted parties or entities controlled by the criminal.
- Purchase through structured cash deposits: To avoid triggering threshold reporting and additional scrutiny from authorities, criminals may make cash deposits below the MUR 500,000 reporting threshold at different banks and at different branches. Those deposits are then used to obtain bank cheques in order to purchase the real estate.
- Property improvements and renovations: Illicit funds are used to pay for renovations and improvements thereby boosting the value of the real estate. Equipment, building and renovation materials would be paid using illicit funds. Many contractors, to evade tax, would not declare the cash received for the renovations. The real estate is then sold for a higher price.
- Fictitious rental income: A real estate is on the market for lease officially to generate rental income. Illicit funds are deposited into an account on a regular basis to give the appearance of legitimate rental income. The real estate may officially be rented to non-residents, making it difficult to subsequently confirm the rent received. The criminal may justify receiving higher rentals through renting to non-residents unaware of the prevailing market rates.
- Disguised rental income: Criminals may buy property in a third party’s name and pay the third party rent using illicit funds. A tenant may also be provided with illicit funds to partially or fully cover rental payments.
- Acquisition through front or anonymous shell companies: Front companies may serve as the official face of criminals seeking to launder illicit funds, with profits from legitimate sales mixed with proceeds from illegal acts. Illicit funds may also be channeled to anonymous shell companies located in jurisdictions with weak controls.
- Use of opaque and complex structures: Criminals may make use of a series of complex transactions involving multiple entities, banks and accounts in order to move, disperse and disguise illegal funds to conceal their true origin.
Real estate agents will find that countering ML is a moving target as criminals are finding increasingly creative ways to launder illicit funds. Criminals would often use multiple gatekeepers and professionals to complicate the money-laundering process and provide a buffer between themselves and their financial activities, in order to reduce the risk of detection.
Regulation and supervision
Mauritius Financial Intelligence Unit: In Mauritius, the supervision of real estate agents, for the purpose of AML/CFT, is the responsibility of the FIU. All real estate agents, land promoters and property developers are now required to register with the FIU.
Mauritius’s AML/CFT regime was further tightened by the passing of the Anti-Money Laundering and Combatting the Financing of Terrorism (Miscellaneous Provisions) Act 2020 on 9 July 2020, amending several pieces of legislation.
Real estate agents are required under S3(2) of the Financial Intelligence and Anti-Money Laundering Act 2002 to take such measures that are necessary to ensure that their services are not being misused for ML/TF purposes. Failure to comply is an offence which may lead on conviction to a fine of up to MUR 10 million and to penal servitude for a term of up to 20 years.
Real Estate Agent Authority: The Real Estate Agent Authority Act 2020, having received the assent of the President of Mauritius on 04 September 2020, will come into operation on a date to be fixed by proclamation. The Act provides for the establishment of a Real Estate Agent Authority (REAA) which will regulate the activities of real estate agents (including those of land promoters, property developers and property managers), with the power to discipline the licensees. The FIU will work in collaboration with the REAA in combatting ML/TF. No person would be permitted to act as real estate agent in Mauritius unless registered with the REAA.
Risk based approach
Real estate agents should ensure that they are well-versed and up to date in their legal obligations under the AML/CFT framework. Real estate agents are required to adopt a risk-based approach to AML/CFT compliance which requires a change from a rule-based paradigm and a simple tick-box approach. When assessing and managing ML/TF risks, there is no one-size-fits-all method that can be applied. Without a comprehensive understanding of what constitute risky transactions, as well as good and rigorous risk mitigation capabilities, it would be difficult to develop effective AML/CFT programs. At the same time, real estate agents are to sustain good relationships with their clients.
Customer due diligence
Customer due diligence (CDD) is the process used to collect and evaluate relevant information about a customer or potential customer. Under S 17B of FIAMLA, real estate agents should not establish or maintain anonymous accounts or accounts in fictitious names. Real estate agents are statutorily obliged to conduct CDD on all customers not only to establish their identity, but also to assess potential customer risks.
Relevant risk factors would include the type of customer (natural person, company, trust, foundation, politically exposed person), the nature of the activities of the customer, cash sensitive activities, activities conducted through opaque and complex structures, jurisdiction of residence or incorporation, business and relevant personal links to jurisdictions with poor AML/CFT frameworks, intermediaries and introducers and their regulatory status and reputation, manner of interaction with the customer (online, face to face, through agents, intermediaries, introducers), unusual behavior of the customer, and so on.
A wide range of due diligence information needs to be collected and analyzed in order to uncover the ML/TF risks of doing business with specific clients. Clients that potentially pose a higher risk must be subjected to enhanced due diligence processes.
Although the initial CDD assessment is carried out on the onset of the relationship, it will nonetheless need to be reviewed on a periodic basis (with the frequency of periodic reviews depending on the risk profile), and on an ad-hoc basis (when new services are being provided or when there is a material departure from the risk profile of the customer). Clients’ transactions would also need to be monitored and analyzed as part of an ongoing due diligence process given that clients’ activities may change over time, affecting their risk profile.
Pursuant to S17C of FIAMLA, real estate agents are obliged to undertake CDD prior to commencing business relationship with clients, where a transaction (single or several transactions that appear to be linked) is for the equivalent of MUR 500,000 or more, and whenever there is any suspicion of ML/TF irrespective of the amount.
An Ultimate Beneficial Owner (UBO) is the natural person who ultimately owns or controls a customer, on whose behalf a transaction is being conducted. AML/CFT investigators sometimes trace suspicious transactions to fictional addresses, PO boxes or the private homes of unsuspecting residents. There is therefore an expectation for real estate agents to establish correct UBO identities.
Consequently, the ownership chain would need to be properly researched, direct or indirect ownership and control structures established, together with the percentage interest in entities within the ownership chain. For a customer that is a legal arrangement, estate agents should take measures to verify the identity of the beneficial owner(s) in relation to the legal arrangement. For trusts, the settlor would need to be identified, as well as the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries. All UBOs would need to go through AML/CFT checks, with further investigations for UBOs that fall under higher risk categories.
Pursuant to S17E of FIAMLA, a reporting person shall apply the CDD requirements to customers and beneficial owners with which it has a business relationship. The CDD shall be applied at appropriate times and based on materiality and risk.
Regulators have been given broad powers to supervise and examine the operations and records of their licensees. Real estate agents have the legal duty to document the risk assessments in writing, keep it up to date, and make it available on request to relevant competent authorities without delay. Changes and updates to the customer risk assessment and customer risk assessment methodology should also be documented in writing, thereby keeping an audit trail of all changes. After a business relationship has been established, the real estate agent is required to maintain all relevant records on transactions of their clients for seven years.
Identifying suspicious transactions
The recognition of an indicator or indicators of suspicious activity is only a first step in a suspicious activity identification system. Clients would often need to be asked further information about the transaction and the identity of parties to the transaction. Client records and previous transactions may also need to be reviewed. Only after all the relevant circumstances have been considered and analyzed would it be possible to form a reasonable opinion that an activity is genuinely suspicious.
Clients may deal with different staff to carry out a series of transactions which may not be considered suspicious if considered individually. Finding body language clues would be more difficult where there is no face-to-face contact, even in video-conferencing situations. The recognition of various types of suspicious activity indicators would often require lengthy training and experience.
When there are one or more suspicious activity indicators present, together with an unwillingness or inability on the part of the client to give a reasonable and legitimate explanation, and taking into account the context and all relevant circumstances, the transaction may be assessed as genuinely suspicious even though no specific crime is known to be connected to the transaction.
Appropriate questions to ask clients in order to receive an explanation of the reason for conducting a transaction with suspicious activity indicators would obviously depend on a proper analysis of the circumstances. Many staff are reluctant to ask clients questions about suspicious activity indicators. Or may ask unnecessary and irrelevant questions with no relationship to a proper assessment of the risk factors. Or may ask questions that clients would find deeply offensive.
Suitable questions would solicit replies without causing offence or putting the client on his guard. For instance, clients may be asked questions associated with the promotion of services and the offering of advice to satisfy clients’ needs. As an example, clients settling a large transaction in cash may be queried about the reason for using cash on the ground that more secure methods of performing the transaction may be proposed. Persons engaged in legitimate activities would generally have no hesitation in answering appropriate questions that do not cause offence. Persons involved in illegal activity would be more likely to refuse to answer, give only a partial explanation, or give an explanation which is unlikely to be true.
Again, lengthy training and experience would be required in order to ensure that various types of suspicious indicators are recognized, evaluated and dealt with appropriately, while maintaining client relationship.
Timely reporting of suspicious transactions
Timely reporting of suspicions is an important defense against possible accusations of assisting in the retention or control of the proceeds of money laundering and criminal conduct.
When becoming aware of any information or matter that gives rise to knowledge or suspicion that a person or a transaction is connected to ML/TF, real estate agents should treat the matter with utmost urgency and shall report the matter to the Reporting Officer without delay. The Reporting Officer’s grounds for suspicion would need to be inserted in a Suspicious Transaction Report (STR) to be forwarded to the FIU. The STR would also need to contain, apart from the grounds for suspicion, all the facts, context, and ML/TF indicators that allowed the Reporting Officer to reach the grounds for suspicion.
It is crucial that real estate agents are aware that they now have only five working days to make a report to the FIU from the time of being aware, or ought to have become aware, of a suspicious transaction. Failure to do so may lead on conviction to a fine of up to MUR one million and to imprisonment of up to 5 years.
The obligation to report within tight time frames can be challenging in view of the sometimes extensive and complex nature of information that needs to be assessed and analyzed.
Tipping off offences
Real estate agents and any of their officers are prohibited from disclosing to any person that a Suspicious Transaction Report is being made or has been filed, or that related information is being requested by the FIU. It is important that real estate agents are aware of the legal prohibition and that adequate safeguards are in place to protect the confidentiality of information exchanged. Failure to comply is an offence punishable on
conviction to a fine not exceeding MUR 5 million and to imprisonment for a term not exceeding 10 years.
The fight against ML/TF has imposed new responsibilities on the shoulders of real estate agents who are expected to be well versed in their legal obligations, aware of the latest developments, and be up to date with new regulations and emerging forms of ML/TF risks. While criminals are finding increasingly creative ways to launder illicit funds, real estate agents are expected not to unknowingly allow their services to be used to further criminal activities. Failure to manage ML/TF risks properly may lead to reputational risks, business continuity risks, and harsh penalties on conviction including custodial sentences.
Real estate agents are specifically expected to understand and consider all relevant risk factors before determining the appropriate level and type of mitigation to be applied. The required risk-based approach to AML/CFT compliance implies a change from a rule-based paradigm and a simple tick-box approach. Without a comprehensive understanding of what constitute risky transactions, as well as good and rigorous risk mitigation capabilities, it would be difficult to develop effective AML/CFT programs. Ineffectual AML/CFT checks may prove to be both costly and cumbersome to both real estate agent and client, and yet not achieve the risk mitigation desired.
AML/CFT checks, if not handled properly, and with tact and sensitivity, may lead to strained client relationships. Lengthy experience and training would be required in order to ensure that various types of suspicious indicators are recognized, evaluated and managed professionally and effectively while maintaining client relationship. Any successful AML/CFT risk management
programme would both nurture client relationship while at the same time mitigate risks associated with ML/TF effectively.
AML/CFT compliance has become increasingly complex and skills-intensive, straining the resources of real estate agents who may not have the resources in terms of skills and time to perform an effective compliance program in-house.
Real estate agents are strongly advised to have access to appropriate professional assistance in order to reduce the burden both on themselves and on clients, effectively meet their legal obligations, avoid criminal penalties, maintain client relationship, safeguard their reputation, and ensure business continuity and sustainability.
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Fred Yeung Sik Yuen CPA FCCA CGMA MBA
Date of publication: 15 April 2021