Suspected Money Laundering in the Residential Real Estate Industry: An Assessment Based Upon Suspicious Activity Report Filing Analysis
FinCEN conducted an assessment of SAR reports on money laundering involving the residential real estate industry. This assessment follows up on a December 2006 FinCEN review of SAR narratives regarding money laundering in the commercial real estate industry.11 The current report, published on May 1, 2008, focuses on certain trends and typologies in the reporting of suspicious activity in key businesses and professions in the residential real estate industry. The report also provides summaries of SAR narratives that were reviewed for this study, which illustrate activities that may be indicative of money laundering and associated illicit financial activity. See the full report at http://www.fincen.gov/MLR_Real_Estate_Industry_SAR_web.pdf.
FinCEN used a BSA database analysis tool to isolate SARs of all types filed during the period January 1, 1996 through December 31, 2006, with narratives containing one or more key words generally associated with the residential real estate industry. Searches of the BSA database located 195,253 SARs of all types that contained one or more of these key words.12
From the 195,253 SARs, 1,095 were randomly selected for review. Of these, 1,029 were filed by depository institutions, 59 were filed by money services businesses, and seven were filed by securities and futures businesses. From our review, we identified 747 filings that described residential real estate-related transactions or involved persons, professions or businesses in that sector.13 Of these identified filings, 151 (20.21%) described suspected structuring and/or money laundering, and 17 of those described specific additional suspected criminal activities, such as tax evasion and fraud.14
Although SAR narratives reporting suspicious activity associated with the residential real estate industry are relatively common, only about 20 percent of such filings reportedly describe suspected structuring and/or money laundering, and of those, only about 11 percent described any other suspected illicit activity including tax evasion, fraud, or identity theft.
Specifically, illicit activity related to tax evasion included:
- cashing checks payable to businesses and the diversion of cash business receipts in a manner possibly designed to evade taxes; and
- misusing the tax exempt status of organizations to conduct real estate-related businesses and disguise the profits as contributions.
Various types of fraud and identity theft were reported, including:
- check kiting on real estate investment accounts;
- real estate investment accounts used to promote a potential pyramid scheme;
- fraudulently acquired state and federal tax refunds laundered through mortgage trust accounts;
- mortgage loans granted on the basis of fraudulent appraisals; and
- identity theft employed to drain the balances of home equity line of credit accounts and to layer illicit proceeds from money laundering activities.
Over 75 percent of the entities suspected to be involved in residential real estaterelated money laundering were identified as individuals unaffiliated with residential real estate-related businesses. For example, launderers may use multiple nominees or straw buyers to secure mortgages on various residential properties, thereby creating a means for the conversion of illicit funds into real property while projecting the appearance of many unrelated mortgages paid on a regular and timely basis.
Within the sampled SARs, the most commonly reported professions associated with the residential real estate industry and suspected of being involved in residential real estate-related structuring and/or laundering were builders, contractors and rehabbers, who were mentioned in only about 5.5 percent of all filing narratives. In these instances, the impetus to structure and/or launder generally appeared to be tax evasion.
The numbers of relevant SAR filings increased significantly after 2002 with the steepest increase reported in 2004-2005. The period 2005-2006 saw a pronounced flattening in the percentage increase in filings. The year-on-year percentage increase in the incidence of all SAR filing types followed a similar, but less pronounced, pattern during these same years.
The pattern of increase generally follows that reported in FinCEN?s commercial real estate and mortgage loan fraud SAR assessments, suggesting that the increase in these filings kept pace with, at least in part, the increase in mortgage loan activity brought on by an active national real estate market. The flattening of the increase in SAR filings noted between the 2005 and 2006 data could be explained by a slowdown in residential real estate market activity resulting in part from an increase in mortgage interest rates during that period.
If SAR filings reporting money laundering associated with residential real estate continue to keep pace with the mortgage loan market, this might suggest mildly increasing numbers of SAR filings in subsequent near-term reporting periods.
11 See FinCEN publication, Money Laundering in the Commercial Real Estate Industry: an Assessment Based upon Suspicious Activity Report Filing Analysis, at http://www.fincen.gov/commercial_real_estate_assessment_final.pdf. 12 Of the 195,253 SARs, 183,072 were from depository institutions, 10,845 were from money services businesses, 1,260 were from securities and futures businesses, and 76 were from casinos. A categorization of the total 151 SAR filings of all types in this assessment that appear to describe structuring and/or money laundering associated with the residential real estate sector includes 118 of 1,029 (11.47%) depository institution filings, 31 of 59 (52.54%) money services business filings, and two of seven (28.57%) securities and futures filings analyzed. 13 The narratives of the remaining 348 filings made only incidental references to residential real estate or contained one or more of the search terms used in other contexts, including commercial real estate.
14 Measured against the entire aggregated SAR database, these 151 SAR narratives in the sample of 1,095, describing structuring and/or money laundering associated with residential real estate, would predict 26,925 relevant SAR filings of the total 4.2 million SARs of all types existent at the time of this assessment; or 0.64 percent of all SAR filings. Accordingly, approximately one of every 156 SAR filings of all types would be predicted to describe this activity. However, only 17 (11.26%) of the 151 SAR filings described one or more illicit activities associated with or underlying the reported structuring and/or money laundering. This outcome predicts that just one in 1,385 SAR filings of all types within the aggregated SAR database would describe other illicit activities associated with structuring and/or money laundering substantively tied to the residential real estate industry; or just 0.07 percent of all SAR filings. The other 596 SAR narratives mainly described mortgage loan fraud involving inflated appraisals of property and/or inflated prospective mortgagor income figures intended to defraud the lending institution.
Excerpted from SAR Activity Review Issue 13, page 11
First published on 04/02/2013