Description
Fincen conducted a Suspicious Activity Report (SAR) narrative assessment specifically to identify reports of suspected money laundering to promote or facilitate financial crimes generally associated with the residential real estate industry.
1 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Suspected Money Laundering in the
Residential Real Estate Industry
An Assessment Based Upon Suspicious Activity
Report Filing Analysis
April 2008
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Table of Contents
BACKGROUND 1
EXECUTIVE SUMMARY 3
METHODOLOGY 5
RESEARCH AND ANALYSIS 6
Structuring Activities Related to Residential Real Estate 6
Money Laundering Activities Related to Residential Real Estate 7
Structuring and/or Money Laundering in Residential Real Estate
to Promote Other Illicit Activities 9
Tax Evasion 9
Fraud 10
Identity Thef 11
Other Reported or Suspected Illicit Activities 11
SIGNIFICANT FINDINGS 13
Persons, Professions and Businesses Involved in Structuring,
Money Laundering, and Associated Crimes Tied to Residential
Real Estate 15
Filing Trends 17
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Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Background
F
inCEN conducted a Suspicious Activity Report (SAR) narrative assessment
specifcally to identify reports of suspected money laundering to promote or
facilitate fnancial crimes generally associated with the residential real estate
industry. It follows upon a December 2006 FinCEN assessment of SAR narratives
regarding money laundering in the commercial real estate industry.
1
This report
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
fnancial activity.
Residential real estate-related money laundering is ofen associated with mortgage
loan fraud.
2
This connection is understandable since money launderers may engage
in mortgage loan fraud to promote laundering through residential real estate. Both
money launderers and fraudsters engaged in mortgage loan fraud to reap illicit profts
may employ nominee or straw buyers to fraudulently secure mortgage loans.
3
Once
a fraudulent mortgage loan is funded, however, the actions of the fraudster and those
of the launderer diverge. The fraudster, who has generally employed a dishonest
appraiser to infate the value of the property and thereby the face amount of the loan
See FinCEN publication, Money Laundering in the Commercial Real Estate Industry: an Assessment Based
upon Suspicious Activity Report Filing Analysis, at
htp://www.fncen.gov/commercial_real_estate_assessment_fnal.pdf.
See FinCEN publication, Mortgage Loan Fraud: An Industry Assessment Based Upon Suspicious Activity
Report Analysis, at htp://www.fncen.gov/MortgageLoanFraud.pdf.
Straw buyer – in real estate transactions, a straw buyer is a person who allows his name, identifers,
and credit rating to be used to secure a mortgage for the purchase of real property. The straw buyer
generally understands that he will neither occupy the property nor make payments on the loan. The
straw buyer is generally paid a fee by the individual who either intends to fip the property or use the
loan to launder illicit funds.
1.
2.
3.
2 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
granted by the lending institution (property fipping), need only take the proceeds of
the loan and abscond.
4
The launderer, on whom this report is focused, has no interest
in defrauding the lending institution. Instead, the launderer will strive to project
an image of normalcy by continuing to make regular and timely payments on the
mortgage loan, thereby integrating his illicit funds. Eventually, the launderer may
re-sell the property, allowing for a trade-up to a more expensive property afording
greater laundering and investment potential.
Whereas a lending institution is virtually certain to fle a SAR in instances where it is
the target of either a failed or successful mortgage loan fraud for proft scheme which
threatens the institution’s revenues, the same lending institution may have signifcant
difculty in even identifying mortgage loan fraud perpetrated by the money
launderer. This may explain the signifcant number of SAR flings reporting mortgage
loan fraud for proft and the paucity of SAR flings reporting mortgage loan fraud to
promote money laundering.
Legitimate property fipping includes the purchase and rehabilitation of distressed property, which
is then resold at a price greater than the original price plus the cost of rehabilitation. Fraudulent
property fipping, as discussed herein, generally involves infation of the true market value of
property by employing the services of a dishonest appraiser. This false appraisal is intended to
persuade a lending institution to grant a mortgage loan on the property for more than the property
is worth. The lending institution may sufer a loss if the loan goes unpaid, and may be lef with a
foreclosed property that has a market value well below the fraudulent appraisal value.
4.
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Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Executive Summary
A
lthough SAR narratives reporting suspicious activity associated with the
residential real estate industry are relatively common, only about 20 percent
of such flings 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 thef.
Specifcally, 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 profts as contributions.
Various types of fraud and identity thef 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 thef 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
estate-related money laundering were identifed as individuals unafliated with
residential real estate-related businesses. For example, launderers may use multiple
nominees or straw buyers to secure numerous mortgages on various residential
properties, thereby creating a means for the conversion of illicit cash into real
property while projecting the appearance of many unrelated mortgages paid on a
regular and timely basis.
•
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4 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
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 fling narratives. In these
instances, the impetus to structure and/or launder generally appeared to be tax evasion.
The numbers of relevant SAR flings increased signifcantly afer 2002 with the
steepest increase reported in 2004-2005. The period 2005-2006 saw a pronounced
fatening in the percentage increase in flings.
The patern of increase generally follows that reported in FinCEN’s commercial real
estate and mortgage loan fraud SAR assessments, suggesting that the increase in these
flings kept pace with, at least in part, the increase in mortgage loan activity brought
on by an active national real estate market, which was in turn fueled in part by low
mortgage interest rates. The fatening of the increase in SAR flings 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 flings reporting money laundering associated with residential real estate
continue to keep pace with the mortgage loan market, a predicted wave of refnancing,
along with the predicted steady course for fxed-rate mortgages, might suggest mildly
increasing numbers of SAR flings in subsequent near-term reporting periods.
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Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Methodology
F
inCEN used a Bank Secrecy Act (BSA) database analysis tool to isolate SARs of
all types fled 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.
5
From the 195,253 SARs, 1,095 were randomly selected for review. Of these, 1,029
were fled by depository institutions, 59 were fled by money services businesses,
and seven were fled by securities and futures businesses. From our review, we
identifed 747 flings that described residential real estate-related transactions or
involved persons, professions or businesses in that sector.
6
Of these identifed
flings, 151 (20.21%) described suspected structuring and/or money laundering, and
17 of those described specifc additional suspected criminal activities, such as tax
evasion and fraud.
7
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 flings 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 flings, 31 of 59 (52.54%) money services business flings, and
two of seven (28.57%) securities and futures flings analyzed.
The narratives of the remaining 348 flings 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.
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 flings of the total 4.2 million SARs of all types existent at the time of
this assessment; or 0.64 percent of all SAR flings. Accordingly, approximately one of every 156 SAR
flings of all types would be predicted to describe this activity. However, only 17 (11.26%) of the
151 SAR flings 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 flings 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 flings. The other 596 SAR narratives mainly described mortgage loan
fraud involving infated appraisals of property and/or infated prospective mortgagor income fgures
intended to defraud the lending institution.
5.
6.
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Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Research & Analysis
T
he 151 identifed SAR narratives fell into six categories: structuring,
8
money
laundering,
9
tax evasion, fraud, identity thef, and other reported or suspected
illicit activities.
Structuring Activities Related to Residential Real Estate
The following summaries of SAR narratives illustrate suspected structuring
activities involving professions, businesses or transactions related to the residential
real estate industry.
A money services business reported that an individual purchased six money
orders totaling $6,000 over a two-week period, all payable to the same mortgage
company. No money order purchase was for more than $3,000.
1.
“Structuring” occurs when a person, for the purpose of evading reporting or recordkeeping
requirements under the Bank Secrecy Act, causes or atempts to cause a fnancial institution to fail to
fle reports or make records; causes or atempts to cause a fnancial institution to fle reports or make
records that contain material omissions or misstatements of fact; conducts or atempts to conduct one
or more transactions, in any amount, at one or more fnancial institutions, on one or more days, in
any manner, including the “breaking up” of a single sum that exceeds a reporting or recordkeeping
threshold into smaller sums at or below the threshold. See 31 U.S.C. 5324; 31 C.F.R. 103.11(gg); 31
C.F.R. 103.63. Although structuring is frequently associated with money laundering and is ofen an
indicator of it, the reasons for structuring fnancial transactions vary.
“Money laundering” is the disguising of funds derived from illicit activity so that the funds may be
used without detection of the illegal activity that produced them. Money laundering is a well-thought
out process accomplished in three stages:
Placement: Requires physically moving and placing the funds into fnancial institutions or the retail
economy. Depositing structured amounts of cash into the banking sector, and smuggling currency
across international borders for further deposit, are common methods for placement.
Layering: Once the illicit funds have entered the fnancial system, multiple and sometimes complex
fnancial transactions are conducted to further conceal their illegal nature, and to make it difcult
to identify the source of the funds or eliminate an audit trail. Purchasing monetary instruments
(traveler’s checks, banks drafs, money orders, leters of credit, securities, bonds, etc.) with other
monetary instruments, transferring funds between accounts, and using wire transfers facilitate
layering.
Integration: The illicit funds re-enter the economy disguised as legitimate business earnings
(securities, businesses, real estate). Unnecessary loans may be obtained to disguise illicit funds as the
proceeds of business loans.
8.
9.
7 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A money services business reported that two individuals purchased ofcial
checks for the same uneven multi-thousand dollar amount within a three-day
period payable to the same title company. Aggregated, the checks exceeded
$10,000.
A bank reported that an individual apparently received a series of structured
personal loans to pay for real estate. All loans were below $10,000.
A bank reported that a customer deposited an escrow check for nearly $1 million
to his personal account. Over a six-month period, the customer used funds from
this account to repeatedly purchase smaller and smaller ofcial checks, each time
taking amounts just under $10,000 in cash.
Money Laundering Activities Related to Residential
Real Estate
The following summaries of SAR narratives illustrate suspected money laundering
activities involving professions, businesses or transactions related to the residential
real estate industry.
1. A bank reported that one of its mortgage ofcers was found to have supplied
false reference leters to non-resident aliens on dozens of mortgage loans. The
bank ofcer resigned from the bank before this information was discovered,
but a bank investigation of the mater determined that the loan ofcer had a
business relationship with both the real estate agent involved in the sale of all of
the properties and with a real estate appraiser. Additionally, the bank thought
the real estate agent might be the actual owner of the properties being sold. The
bank feared that given the false nature of the reference leters combined with the
involvement of the appraiser, the bank might be facing multiple loan defaults as the
result of loans made to fnancially unqualifed loan applicants on properties with
infated values. Nonetheless, every one of the loans was reportedly performing.
Although not specifcally suggested by the fling institution, it has been our
experience that such activity may indicate the potential use of straw buyers to
obtain dozens of mortgages, which could then be used to launder illicit funds as
the loan payments are made.
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2.
3.
4.
In this illustration, a straw buyer is a person who accepts a fee from a money launderer to allow the
money launderer to use the straw buyer’s identity on a mortgage loan application. The straw buyer
generally neither occupies the purchased property, nor has any material part in repaying the loan.
10.
8 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
2. An investment company reported that an individual received a wire from a
third party remiter to his investment account and then drew down funds in
the account, including a check to his business, a development company. The
investment company reported it believed the activities described may indicate
money laundering.
3. A bank reported that during a three-month period, a customer received nearly
$800,000 in large wire transfers to his account from an escrow company. The
customer then purchased three large cashier’s checks payable to the same escrow
company. Although not specifcally stated in the SAR narrative, it has been our
experience that such activity may be part of a layering scheme.
4. A bank reported that its customer, an employee of a loan company, made 20
deposits and received 27 on-line payment transfers to his personal account
within a four-month period. During the same period, the customer sent three
wire transfers, purchased 17 ofcial checks, and wrote four checks against the
account. Many of these payments were made to real estate-related companies.
Transactions on the account totaled nearly $600,000 during this period. The bank
reported that it believed the described activities might be indicative of money
laundering.
5. A bank reported that it made a series of residential real estate loans (mainly
refnancing and home equity loans) through the same two mortgage companies
to various individuals aggregating just over $6.5 million. In each instance, the
borrower demanded rescission of the loan(s) a short time afer funding. In each
instance, the bank refused to rescind the loan(s), and the borrower immediately
paid of the loan(s). Although not specifcally stated in the SAR narrative, it has
been our experience that the described activities may suggest the operation of
some type of layering scheme.
6. A bank reported that a customer operating as a mortgage company issued
numerous even multi-thousand dollar checks to numerous individuals, all under
$10,000. The mortgage company’s principal claimed that the checks represented
employee salaries, and that the company’s funding sources were title and real
estate companies.
7. A bank reported that two related customers opened ten certifcates of deposit
accounts with aggregate balances of $1.5 million using funds from an undisclosed
source. Though the maturities on the time deposit accounts were two years, afer
approximately one year, the customers closed all of the accounts and used the
funds to purchase a cashier’s check payable to an escrow company.
9 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
8. A bank reported that it had declined a borrower’s $2 million mortgage loan
application based on information obtained from the Internet. The Internet
implicated the bank’s customer in a scheme to launder millions of dollars
originating in Russia. The SAR narrative indicated the customer was under
investigation for laundering between $300,000 and $500,000 per week in this case
associated with a major bank scandal.
Structuring and/or Money Laundering in Residential Real
Estate to Promote Other Illicit Activities
The following summaries of SAR narratives illustrate suspected structuring and/or
money laundering to promote or facilitate other reported or suspected crimes.
Tax Evasion
A bank reported that a law enforcement ofcial, who also owned a business,
made a cash deposit to his personal account and purchased a bank check payable
to a mortgage company with additional cash totaling over $40,000. The money
was comprised mainly of 50-dollar bills. The fler indicated its concern about
the source of the cash, which was deposited to the subject’s account in a period
of less than one month. Though the SAR narrative does not specifcally state it,
our experience suggests the cash may have been derived from the customer’s
business and may have represented a conversion of cash business receipts in a
possible atempt to evade taxes. Given the reported occupation of the customer
and the form of the cash, the activities could also suggest potential public
corruption.
A bank reported a series of transactions occurring within a one-month period in
which the same property was bought and sold among related individuals. As
a result of this fipping of the property, the bank granted a loan re-fnance of
over $600,000 to an individual who did not hold title to the property at the time
the loan closed. The bank indicated in the SAR narrative that it was not able to
defnitively determine the motive for these transactions, but surmised that they
may have been conducted to promote money laundering or tax evasion.
A bank reported that the wife of a real estate construction company owner
cashed numerous checks payable to the construction business totaling nearly
$89,000, in amounts of or below $10,000. In the SAR narrative, the bank surmised
that the checks were cashed in a structured manner to lessen the reported income
for the construction business and thereby evade taxes.
1.
2.
3.
10 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported account activity for a customer who was involved in buying
and selling real estate and collecting rental payments. The reported transactions
were being conducted through accounts intended for non-proft religious
organizations. Account activity showed no evidence of parishioner contributions
or purchases that might be particular to a religious organization. The bank
stated in the SAR narrative that it believed the customer was misusing his tax
exempt status as a non-proft organization to run a for-proft real estate and
property management company and using his non-proft accounts to disguise
the proceeds as contributions to evade taxes.
Fraud
An investment company reported that individuals allegedly involved in real
estate investing atempted to kite over $25 million through their investment
company account by depositing a check drawn on a closed account. The
individuals atempted to layer the proceeds by sending four wire transfers
to other fnancial institutions totaling nearly $22.8 million funded by the
uncollected balance in their investment account.
A bank reported that a customer used a $500,000 home equity line of credit
to start what appeared at frst to be a major check kiting operation. During a
three-month period, nearly $2.5 million moved through the customer’s personal
account. The source of funds was checks drawn on what were apparently
multiple real estate investment company accounts on which the customer was
the sole signer. Also, during this period no checks were returned unpaid. The
bank noted in the SAR narrative that these activities had the appearance of
layering. Bank research located a website associated with the customer that
describes how small investors can invest in contracts to develop residential and
commercial real estate. The bank believes this Internet solicitation might be a
pyramid scheme intended to defraud the public.
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4.
1.
2.
According to a Securities and Exchange Commission report: “In the classic ‘pyramid’ scheme,
participants atempt to make money solely by recruiting new participants into the program. The
hallmark of these schemes is the promise of sky-high returns in a short period of time for doing
nothing other than handing over your money and geting others to do the same. The fraudsters
behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-
level marketing program. But despite their claims to have legitimate products or services to sell, these
fraudsters simply use money coming in from new recruits to pay of early stage investors.”
See htp://www.sec.gov/answers/pyramid.htm.
11.
11 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported that federal and state tax refund checks generated by the fling
of false tax returns were apparently deposited to mortgage trust accounts. The
trust accounts were tied to properties to which the fraudulently obtained tax
refund checks were mailed.
A bank reported that one of its customers was named in media reports. The
customer had pled guilty to wire fraud and money laundering. He admited that
he obtained $6.4 million in mortgage loans using false appraisals.
Identity Theft
A bank reported that it received a change of address on a home equity line of
credit account and later determined that the actual accountholder’s identity had
been assumed by another individual. Nearly $260,000 was paid out against the
home equity line before the fraud was discovered. The funds were paid by check
to several diferent individuals.
A bank reported a similar scheme involving a home equity line of credit. In this
scheme, the identity thief both sent in a change of address to the bank and set
up a bank account at a diferent institution in the name of the actual account
holder. Though the fler did not specifcally speculate on the precise reasons for
these activities, it is our experience that the reported information suggests this
may have been done to both facilitate transfers that would be less likely to raise
suspicions and to initiate the layering process.
Other Reported or Suspected Illicit Activities
A bank reported that an unemployed individual made cash deposits with
ofseting wire transfers and ofcial check purchases totaling more than $350,000
over a nine-month period payable to the same escrow company. Though not
reported in the SAR narrative, the information reported suggests the individual
may have been layering funds and was potentially operating an unregistered
money services business.
A bank reported that according to news reports one of its customers was arrested
for his involvement in the sale of drugs. Bank records indicated the customer
may have laundered proceeds through a title company, a health food and
supplements store he was associated with, and through the purchase of real
estate.
3.
4.
1.
2.
1.
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12 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported that within a four-month period a customer made structured
cash deposits to her account. She also deposited large checks writen by
apparently unrelated individuals residing in two diferent states. Additionally,
bank records indicated that the customer had received fve wire transfers to her
account totaling $150,000 several months before. All of these monies served to
fund a wire transfer of over $450,000 to an escrow company. One of the signors
on some of the large checks deposited to the account was also found to have
writen a large check to the same escrow company. It was noted that another
of the deposited large checks bore a memo line notation apparently referencing
real estate in a city in a Middle Eastern country under Ofce of Foreign Assets
Control (OFAC) sanctions. The customer also sent a wire transfer from the
account to an individual located in another country in the same region.
A bank reported that it had discovered through media reports that one of its
customers, whose corporation had a mortgage loan with the bank, had been
paying the mortgage with funds derived from sales of pirated compact discs.
3.
4.
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Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Signifcant Findings
T
he level of residential real estate related SAR flings describing structuring
and/or money laundering remained steady from 1997 to 2002. The number of
flings increased markedly from 2002 to 2003, reached a plateau from 2003 to
2004, and rose sharply in the period 2004 to 2005, resulting in six times the number
of SARs fled in 2005 as were fled in 2002. A pronounced fatening of this rate of
increase in flings occurred from 2005 to 2006. The increases in flings were much
larger than the corresponding increases in sales of new and existing homes.
One possible explanation for the disproportionate increase in flings may be the
difering SAR fling requirements of the players within the residential real estate
industry combined with the due diligence performed on each mortgage loan package
as real estate market conditions changed over time. Unlike lending institutions,
mortgage brokers have no SAR fling requirement. Consequently, a loan package
rejected by a mortgage broker for reasons of atempted fraud will not trigger a SAR
fling, whereas the same loan package reviewed by a lending institution probably will.
As the real estate market turned up during 2003-2005, mortgage brokers may not have
devoted the proper amount of due diligence to all loan packages, thus resulting in a
larger number of fraudulent loan packages being approved and forwarded to lending
institutions. This greater number of fraudulent loan packages reaching lending
institutions might account for the noted increase in SAR flings.
The numbers of SAR flings describing money laundering associated with residential
real estate tracked the changes in market activity over time. As mortgage interest rates
dropped signifcantly during 2003-2005, market activity increased as did these types
of SAR flings. As mortgage interest rates moved higher in 2005-2006, market activity
slowed refecting the fatening noted above in the fling pace of related SAR flings.
14 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A total of $1.1 trillion worth of adjustable rate mortgages reset in 2007. With
adjustable rates trending higher than fxed rates, a major shif into fxed rate
mortgages may be in the ofng.
12
Though the refnancing of these loans would
probably not pose as high a level of risk for loan fraud and money laundering as
would new loans, such a wave of refnancing could correlate with an increase in SAR
flings reporting money laundering associated with the residential real estate sector.
Of the 1,095 SAR flings in the reviewed sample, 747 were found to be relevant to the
study. Just over 20 percent of these concerned suspected structuring and/or money
laundering. However, just 11 percent of this subset of SAR flings described one or
more suspected illicit activities apparently facilitated by the reported structuring and/
or money laundering. Of the other suspected activities reported, the most prevalent
were tax evasion, fraud, and identity thef.
A wide range of professions and businesses were noted as subjects in the SAR
narratives describing the suspected structuring and/or money laundering. In most
of the narratives, however, the subjects were not employed by, or otherwise afliated
with, residential real estate-related businesses. Builders, contractors, and rehabbers
were the most commonly reported subjects that were afliated with residential
real estate-related businesses.
13
Other businesses involved in residential real estate
transactions, such as escrow companies, real estate companies, title companies and
mortgage companies, were reported as primary subjects, but with less frequency than
unafliated individuals and builders, contractors or rehabbers.
See library.hsh.com/?row_id=92, library.hsh.com/?row_id=93, and library.hsh.com/?row_id=94; and
htp://www.house.gov/apps/list/hearing/fnancialsvcs_dem/htbair090507.pdf. Additionally, Freddie
Mac predicted steady levels for fxed-rate mortgage interest rates continuing through at least the frst
quarter of 2007. See htp://www.freddiemac.com/news/fnance/outlooks/Dec_06_frecom_outlook.html.
Of the total 161 subjects reported in 151 flings, 122 (75.78%) were individuals not employed by a
residential real estate-related entity. As a group, builders, contractors, and rehabbers were the next
most frequently reported subjects in nine (5.59%) reported occurrences.
12.
13.
15 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Persons, Professions and Businesses Involved in Structuring,
Money Laundering and Associated Crimes Tied to Residential
Real Estate
Table 1 shows a breakdown of the persons, professions and businesses referenced in
the 151 sampled SAR narratives.
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Table 1
Subject Reported Occurrences
(#)
Total Reported
Occurrences (%)
Unaffliated Individual 122 75.78
Builder/Contractor/Rehabber 9 5.59
Escrow Company 5 3.11
Real Estate Company 5 3.11
Title Company 5 3.11
Mortgage Company 4 2.48
Bank Offcer 3 1.86
Attorney 2 1.24
Loan Broker 2 1.24
Development Company 1
Fincen conducted a Suspicious Activity Report (SAR) narrative assessment specifically to identify reports of suspected money laundering to promote or facilitate financial crimes generally associated with the residential real estate industry.
1 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Suspected Money Laundering in the
Residential Real Estate Industry
An Assessment Based Upon Suspicious Activity
Report Filing Analysis
April 2008
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Table of Contents
BACKGROUND 1
EXECUTIVE SUMMARY 3
METHODOLOGY 5
RESEARCH AND ANALYSIS 6
Structuring Activities Related to Residential Real Estate 6
Money Laundering Activities Related to Residential Real Estate 7
Structuring and/or Money Laundering in Residential Real Estate
to Promote Other Illicit Activities 9
Tax Evasion 9
Fraud 10
Identity Thef 11
Other Reported or Suspected Illicit Activities 11
SIGNIFICANT FINDINGS 13
Persons, Professions and Businesses Involved in Structuring,
Money Laundering, and Associated Crimes Tied to Residential
Real Estate 15
Filing Trends 17
1
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Background
F
inCEN conducted a Suspicious Activity Report (SAR) narrative assessment
specifcally to identify reports of suspected money laundering to promote or
facilitate fnancial crimes generally associated with the residential real estate
industry. It follows upon a December 2006 FinCEN assessment of SAR narratives
regarding money laundering in the commercial real estate industry.
1
This report
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
fnancial activity.
Residential real estate-related money laundering is ofen associated with mortgage
loan fraud.
2
This connection is understandable since money launderers may engage
in mortgage loan fraud to promote laundering through residential real estate. Both
money launderers and fraudsters engaged in mortgage loan fraud to reap illicit profts
may employ nominee or straw buyers to fraudulently secure mortgage loans.
3
Once
a fraudulent mortgage loan is funded, however, the actions of the fraudster and those
of the launderer diverge. The fraudster, who has generally employed a dishonest
appraiser to infate the value of the property and thereby the face amount of the loan
See FinCEN publication, Money Laundering in the Commercial Real Estate Industry: an Assessment Based
upon Suspicious Activity Report Filing Analysis, at
htp://www.fncen.gov/commercial_real_estate_assessment_fnal.pdf.
See FinCEN publication, Mortgage Loan Fraud: An Industry Assessment Based Upon Suspicious Activity
Report Analysis, at htp://www.fncen.gov/MortgageLoanFraud.pdf.
Straw buyer – in real estate transactions, a straw buyer is a person who allows his name, identifers,
and credit rating to be used to secure a mortgage for the purchase of real property. The straw buyer
generally understands that he will neither occupy the property nor make payments on the loan. The
straw buyer is generally paid a fee by the individual who either intends to fip the property or use the
loan to launder illicit funds.
1.
2.
3.
2 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
granted by the lending institution (property fipping), need only take the proceeds of
the loan and abscond.
4
The launderer, on whom this report is focused, has no interest
in defrauding the lending institution. Instead, the launderer will strive to project
an image of normalcy by continuing to make regular and timely payments on the
mortgage loan, thereby integrating his illicit funds. Eventually, the launderer may
re-sell the property, allowing for a trade-up to a more expensive property afording
greater laundering and investment potential.
Whereas a lending institution is virtually certain to fle a SAR in instances where it is
the target of either a failed or successful mortgage loan fraud for proft scheme which
threatens the institution’s revenues, the same lending institution may have signifcant
difculty in even identifying mortgage loan fraud perpetrated by the money
launderer. This may explain the signifcant number of SAR flings reporting mortgage
loan fraud for proft and the paucity of SAR flings reporting mortgage loan fraud to
promote money laundering.
Legitimate property fipping includes the purchase and rehabilitation of distressed property, which
is then resold at a price greater than the original price plus the cost of rehabilitation. Fraudulent
property fipping, as discussed herein, generally involves infation of the true market value of
property by employing the services of a dishonest appraiser. This false appraisal is intended to
persuade a lending institution to grant a mortgage loan on the property for more than the property
is worth. The lending institution may sufer a loss if the loan goes unpaid, and may be lef with a
foreclosed property that has a market value well below the fraudulent appraisal value.
4.
3
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Executive Summary
A
lthough SAR narratives reporting suspicious activity associated with the
residential real estate industry are relatively common, only about 20 percent
of such flings 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 thef.
Specifcally, 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 profts as contributions.
Various types of fraud and identity thef 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 thef 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
estate-related money laundering were identifed as individuals unafliated with
residential real estate-related businesses. For example, launderers may use multiple
nominees or straw buyers to secure numerous mortgages on various residential
properties, thereby creating a means for the conversion of illicit cash into real
property while projecting the appearance of many unrelated mortgages paid on a
regular and timely basis.
•
•
•
•
•
•
•
4 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
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 fling narratives. In these
instances, the impetus to structure and/or launder generally appeared to be tax evasion.
The numbers of relevant SAR flings increased signifcantly afer 2002 with the
steepest increase reported in 2004-2005. The period 2005-2006 saw a pronounced
fatening in the percentage increase in flings.
The patern of increase generally follows that reported in FinCEN’s commercial real
estate and mortgage loan fraud SAR assessments, suggesting that the increase in these
flings kept pace with, at least in part, the increase in mortgage loan activity brought
on by an active national real estate market, which was in turn fueled in part by low
mortgage interest rates. The fatening of the increase in SAR flings 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 flings reporting money laundering associated with residential real estate
continue to keep pace with the mortgage loan market, a predicted wave of refnancing,
along with the predicted steady course for fxed-rate mortgages, might suggest mildly
increasing numbers of SAR flings in subsequent near-term reporting periods.
5
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Methodology
F
inCEN used a Bank Secrecy Act (BSA) database analysis tool to isolate SARs of
all types fled 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.
5
From the 195,253 SARs, 1,095 were randomly selected for review. Of these, 1,029
were fled by depository institutions, 59 were fled by money services businesses,
and seven were fled by securities and futures businesses. From our review, we
identifed 747 flings that described residential real estate-related transactions or
involved persons, professions or businesses in that sector.
6
Of these identifed
flings, 151 (20.21%) described suspected structuring and/or money laundering, and
17 of those described specifc additional suspected criminal activities, such as tax
evasion and fraud.
7
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 flings 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 flings, 31 of 59 (52.54%) money services business flings, and
two of seven (28.57%) securities and futures flings analyzed.
The narratives of the remaining 348 flings 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.
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 flings of the total 4.2 million SARs of all types existent at the time of
this assessment; or 0.64 percent of all SAR flings. Accordingly, approximately one of every 156 SAR
flings of all types would be predicted to describe this activity. However, only 17 (11.26%) of the
151 SAR flings 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 flings 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 flings. The other 596 SAR narratives mainly described mortgage loan
fraud involving infated appraisals of property and/or infated prospective mortgagor income fgures
intended to defraud the lending institution.
5.
6.
7.
6
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Research & Analysis
T
he 151 identifed SAR narratives fell into six categories: structuring,
8
money
laundering,
9
tax evasion, fraud, identity thef, and other reported or suspected
illicit activities.
Structuring Activities Related to Residential Real Estate
The following summaries of SAR narratives illustrate suspected structuring
activities involving professions, businesses or transactions related to the residential
real estate industry.
A money services business reported that an individual purchased six money
orders totaling $6,000 over a two-week period, all payable to the same mortgage
company. No money order purchase was for more than $3,000.
1.
“Structuring” occurs when a person, for the purpose of evading reporting or recordkeeping
requirements under the Bank Secrecy Act, causes or atempts to cause a fnancial institution to fail to
fle reports or make records; causes or atempts to cause a fnancial institution to fle reports or make
records that contain material omissions or misstatements of fact; conducts or atempts to conduct one
or more transactions, in any amount, at one or more fnancial institutions, on one or more days, in
any manner, including the “breaking up” of a single sum that exceeds a reporting or recordkeeping
threshold into smaller sums at or below the threshold. See 31 U.S.C. 5324; 31 C.F.R. 103.11(gg); 31
C.F.R. 103.63. Although structuring is frequently associated with money laundering and is ofen an
indicator of it, the reasons for structuring fnancial transactions vary.
“Money laundering” is the disguising of funds derived from illicit activity so that the funds may be
used without detection of the illegal activity that produced them. Money laundering is a well-thought
out process accomplished in three stages:
Placement: Requires physically moving and placing the funds into fnancial institutions or the retail
economy. Depositing structured amounts of cash into the banking sector, and smuggling currency
across international borders for further deposit, are common methods for placement.
Layering: Once the illicit funds have entered the fnancial system, multiple and sometimes complex
fnancial transactions are conducted to further conceal their illegal nature, and to make it difcult
to identify the source of the funds or eliminate an audit trail. Purchasing monetary instruments
(traveler’s checks, banks drafs, money orders, leters of credit, securities, bonds, etc.) with other
monetary instruments, transferring funds between accounts, and using wire transfers facilitate
layering.
Integration: The illicit funds re-enter the economy disguised as legitimate business earnings
(securities, businesses, real estate). Unnecessary loans may be obtained to disguise illicit funds as the
proceeds of business loans.
8.
9.
7 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A money services business reported that two individuals purchased ofcial
checks for the same uneven multi-thousand dollar amount within a three-day
period payable to the same title company. Aggregated, the checks exceeded
$10,000.
A bank reported that an individual apparently received a series of structured
personal loans to pay for real estate. All loans were below $10,000.
A bank reported that a customer deposited an escrow check for nearly $1 million
to his personal account. Over a six-month period, the customer used funds from
this account to repeatedly purchase smaller and smaller ofcial checks, each time
taking amounts just under $10,000 in cash.
Money Laundering Activities Related to Residential
Real Estate
The following summaries of SAR narratives illustrate suspected money laundering
activities involving professions, businesses or transactions related to the residential
real estate industry.
1. A bank reported that one of its mortgage ofcers was found to have supplied
false reference leters to non-resident aliens on dozens of mortgage loans. The
bank ofcer resigned from the bank before this information was discovered,
but a bank investigation of the mater determined that the loan ofcer had a
business relationship with both the real estate agent involved in the sale of all of
the properties and with a real estate appraiser. Additionally, the bank thought
the real estate agent might be the actual owner of the properties being sold. The
bank feared that given the false nature of the reference leters combined with the
involvement of the appraiser, the bank might be facing multiple loan defaults as the
result of loans made to fnancially unqualifed loan applicants on properties with
infated values. Nonetheless, every one of the loans was reportedly performing.
Although not specifcally suggested by the fling institution, it has been our
experience that such activity may indicate the potential use of straw buyers to
obtain dozens of mortgages, which could then be used to launder illicit funds as
the loan payments are made.
10
2.
3.
4.
In this illustration, a straw buyer is a person who accepts a fee from a money launderer to allow the
money launderer to use the straw buyer’s identity on a mortgage loan application. The straw buyer
generally neither occupies the purchased property, nor has any material part in repaying the loan.
10.
8 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
2. An investment company reported that an individual received a wire from a
third party remiter to his investment account and then drew down funds in
the account, including a check to his business, a development company. The
investment company reported it believed the activities described may indicate
money laundering.
3. A bank reported that during a three-month period, a customer received nearly
$800,000 in large wire transfers to his account from an escrow company. The
customer then purchased three large cashier’s checks payable to the same escrow
company. Although not specifcally stated in the SAR narrative, it has been our
experience that such activity may be part of a layering scheme.
4. A bank reported that its customer, an employee of a loan company, made 20
deposits and received 27 on-line payment transfers to his personal account
within a four-month period. During the same period, the customer sent three
wire transfers, purchased 17 ofcial checks, and wrote four checks against the
account. Many of these payments were made to real estate-related companies.
Transactions on the account totaled nearly $600,000 during this period. The bank
reported that it believed the described activities might be indicative of money
laundering.
5. A bank reported that it made a series of residential real estate loans (mainly
refnancing and home equity loans) through the same two mortgage companies
to various individuals aggregating just over $6.5 million. In each instance, the
borrower demanded rescission of the loan(s) a short time afer funding. In each
instance, the bank refused to rescind the loan(s), and the borrower immediately
paid of the loan(s). Although not specifcally stated in the SAR narrative, it has
been our experience that the described activities may suggest the operation of
some type of layering scheme.
6. A bank reported that a customer operating as a mortgage company issued
numerous even multi-thousand dollar checks to numerous individuals, all under
$10,000. The mortgage company’s principal claimed that the checks represented
employee salaries, and that the company’s funding sources were title and real
estate companies.
7. A bank reported that two related customers opened ten certifcates of deposit
accounts with aggregate balances of $1.5 million using funds from an undisclosed
source. Though the maturities on the time deposit accounts were two years, afer
approximately one year, the customers closed all of the accounts and used the
funds to purchase a cashier’s check payable to an escrow company.
9 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
8. A bank reported that it had declined a borrower’s $2 million mortgage loan
application based on information obtained from the Internet. The Internet
implicated the bank’s customer in a scheme to launder millions of dollars
originating in Russia. The SAR narrative indicated the customer was under
investigation for laundering between $300,000 and $500,000 per week in this case
associated with a major bank scandal.
Structuring and/or Money Laundering in Residential Real
Estate to Promote Other Illicit Activities
The following summaries of SAR narratives illustrate suspected structuring and/or
money laundering to promote or facilitate other reported or suspected crimes.
Tax Evasion
A bank reported that a law enforcement ofcial, who also owned a business,
made a cash deposit to his personal account and purchased a bank check payable
to a mortgage company with additional cash totaling over $40,000. The money
was comprised mainly of 50-dollar bills. The fler indicated its concern about
the source of the cash, which was deposited to the subject’s account in a period
of less than one month. Though the SAR narrative does not specifcally state it,
our experience suggests the cash may have been derived from the customer’s
business and may have represented a conversion of cash business receipts in a
possible atempt to evade taxes. Given the reported occupation of the customer
and the form of the cash, the activities could also suggest potential public
corruption.
A bank reported a series of transactions occurring within a one-month period in
which the same property was bought and sold among related individuals. As
a result of this fipping of the property, the bank granted a loan re-fnance of
over $600,000 to an individual who did not hold title to the property at the time
the loan closed. The bank indicated in the SAR narrative that it was not able to
defnitively determine the motive for these transactions, but surmised that they
may have been conducted to promote money laundering or tax evasion.
A bank reported that the wife of a real estate construction company owner
cashed numerous checks payable to the construction business totaling nearly
$89,000, in amounts of or below $10,000. In the SAR narrative, the bank surmised
that the checks were cashed in a structured manner to lessen the reported income
for the construction business and thereby evade taxes.
1.
2.
3.
10 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported account activity for a customer who was involved in buying
and selling real estate and collecting rental payments. The reported transactions
were being conducted through accounts intended for non-proft religious
organizations. Account activity showed no evidence of parishioner contributions
or purchases that might be particular to a religious organization. The bank
stated in the SAR narrative that it believed the customer was misusing his tax
exempt status as a non-proft organization to run a for-proft real estate and
property management company and using his non-proft accounts to disguise
the proceeds as contributions to evade taxes.
Fraud
An investment company reported that individuals allegedly involved in real
estate investing atempted to kite over $25 million through their investment
company account by depositing a check drawn on a closed account. The
individuals atempted to layer the proceeds by sending four wire transfers
to other fnancial institutions totaling nearly $22.8 million funded by the
uncollected balance in their investment account.
A bank reported that a customer used a $500,000 home equity line of credit
to start what appeared at frst to be a major check kiting operation. During a
three-month period, nearly $2.5 million moved through the customer’s personal
account. The source of funds was checks drawn on what were apparently
multiple real estate investment company accounts on which the customer was
the sole signer. Also, during this period no checks were returned unpaid. The
bank noted in the SAR narrative that these activities had the appearance of
layering. Bank research located a website associated with the customer that
describes how small investors can invest in contracts to develop residential and
commercial real estate. The bank believes this Internet solicitation might be a
pyramid scheme intended to defraud the public.
11
4.
1.
2.
According to a Securities and Exchange Commission report: “In the classic ‘pyramid’ scheme,
participants atempt to make money solely by recruiting new participants into the program. The
hallmark of these schemes is the promise of sky-high returns in a short period of time for doing
nothing other than handing over your money and geting others to do the same. The fraudsters
behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-
level marketing program. But despite their claims to have legitimate products or services to sell, these
fraudsters simply use money coming in from new recruits to pay of early stage investors.”
See htp://www.sec.gov/answers/pyramid.htm.
11.
11 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported that federal and state tax refund checks generated by the fling
of false tax returns were apparently deposited to mortgage trust accounts. The
trust accounts were tied to properties to which the fraudulently obtained tax
refund checks were mailed.
A bank reported that one of its customers was named in media reports. The
customer had pled guilty to wire fraud and money laundering. He admited that
he obtained $6.4 million in mortgage loans using false appraisals.
Identity Theft
A bank reported that it received a change of address on a home equity line of
credit account and later determined that the actual accountholder’s identity had
been assumed by another individual. Nearly $260,000 was paid out against the
home equity line before the fraud was discovered. The funds were paid by check
to several diferent individuals.
A bank reported a similar scheme involving a home equity line of credit. In this
scheme, the identity thief both sent in a change of address to the bank and set
up a bank account at a diferent institution in the name of the actual account
holder. Though the fler did not specifcally speculate on the precise reasons for
these activities, it is our experience that the reported information suggests this
may have been done to both facilitate transfers that would be less likely to raise
suspicions and to initiate the layering process.
Other Reported or Suspected Illicit Activities
A bank reported that an unemployed individual made cash deposits with
ofseting wire transfers and ofcial check purchases totaling more than $350,000
over a nine-month period payable to the same escrow company. Though not
reported in the SAR narrative, the information reported suggests the individual
may have been layering funds and was potentially operating an unregistered
money services business.
A bank reported that according to news reports one of its customers was arrested
for his involvement in the sale of drugs. Bank records indicated the customer
may have laundered proceeds through a title company, a health food and
supplements store he was associated with, and through the purchase of real
estate.
3.
4.
1.
2.
1.
2.
12 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A bank reported that within a four-month period a customer made structured
cash deposits to her account. She also deposited large checks writen by
apparently unrelated individuals residing in two diferent states. Additionally,
bank records indicated that the customer had received fve wire transfers to her
account totaling $150,000 several months before. All of these monies served to
fund a wire transfer of over $450,000 to an escrow company. One of the signors
on some of the large checks deposited to the account was also found to have
writen a large check to the same escrow company. It was noted that another
of the deposited large checks bore a memo line notation apparently referencing
real estate in a city in a Middle Eastern country under Ofce of Foreign Assets
Control (OFAC) sanctions. The customer also sent a wire transfer from the
account to an individual located in another country in the same region.
A bank reported that it had discovered through media reports that one of its
customers, whose corporation had a mortgage loan with the bank, had been
paying the mortgage with funds derived from sales of pirated compact discs.
3.
4.
13
Financial Crimes Enforcement Network
Money Laundering in the Residential Real Estate Industry
Signifcant Findings
T
he level of residential real estate related SAR flings describing structuring
and/or money laundering remained steady from 1997 to 2002. The number of
flings increased markedly from 2002 to 2003, reached a plateau from 2003 to
2004, and rose sharply in the period 2004 to 2005, resulting in six times the number
of SARs fled in 2005 as were fled in 2002. A pronounced fatening of this rate of
increase in flings occurred from 2005 to 2006. The increases in flings were much
larger than the corresponding increases in sales of new and existing homes.
One possible explanation for the disproportionate increase in flings may be the
difering SAR fling requirements of the players within the residential real estate
industry combined with the due diligence performed on each mortgage loan package
as real estate market conditions changed over time. Unlike lending institutions,
mortgage brokers have no SAR fling requirement. Consequently, a loan package
rejected by a mortgage broker for reasons of atempted fraud will not trigger a SAR
fling, whereas the same loan package reviewed by a lending institution probably will.
As the real estate market turned up during 2003-2005, mortgage brokers may not have
devoted the proper amount of due diligence to all loan packages, thus resulting in a
larger number of fraudulent loan packages being approved and forwarded to lending
institutions. This greater number of fraudulent loan packages reaching lending
institutions might account for the noted increase in SAR flings.
The numbers of SAR flings describing money laundering associated with residential
real estate tracked the changes in market activity over time. As mortgage interest rates
dropped signifcantly during 2003-2005, market activity increased as did these types
of SAR flings. As mortgage interest rates moved higher in 2005-2006, market activity
slowed refecting the fatening noted above in the fling pace of related SAR flings.
14 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
A total of $1.1 trillion worth of adjustable rate mortgages reset in 2007. With
adjustable rates trending higher than fxed rates, a major shif into fxed rate
mortgages may be in the ofng.
12
Though the refnancing of these loans would
probably not pose as high a level of risk for loan fraud and money laundering as
would new loans, such a wave of refnancing could correlate with an increase in SAR
flings reporting money laundering associated with the residential real estate sector.
Of the 1,095 SAR flings in the reviewed sample, 747 were found to be relevant to the
study. Just over 20 percent of these concerned suspected structuring and/or money
laundering. However, just 11 percent of this subset of SAR flings described one or
more suspected illicit activities apparently facilitated by the reported structuring and/
or money laundering. Of the other suspected activities reported, the most prevalent
were tax evasion, fraud, and identity thef.
A wide range of professions and businesses were noted as subjects in the SAR
narratives describing the suspected structuring and/or money laundering. In most
of the narratives, however, the subjects were not employed by, or otherwise afliated
with, residential real estate-related businesses. Builders, contractors, and rehabbers
were the most commonly reported subjects that were afliated with residential
real estate-related businesses.
13
Other businesses involved in residential real estate
transactions, such as escrow companies, real estate companies, title companies and
mortgage companies, were reported as primary subjects, but with less frequency than
unafliated individuals and builders, contractors or rehabbers.
See library.hsh.com/?row_id=92, library.hsh.com/?row_id=93, and library.hsh.com/?row_id=94; and
htp://www.house.gov/apps/list/hearing/fnancialsvcs_dem/htbair090507.pdf. Additionally, Freddie
Mac predicted steady levels for fxed-rate mortgage interest rates continuing through at least the frst
quarter of 2007. See htp://www.freddiemac.com/news/fnance/outlooks/Dec_06_frecom_outlook.html.
Of the total 161 subjects reported in 151 flings, 122 (75.78%) were individuals not employed by a
residential real estate-related entity. As a group, builders, contractors, and rehabbers were the next
most frequently reported subjects in nine (5.59%) reported occurrences.
12.
13.
15 Money Laundering in the Residential Real Estate Industry
Financial Crimes Enforcement Network
Persons, Professions and Businesses Involved in Structuring,
Money Laundering and Associated Crimes Tied to Residential
Real Estate
Table 1 shows a breakdown of the persons, professions and businesses referenced in
the 151 sampled SAR narratives.
14
Table 1
Subject Reported Occurrences
(#)
Total Reported
Occurrences (%)
Unaffliated Individual 122 75.78
Builder/Contractor/Rehabber 9 5.59
Escrow Company 5 3.11
Real Estate Company 5 3.11
Title Company 5 3.11
Mortgage Company 4 2.48
Bank Offcer 3 1.86
Attorney 2 1.24
Loan Broker 2 1.24
Development Company 1