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Regulation of the Real Estate Sector – AML/CFT Framework

The real estate sector is identified as being highly exposed to the risk of money laundering. Real estate agents are therefore prone to being the target of criminals for hiding illicit gains, which is why they can undoubtedly play a pivotal role in the detection of a suspicious transaction/activity. As a result, the Financial Intelligence and Anti-Money Laundering Act 2002 (‘FIAMLA’) was amended in 2020 to allow for a real estate agent[1] to be a reporting person falling within the regulatory purview of the Financial Intelligence Unit (‘FIU’).

The primary implication of a real estate agent being a reporting person is that the latter is legally bound to ensure compliance of its business with relevant money laundering and terrorist financing laws and regulations. The FIU has made available codes and guidelines to further help the understanding of and compliance with obligations pertaining to the prevention, detection and reporting of money laundering, financing of terrorism and proliferation.

The legal framework regulating the obligations of a reporting person, including a real estate agent, comprises of the FIAMLA, the Financial Intelligence and Anti-Money Laundering Regulations 2018 (‘FIAML Regulations’) coupled with the 2020 Guidelines on the Measures for The Prevention of Money Laundering and Countering the Financing of Terrorism for the Real Estate Sector (the ‘FIU Guidelines’) issued by the FIU under Section 10 (2) (ba) of the FIAMLA. As for combatting the financing of terrorism, the relevant instruments include the Prevention of Terrorism Act 2002, the United Nations (Financial Prohibitions, Arms Embargo and Travel Ban) Sanctions Act 2019 and the Convention of the Suppression of the Financing of Terrorism Act 2003.

Pursuant to section 17 of FIAMLA, real estate agents must identify, assess and understand their money laundering/terrorist financing (‘ML/TF’) risks. In so doing, the starting crucial point for any real estate agent is to assess the risk of its business being exposed to ML/TF. The question which then crops up is what steps should be taken by a real estate agent to ensure compliance as reporting person for the purposes of the law?

The FIU Guidelines have laid down certain criteria to assist a real estate agent in fulfilling its obligations as a reporting person, which include:

  1. Through the risk-based approach;
  2. Through internal controls; and
  3. Through preventive measures.

 

(1) The Risk-based Approach

The risk-based approach has three steps, namely risk assessment, risk mitigation and risk monitoring. In simple terms, a real estate agent has to evaluate the existing/foreseeable risks; devise ways to mitigate such risks and eventually develop a monitoring process for same.

Whilst the risk-based approach appears to be easy in lay terms, the application is not necessarily as easy. A real estate agent has to put in place systems and controls in line with the specific risks of money laundering and financing of terrorism facing its line of business. Therefore, a good anti-money laundering compliance programme is a must. This programme should spell out the levels of measures which a real estate agent should implement to have a robust system to counter ML/TF.

Step 1: Risk assessment

In assessing the risks, the real estate agent will consider factors such as the client base, the services and products provided, their geographic location, their delivery channels and business practices. Any red flag or unusual concerns shall give rise to a possible risk factor, in which case, a real estate agent will need to have in place a ‘Risk Assessment Tool’ which should be adapted to its specific business needs.

Step 2: Risk mitigation

Section 17A of FIAMLA provides that a real estate agent must establish policies, controls and procedures to mitigate and effectively manage the risks of ML/TF identified in any risk assessment. It is essential to have written policies, controls and procedures designed to mitigate risks and that such risk mitigation strategies can be shared with the management and employees. It is further advisable that the application of such mitigation strategies be documented.

Step 3: Risk monitoring

The need for an on-going monitoring of financial transactions goes without saying for any reporting person. The manuals for the risk mitigating policies, controls and procedures must provide for a monitoring methodology which ensures the detection of suspicious transactions.

It is important to emphasise that pursuant to section 3(2) of FIAMLA, a real estate agent is required to take such measures as are reasonably necessary to ensure that its service does not become the tool for the commission or facilitation of a money laundering offence or the financing of terrorism offence. The penalty for such an offence is a fine not exceeding 10 million rupees and penal servitude for a term not exceeding 20 years. Hence, a real estate agent should have in place such systems and procedures to detect, monitor and report high-risk clients and transactions.

 

(2) The Internal Controls

A real estate agent is expected to have internal controls in place, more specifically through an anti-money laundering and combating the financing of terrorism (‘AML/CFT’) programme. The AML/CFT programme sets out how the real estate agent shall implement its AML/CFT obligations, while bearing in mind that each agent will have its own tailor-made programme based on its business specificities determining the level of associated risks.

The FIU Guidelines sets out a non-exhaustive list which are the basic requirements of an AML/CFT programme for a real estate agent, namely:

  1. The appointment of key officers, i.e. a compliance officer and a money laundering reporting officer as part of its internal procedures and controls;
  2. To have in place adequate policies, controls and procedures that advance high ethical and professional standards and prevent the business from falling prey to ML/TF offences;
  3. To carry out ‘employment screening’ under Regulation 22(1)(b) of FIAML Regulations, ensuring high standards in the recruitment process, followed by regular employment training under Regulation 22(1)(c) of FIAML Regulations to ensure employees’ continuous awareness about AML/CFT legal framework; and
  4. To have regular auditing and reviewing of the AML/CFT program to assess its effectiveness and update in line with existing risk factors.

Further, the AML/CFT programme must include the following obligations:

  • Customer due diligence,
  • Record keeping,
  • Enhanced due diligence,
  • Politically exposed persons,
  • Ongoing monitoring,
  • Suspicious transaction reporting,
  • Training, and
  • Terrorism financing obligations.

 

(3) The Preventive Measures

A real estate agent must comply with all preventive measures provided by the relevant laws and regulations along with those set out in its AML/CFT programme to prevent its business from misuse by criminals. It is also imperative that the AML/CFT programme/policies/manuals of the real estate agent cater for the processes to be followed when it comes to preventive measures.

Some of the key preventive measures highlighted by the FIU Guidelines, in line with the FIAMLA and FIAML Regulations, are as follows:

  1. Customer due diligence (‘CDD’) – A real estate agent must ensure that there are set identification and verification procedures when it comes to ‘Know Your Client’;
  2. Record keeping – A real estate agent is bound to keep records of all transactions in which he is involved and that of all customers;
  3. Enhanced due diligence (EDD) – Where the ML/TF risks get higher, a real estate agent must be prepared to conduct an EDD to mitigate and manage such risks;
  4. Simplified due diligence – As a matter of rule, the full range of CDD measures should apply. However, a real estate agent can implement simplified CDD measures where there are lower risks;
  5. Politically exposed persons (‘PEPs’) – A real estate agent should keep a close eye on PEPs together with their close relatives and associates who represent high risks owing to their status;
  6. Reporting of suspicious transactions – A real estate agent has a legal obligation to file a suspicious transaction report as soon as he becomes aware of a suspicious transaction and not later than 5 working days after the suspicion arose. Failure to do so is an offence; and
  7. Cash prohibition – A real estate agent shall not make or accept any payment in cash in excess of 500,000 rupees or an equivalent amount in foreign currency by virtue of Section 5 of FIAMLA.

Therefore, in order to ensure compliance with the prevailing laws and regulations, a real estate agent must be equipped with its AML/CFT programme, policies and procedures and other relevant manuals adapted to its real estate operations, failing which the agent may be subject to sanctions by the FIU, which include amongst others, administrative sanctions under FIAMLA and revoking or cancelling of licences.

[1] Includes a land promoter and property developer, where he is involved in real estate transactions for a client concerning the sale, exchange, purchase or lease of real estate

Kunal Ramnah

Senior Associate