How much money is laundered in Oz realty?

By Nathan Lynch, Head Regulatory Analyst for Australia & New Zealand, Thomson Reuters

Australian authorities are “tightening the noose” around money laundering involving real estate, amid concerns that inflows of illicit funds into established residential property may be over-heating some capital city markets. There are growing concerns at the federal government level that Australia’s failure to capture real estate agents, accountants and lawyers under the country’s anti-money laundering regime may have made Australia a soft target for illicit money flows. The government has also identified hundreds of transactions that may have breached foreign property ownership laws, which bar non-residents from buying established houses.

Speaking at a Thomson Reuters risk summit in Sydney yesterday, senior officials from the Australian Taxation Office (ATO) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) said there were significant warning signs around the Australian property market. They said it was extremely difficult to put a figure on the size of the laundering problem, however, due to the fact that Australia has limited visibility over the sources of funds coming in from overseas.

Bradley Brown, acting national manager for strategic intelligence and policy at AUSTRAC, said his agency was limited in what it could do in relation to real estate under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

Real estate agents, lawyers, accountants and other gatekeepers are not captured by the Australian legislation despite ongoing international pressure from the Financial Action Task Force (FATF). This means AUSTRAC has to use other forms of financial intelligence, including records of wire transfers and transaction reports from banks, when analysing suspicious property transactions.

“Australia is one of the few countries that collects all of the international funds transfer instructions (IFTIs), or wire transfers, in and out of Australia. So the movements of money that we receive information on via reports to AUSTRAC still may contain information on purchases of real estate if those funds have come in through a wire transfer. So there’s certainly some visibility over the sector,” Brown said.

At the same time, there is no obligation on professional facilitators to report suspicious transactions, unlike banks, casinos and bullion dealers.

The attraction of Australian real estate for money laundering and offshore flight capital was highlighted in the recent mutual evaluation report on the effectiveness of the country’s money laundering regime. The FATF report identified real estate as a “high risk” sector for laundering and said AUSTRAC had little power over several crucial industries, including real estate agents, accountants and lawyers. The assessors found that offshore organised crime groups were using “professional facilitators” to launder their criminal proceeds through Australian real estate. Australian housing is viewed across Asia as an attractive vehicle for parking illicit funds, particularly among corrupt officials, the report found.

The Governor of the Reserve Bank of Australia (RBA) also warned recently that “crazy” property prices in some east coast capital city markets could lead to a host of problems, including financial instability, if there is a sudden fall in speculative demand.

In response to growing public concerns over Australian residential real estate prices, the government has tasked the ATO and the nation’s anti-money laundering agency with cracking down on any suspect property transactions.

Flight or fight?

In the public debate around real estate-related laundering there has been significant confusion over the differences between flight capital and actual laundering. While residents of countries such as China may use money laundering techniques to circumvent the country’s capital controls, this is not a predicate offence under the Australian money laundering legislation. As such, Australian authorities need to make the difficult distinction between purchases that are designed to get legally obtained funds out of countries such as China — often using money laundering techniques — and cases of actual money laundering where there is an underlying predicate offence.

Brown said it was crucial to distinguish between flight capital and money laundering when looking at suspicious property purchases involving foreigners.

“There’s a whole lot of legal, legitimate funds from offshore that are used to purchase property, so I think that’s a fundamental consideration in anything that AUSTRAC does,” Brown said.

“One of the extreme challenges that we face is actually differentiating between what may be capital flight and what may be money laundering. It comes back to a question of what the origin of those funds is. I think that’s one of the greatest challenges for reporting entities and it’s also one of the greatest challenges for us,” he added.

For reporting entities, this underpins the importance of having effective systems and controls in place to identify risks, “know your customers” and implementing strong due diligence and monitoring, Brown said.

AUSTRAC’s surveillance efforts are also being frustrated by the fact that money launderers will often use unregulated entities as a “first point of contact” to help disguise their source of funds. If a criminal makes a suspicious cash deposit into a real estate agent or lawyer’s trust account, for example, the suspicious transaction is not required to be reported to AUSTRAC. Reporting entities, such as banks, are required to report transactions of this type within three business days of forming a suspicion. Lawyers are only required to report threshold transactions under the legacy Financial Transaction Reports Act 1988, not suspicious matters, while real estate agents have no reporting obligations.

“One thing that we consider is that lawyers, accountants and real estate agents are often a first point of engagement for clients — particularly for clients and customers who are looking to establish a company or a trust. They don’t go to the bank first, they go to someone who is capable of setting that up for them,” Brown said.

Taxing times

As part of the government’s scrutiny of the property sector, the ATO has been tasked with overseeing foreign investment in residential real estate and establishing a new register of foreign asset ownership. The ATO is now responsible for policing foreign investors’ compliance with their obligations under the Foreign Acquisition and Takeover Act 1975 (FATA). The legislation bars non-residents from buying established residential property.

The ATO is investigating a surge in cases where offshore buyers are believed to be using nominee purchasers, companies, trusts and other structures to circumvent the rules.

Aislinn Walwyn, assistant commissioner for private groups and high-wealth individuals at the ATO, said her agency was not responsible for identifying money laundering but that it was working closely with other agencies including AUSTRAC and the Australian Federal Police (AFP). She said that if a foreign buyer made a property purchase in cash, for instance, that could be a red flag for further investigation.

“It certainly raises alarm bells with us if we see people with funds that potentially aren’t from legitimate sources,” Walwyn said.

The summit heard about anecdotal reports of people flying into Sydney on private jets with suitcases full of cash to purchase real estate at auction. Walwyn said the ATO had not seen any evidence to substantiate those claims.

“We’ve seen one incident where there was a property sale and it was a cash transaction and there was no AUSTRAC reporting. That is a situation that raises alarm bells. If there’s no mortgage finance and no AUSTRAC report then that would be something we would probe,” Walwyn said.

The Foreign Investment Review Board has referred an initial batch of 195 cases to the ATO for investigation in relation to potential breaches of the FATA legislation. The ATO has found that in a number of those cases the individuals are already Australian residents or have permanent resident status in Australia. At surface level these types of transactions appear to be legitimate. On deeper inspection, however, investigators have found that the individual’s reported income does not match the size of the purchase. The ATO then needs to determine whether this is a case of tax evasion or individuals acting illegally as nominees for foreign buyers.

“We’ve seen some examples where somebody had acquired multiple properties and they were reporting a very low income. That immediately raises questions for us, which we will then be probing to establish the source of this person’s income and whether they are understating their income or, alternatively, if they’re a nominee for some foreign beneficial owner. We need to probe that type of case because that might, in turn, reveal a FATA breach,” Walwyn said.

The FATA legislation is designed to ensure that foreign buyers can legally purchase off-the-plan residential properties. The rationale behind the legislation is that this encourages investment in new housing stock, rather than inflating the price of properties that are already built. Temporary visa holders, meanwhile, can buy existing property but if they cease to be a temporary visa holder they are required to sell their property.

“Professional facilitators”

The ATO is also focusing on the role played by professional intermediaries and facilitators, such as lawyers, accountants and real estate agents in relation to FATA breaches.

“If somebody is knowingly concerned with a breach of the FATA obligations they can be exposed to criminal penalties. In the future, once new legislative measures are passed, there will be civil penalties too,” Walwyn said.

In Australia tax evasion is a predicate offence for money laundering. As such, individuals who use property renovations and other property-linked strategies to hide undeclared income can be charged with money laundering. Renovations are a popular laundering strategy for tax evaders as individuals can pay cash directly to tradespeople without arousing any suspicions. In doing so, they are effectively transforming their cash into capital improvements on their property without leaving behind any records of payment or an electronic money trail.

When they sell the property at a profit they can pass off the price increase as passive capital growth or the result of “DIY home renovations”. The illicit profits are potentially tax-free if the property is classified as a principal residence and are taxed at a reduced tax rate, relative to income, for investment properties.

Walwyn said the ATO is heightening its scrutiny of professional service providers who might be complicit in advising on or facilitating these types of illegal activities.

“If we see facilitators or intermediaries being knowingly concerned or having colluded in that then there are potential criminal sanctions under the Criminal Code,” Walwyn said. “With Project Wickenby, for instance, we’ve had a number of facilitators who have been convicted and have received custodial sentences.”

Project Wickenby was wrapped up in June this year and has now been replaced by the Serious Financial Crime Taskforce. The new multi-agency taskforce has a wider remit than Wickenby, with a focus on superannuation and investment fraud, identity crime and the role of professional facilitators.

Thomson Reuters Regulatory Intelligence delivers a focused view of global regulatory compliance, empowering professionals to make well-informed decisions to manage regulatory risk with confidence using the most comprehensive and trusted intelligence available.

Comments

  1. As Billy Birmingham’s Mark Taylor would say “sh$t, hey?”.

    A pleasant side note to this might be discovered a bucket load of dodgy mofos (locals) funnelling ill gotten gains (not delightful piratesque ones) through #OzProp.

  2. TailorTrashMEMBER

    I think Monika described her self in that TV interview as a property “concierge” …….that sounds like a facilitator ( most concierges I have had contact with can facilitate anything you need ) so I hope the ATO have her on the list to be looked at

      • TailorTrashMEMBER

        Agree there are subtilities in this kind of relationship but the Monikas’ of this world are good at f#€£¥ing people ….how ever they offer their concierge services ……

  3. Pisses me off when I’m asked why I’m purchasing a few grand in foreign currency when the government allows BILLIONS to be laundered through real estate.

    Reality is it is a revenue stream they’ll keep open until no longer practical, while harassing the populous over ‘loose change’.

  4. As the maximum amount leaving mainland China under Chinese law is 50,000 USD per Year I believe the onus of proof should be reversed and those having moved more than that sum in a 12 month period need to demonstrate that the cash is clean, and the transfer not in contravention of Chinese law.

    Persons investing in any form in Australia should have to demonstrate that they are in fact ‘fit and proper persons’ ie not on a wanted list or having a criminal record.

    • “ie not on a wanted list”
      But that’s the problem. They are very much wanted. And that’s why nothing has been done for so long.

  5. “Real estate agents, lawyers, accountants and other gatekeepers are not captured by the Australian legislation despite ongoing international pressure from the Financial Action Task Force (FATF). This means AUSTRAC has to use other forms of financial intelligence, including records of wire transfers and transaction reports from banks, when analysing suspicious property transactions.”

    this is the part that gets me.
    What hope is there of busting these guys, when the very people you need to apply enforcement to make up significant family members of the political leeches that we need to make the legislation for this.

  6. The laughter greeting these property market ‘revelations’ is as audible as the chortling from the Members’ at Trent Bridge last week. Everyone knows the score, and the Australian Team is being made to look silly…..

  7. The part that annoys me is the primary concern seems to be the impact on RE prices, not the corruption itself! Goes to show we are open for business, unless it will cause the gov political pain.

    • Mining BoganMEMBER

      The only way anything will be done is if it is found that the sale of a house in Sydney paid for the missile that shot down MH17.

      Until then it’s open for business.

      • Whoa whoa whoa there! Let’s not jump to conclusions! Until we have a royal commission to give an iron clad guarantee that has indeed happened, I say we cannot and should not do anything that might affect the finances of many mom and dad investors, just trying to get ahead in these days.

      • Or if someone digs up a corrupt property developer who’s Muslim or at least from a country that’s near other Muslim countries, because that would pretty much prove that RE investment is funding terrorism.

        Luckily if there’s anyone like that out there, they’re good at keeping a low profile.

    • “Open for business” was an open endorsement of corruption from the highest office in the land…
      … and yet Australians (except for a smattering of youth) will continue to vote LibLab because more than 50% of the population benefits from said corruption, and Australians are both greedy and stupid.

      Australia is setting itself up for an epic fall – and the > 50% (paying attention to the greater-than sign, ResearchTime?) of the population who support said corruption will yap and yap like an ill-trained little rat-dog until their master relents and throws more treats their way. This will of course continue until the entitled little fink dies, or there are no more treats. Ha ha ha!

      • I agree with the greedy and dumb, but at the same time I think a lot out there are just plain ignorant. For the life of me I have to go with that as the other is just too difficult for me to want to believe!

  8. Yes Hollywood has a lot to answer portraying lawyers as good guys – these guys undermine the law more than any other profession including that of the criminal class.

  9. All caveats notwithstanding, it’s encouraging at least to see this issue start to come in from the loony fringes, such as MB. We’re seeing quite a number of these recently.

  10. adelaide_economist

    “Australian authorities are “tightening the noose” around money laundering involving real estate, amid concerns that inflows of illicit funds into established residential property may be over-heating some capital city markets.”

    should read…

    “Australian authorities are “tightening the noose” around money laundering involving real estate, amid concerns that not assisting the Chinese with their crackdown could have serious ramifications.”

    Does anyone really think after letting this run for so long, even as daily newspapers include interviews that blatantly boast of sales that couldn’t possibly be compliant, that the Government is doing this to cool property markets? The impact may be identical but the motivation isn’t.

    • Think it’s more about TPTB suddenly twigging to the massive systemic risk this is creating for the Australian banks and financial sector in general. When Captain Glenn came out and called Sydney prices “crazy” it was a definite policy inflection point.

      Wouldn’t it be entertaining if Australian real estate turned out to be the ultimate pump n’ dump scheme. One two sucker punch: first iron ore, now this.

    • Could also be personal, in that the local elites, or maybe their kids, are getting outbid for the sort of properties they expect to be able to live in, and are having to “lower their expectations”..

  11. I know it’s popular here to talk about illicit Chinese money being laundered through Aussie RE but to be honest the idea is bat shit crazy. Nobody wanting to launder dirty money is going to by Real Estate it just leaves too many traces, you simply cant hide the purchase price or the fact that you bought the property, there are much better (easier) ways to clean up ill-gotten gains so I don’t buy any of this Aussie RE laundering talk, IMHO it’s just another manifestation of the well-known bogan complaint Xenophobia

    • Well said CB.

      Most people here want to believe the only way the Chinese can afford to out-bid them at auctions is thru ‘corrupt, ill-gotten, blood money’, notwithstanding the productivity and genuine wealth creation coming out of China, be it manufacturing, property development, stock market. Lots of people have made lots of money and now that we are loosing at the capitalist game, we cry foul.

      Truth of the matter is, its not that the Chinese are not buying everything, we are SELLING everything to them (or whoever fronts up the cash). We now have to admit that the absolute capitalism we champion now no longer serves us, that is why we are asking for the govt to re-introduce various forms of protectionism.

      • Talk about missing the point completely, Dennis. For good reason there are rules in place to stop established homes being sold-off to foreigners. These rules are being broken en masses. This is the crux of the issue.

    • Wow China-Bob. You have really drunk the Kool Aid today. Both Austrac and FATF have highlighted that Aussie real estate is a haven for illicit funds, and that there are few checks and balances operating in Australia (due in part to real estate agents, lawyers and other facilitators being excluded from AML requirements), and yet you ignore this evidence completely and play the lazy xenophobia card.

      • Even StevenMEMBER

        I completely disagree with you, China Bob and Dennis.

        Whilst I can’t really speculate as to how much is money laundering, there is SURE AS HELL a lot of illegal foreign purchasing taking place. Disappointed with your comment above re: xenophobia.

      • OK UE let me clarify what I mean.
        Imagine Australia were a small island that had no export except coconuts but was a very desirable place to live. Being rich (highly desired country) they purchased foreign goods with wild abandon and purveyors of these goods were more than happy to take any Aussie IOU’s (Private or Public) secured or unsecured. an Aussie IOU was good as gold. As a result Aussie ran a chronic Trade deficit. As a result of this an economy developed where Tangible Goods were traded for worthless paper promises and business continued this way for over 50 years when the existing IUO’s became due both principle and Interest were rolled into the next tranche of freshly minted IOU’s. Business boomed especially the import and finance (re-finance) sectors. we were all rich.
        OK so while the boom times lasted their vendors gladly supplied credit and our banks offered handsome rewards for (in theory because remember that they always fully refinanced both interest and principal.
        OK hope your with me because this is the tricky bit. Times changed and the main Aussie banker (lets call him Capitan Glenn) pushes Aussie interest rates down with it the currency tanks now these patient vendors financing our Trade deficit decided they’ve got enough Aussie paper matter of fact at the 2% (10 year rates offered ) they dont even want to keep the loans they have, so they wont issue new loans (against paper) and they’re wanting something tangible in exchange for their existing loans. New loans are ONLY available in trade for Real existing Assets (lets call these assets Real Estate)
        Well remember the wonderful Aussie island’s only product is coconuts (for which there happens to be a global surplus) so vendors dont want coconuts or coconut futures or coconut plantations matter of fact any mention of the word coconut halves the value of the trade.
        OK so what happens:
        Well our rich (addicted) Aussies trade their RE for trinkets. The problem starts off small but it grows and grows, unfortunately at the same time the coconut market tanks and Capitan Glenn guides the AUD to new lows (both exchange wise and Interest wise) our not so dumb vendors see the light and swap their Aussie paper for Aussie RE (remember its a really desirable place). Suddenly the penny drops Foreigners are causing Aussie RE to become unaffordable for Aussie Residents well that’s politically unacceptable so like all good politicians they pass laws forbidding foreigners from owning Aussie RE. Everyone smiles all is well the dragon has been de-clawed. back to business as usual EXCEPT remember the world doesn’t actually want our coconuts BUT we can’t live without their trinkets, in part because all other Aussie industry have long ago shuttered their doors (remember we’re rich and don’t need to work our vendors love us and WERE glad to take every worthless IOU that we produced)
        My point is this trade imbalance (real goods for worthless IOU’s) has consequences one of the most obvious is that Foreigners will wake up realize they’ve been fooled and start demanding payment in the true currency of our island which is actual ownership of the island.

        The laws forbidding the sale of part of the island to foreigners are stupid and in a way similar to the 18th century habit of criminalizing adherence to the laws of Physics….because they were rather inconvenient

        OK cut to the chase. Foreigners flaunt our laws because we continue to DEMAND their products our economy continues to tank so both our interest rates and exchange rates tank with the economy. Hmm sounds familiar.. Cheap interest rates force Aussie RE through the roof so Foreigners naturally want part of the upside …..more laws more posturing more examples more foreign money and dont forget Aussies get more trinkets more trinkets more trinkets.
        Politicians need to make a stand so they prosecute some unfortunate foreigner for breaking our laws (yet the laws of physics tell me that no other outcome was possible) …….

      • @Even Steven
        If there is really so much Illicit Chinese money flowing into Australia than the problem can be completely fixed by simply informing the Chinese Tax dept whenever one of their nationals buys an Aussie House.
        Trust me the Chinese gov’t has simple ways of dealing with this problem. For Chinese citizens the consequences of finding your name on this Aussie list will far out way any possible gains from tax avoidance or what ever. Do this an I guarantee you that not one illicit Chinese penny will flow into Aussie RE…it’s simple …maybe too simple because it creates a different problem for which we have no fix (see my reply to UE)

    • Ha ha ha ha! Your orl rashists! Now stop being haters and let the clever Chinamen get on with buying up the joint. Ha ha ha ha ha!

    • It’s a question of scale. If you need to launder $20mil, Aussie RE is not a good option. But, if it is only $2mil, the amount is too small for the Chinese Govt to bother trying to track it down off-shore (but large enough that they may confiscate it if it is still sitting around in a Chinese bank).

  12. Forrest GumpMEMBER

    I lived in a unit that was purchased by a 21 year old overseas uni student. “She” paid $468K cash for the unit…..She had a student visa, but naturally, im assuming, used Daddy’s money….whom does not have any residency here in Oz…She then rented it out…Daddy came and had a look at it after the settlement, stayed for a week, and then flew home again.

  13. Sorry the Government is too busy putting an costly and ineffective GST on overseas purchases under $1000 to worry about money laundering.

      • Ha ha ha! It sure will be! And think of the backlog. Getting anything through customs will be a frickin nightmare.

        I think this is the best thing ever! A bit more of this, and the aspirationals might realise that their lot is to be the source of the filthy lucre intended for corrupt interests, and not the recipients.

        Plus, the system is working. Australia voted for these boat stopping axe taxing witch ditchers, and you all deserve every last bit of the discomfort heaped upon you. Ha ha ha ha ha!