Business integrity in real estate: tackling illicit financial flows

In the face of advancing technology, what are the most effective measures and approaches to managing illicit financial flows in real estate? Held in collaboration with the World Economic Forum’s Partnering Against Corruption Initiative, a panel of experts examined the roles and responsibilities of gatekeepers working in real estate.

In a recent webinar moderated by Chris Alder, RICS’ senior executive officer, standards and regulation, an expert panel discussed illicit financial flows in real estate: why the real sector is particularly vulnerable and the work of the World Economic Forum’s Partnering Against Corruption Initiative.

What are illicit financial flows and what impact do they have?

Illicit financial flows are illegal cross-border movements of money obtained through corruption, fraud, tax evasion or organised crime. Up to $1.6 trillion annually – equivalent to 2.7% of global GDP – is lost to money laundering, according to the UN. This figure includes both domestic and cross-border criminal activities. The harm caused extends far beyond economic damage and financial costs. Illicit financial flows also deepen social inequalities, lead to unsafe developments, fuel environmental harm, deter foreign investment and divert resources intended for sustainable growth, says, Houssam Al Wazzan, lead, Partnering Against Corruption Initiative (PACI), at the World Economic Forum (WEF). Founded 20 years ago by CEOs of WEF partner companies, PACI takes a multi-stakeholder approach to tackling corruption globally across industries and is committed to promoting a transparent, accountable and sustainable business environment.

Why is real estate vulnerable to illicit financial flows?

Real estate is particularly vulnerable to illicit financial flows because of the high value of transactions and the complex ownership structures, explains Houssam. One of the challenges for global real estate firms is inconsistent regulation across jurisdictions, says Claire Handley, chief ethics and compliance officer at JLL. In some markets, for example in the US, there is no legal requirement for real estate brokers to conduct anti-money laundering (AML) checks. In others, like the UK, there are more stringent AML regulations. This makes it difficult not only to implement consistent standards across all countries, but also to request thorough due diligence information from clients in markets where such questions are not typically expected, says Claire.

For smaller firms, challenges include a lack of risk awareness, training and resources, such as a dedicated compliance department, says Delia Ferreira Rubio, a member of the WEF Global Future Council of Good Governance. Access to information is made more difficult by the cross-border nature of transactions and participants involved in illicit financial flows. Delia also points out that due diligence typically focuses on buyers, but sellers should not be overlooked, as they, too, can be part of a laundering network.

Red flags to consider

One of the biggest challenges for law enforcement and regulators is that criminals persistently attempt to circumvent measures designed to close vulnerabilities. Therefore, it is vital that all professionals involved in the real estate transaction chain maintain vigilance and continued efforts to stay one step ahead, says Jonathan Drimmer a partner in the litigation department of Paul Hastings LLP and its global co-chair of ESG and sustainable finance.

 ‘The inability to ascertain true ownership, even after due diligence, remains the single clearest red flag’, says Jonathan. Complex ownership structures, unexplained wealth, use of shell companies and transactions through jurisdictions with opaque regulations are key potential indicators, he says. Jonathan recommends the Financial Action Task Force (FATF) ‘black list’ (high-risk jurisdictions) and ‘grey list’ (countries working with FATF to address deficiencies) as a useful resource professionals involved in real estate transactions.

Anti-corruption organisation, Transparency International, which Delia chaired from 2017 to 2023, is also a valuable source of information, including its Corruption Perceptions Index. A recent report by Transparency International France, Transparency International and the Anti-Corruption Data Collective, reveals that 71% of all corporate-owned French parcels (the smallest divisions in the French land registry) contain real estate that remains anonymously held. This includes 717,411 legal entities (out of 2.37 million different private legal entities) that appear to have a ‘fictitious’ SIREN number (unique company identifiers) starting with the letter U that cannot be located in the French national company register. This is a major red flag and something that can be easily checked, says Delia.

Using technology to counter illicit financial flows

Modern screening solutions and AI have significantly enhanced risk management, says Claire. For larger firms in a competitive market, she emphasises that the due diligence process must keep pace with the speed and volume of the deal flow to avoid becoming a bottleneck. She recognises that these platforms require significant investment, both in terms of initial implementation and ongoing costs, which may not be feasible for smaller firms. However she suggests other systems, such as CRMs or invoice systems can be leveraged to help identify red flags such as multiple entities sharing the same address or other suspicious patterns.

Jonathan highlights that one of the main mistakes firms make is thinking complying with local regulation, or even the strictest international regulations, is sufficient. Firms also need to put into place affirmative measures that are designed to detect and prevent fraudulent activity through continued education, vigilance, resources and technology, he says.

Aside from the criminal repercussions for companies and individuals inadvertently caught up in illicit financial flows, firms can also face reputational damage, significant commercial and operational impacts, including increased difficulty in contracting business, as well as heightened due diligence scrutiny, says Jonathan. He also points out that these negative consequences are likely to affect a firm’s ability to recruit talent.

What can be done to protect the industry?

‘Gatekeepers are essential in protecting our system from illicit activities. If they don’t perform their role effectively, they risk becoming enablers’, stresses Delia.  Professions such as finance, law, surveying and real estate professionals are often at the forefront of the transaction chain. Rather than being passive intermediaries, they are essential in defending the legitimate system, says Houssam.

Building on PACI, in October 2024 the WEF set up Gatekeepers Advancing Integrity and Transparency. This includes a framework to support real estate with implementing standards and developing a risk-based approach, along with providing a detailed set of principles to help the sector identify and manage inherent risks. Importantly, both large firms and small and medium-sized enterprises were consulted to ensure the framework is accessible and relevant to companies of all sizes and resource capabilities, explains Houssam.

It is only through collective action, shared knowledge, proactive safeguards, emphasising the importance of gatekeepers and commitment between all the different stakeholders, can we strengthen integrity in the real estate sector to protect markets and ultimately foster a more sustainable future, says Houssam. ‘It's more than just about the regulations, it’s also recognising we sometimes need to go the extra mile and do the right thing’, he concludes. 

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