Escrow In Real Estate: An Avenue For Money Launderers

Escrow in real estate is seen in scenarios such as when a property in the form of land or buildings is commonly utilized as a conduit for money laundering activities in the real estate business. The sector has long been regarded as one of the oldest known conduits for the layering and integration of ill-gotten gains, both in politically and economically stable countries and jurisdictions with lax or non-existent AML/CFT regulation.

Every year, around $1.6 trillion in dirty money flows through this market, equal to 3% of global GDP. This blog post will look at a key aspect of this topic: escrow (or trust) accounts.

Table of Contents

Key Takeaways

What Are Escrow Accounts And Funds?

Escrow is a legal term that refers to a financial instrument in which a third party holds an asset or escrow money on behalf of two other parties who are completing a deal. Escrow is most times linked with real estate transactions. However, it is applicable be in other scenarios involving the transfer of funds from one party to another, such as mergers and acquisitions or securities.

These accounts are typically maintained by real estate agents, brokers, and other fiduciaries in the context of purchasing and selling property and are designed to keep cash for protection and proper disbursement after certain requirements have been met.

For example, the seller and buyer may agree to utilize escrow during the sale of a home, and the buyer would put the balance owed in an account administered by, or in the custody of, an agent. This convinces the seller that the buyer will be able to complete the transaction. Once all of the terms of the sale have been met, the agent distributes the funds to the seller, and the buyer receives the title to the property. This method ensures that the buyer has the cash necessary to complete the transaction and that the monies will be transferred after the title is transferred, establishing trust between the two parties.

An Avenue For Money Laundering

Every day, escrow is used to close a large number of real estate transactions. Money launderers are attracted to this practice for two primary reasons:

  • In any trade, a large number of different transactions can travel through them.
  • Escrow accounts allow monies to be transferred to ostensibly legal individuals or businesses via cashier’s checks, wire transfers, or corporate checks.

Given the high volume of activity that can be expected in an escrow account (mortgage payments, real estate commissions, taxes, satisfaction of liens, and other payments), criminals could easily conceal illegal activity by operating the account in a standard manner consistent with the nature of typical real estate transactions. Launderers are given a realistic vehicle through which they can pour monies into the financial system while appearing legal in this way.

Escrow arrangements should be carefully considered when participating in property transfers because they are convenient for making tainted money appear clean. Intermediaries must determine the source of monies sent to accounts by purchasing natural or legal persons and the (ultimate) beneficial owner of the real asset, who may be hidden behind a corporate vehicle such as a shell corporation or trust.

The Task Of Real Estate Professionals

Real estate agents working as fiduciaries are now included within the scope of obliged entities under the Directive. They must therefore comply with all relevant AML/CFT duties, according to the 5th AML Directive. Furthermore, the USA PATRIOT ACT mandates that all financial institutions gather, verify, and record information identifying any person who establishes any type of account with them. 

Escrow In Real Estate

For example, escrow.com, one of the most well-known escrow service providers in the United States, introduced a Know Your Customer (KYC) policy in 2016 to ensure that all buyers and sellers are properly vetted through paperwork collection and due diligence tests. As intermediaries, real estate professionals are involved in the great majority of real estate transactions, making them an important ‘gatekeeper’ in the detection of money laundering and terrorism financing. The present regulatory environment requires gatekeepers to conduct extensive KYC checks and sanctions, PEP, and adverse media screening, as well as suspicious activity checks on individual transactions.

Managing Risk In Real Estate

Without appropriate restrictions, illicit cash flows via this sector produce unfair competition, alter market values, and harm legitimate enterprises’ reputations and confidence. Money laundering can result in lawsuits, unenforceable contracts, fines, higher expenses, or even closure from a legal standpoint.

There is a range of innovative solutions to help real estate professionals comply with regulatory obligations and demonstrate that they have rigorous AML screening and compliance policies in place to help limit these risks.

Summary

Escrow accounts, which are commonly utilized in real estate transactions, are also a tempting target for financial fraudsters. Escrow accounts provide criminals with a viable vehicle to route monies into the economy and make them appear genuine due to the enormous volumes of funds and transactions performed through them.

It isn’t just about sales, though. The lettings market is a target as well, and it is equally vulnerable. The extent of background checks and due diligence currently being undertaken on both possible landlords and prospective tenants, even more so than in the acquisition of property, might expose the business. Estate agents will be better able to combat the larger incidence of financial crime in the economy by sharing concerns through SARs. Providing compliance workers with organized training to help them feel confident about reporting and access to the relevant technology and data to assist them in developing a complete picture of suspicious conduct will help increase reporting.

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