Money laundering in real estate transactions

In this article we examine Australia’s anti-money laundering laws and how they touch on the activities of real estate developers, as well as the penalties developers may face if they are found to have facilitated money laundering.

In April 2015, the Financial Action Task Force (FATF), an intergovernmental body whose aim is to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the international financial system, published a Mutual Evaluation Report reviewing Australia’s anti-money laundering and counter-terrorist measures. In the report, the FATF noted that, although Australia has strong legal, law enforcement and operational measures for combating money laundering and terrorism financing, it is still seen as an attractive destination for foreign proceeds of crime and identified the Australian real estate sector as a high money laundering risk.

In June 2015, Melbourne daily newspaper The Age published an article alleging that the sale of a Melbourne apartment complex had been used to facilitate the payment of bribes to Malaysian officials. Developers in Melbourne’s suburb of Caulfield allegedly accepted a price from a Malaysian Government investment fund that was inflated by around A$4.75 million; that excess was allegedly then paid to corrupt Malaysian government officials through the Australian developers. According to the article, the developers went along with the money laundering scheme in order to push forward the sale of the development.

This case highlights the need for property developers in Australia to understand their potential liability should they be found to have facilitated money laundering (whether knowingly or not).

In Australia, anti-money laundering offences are mainly contained in the Anti-Money Laundering and Counter- Terrorism Financing Act 2006 and accompanying regulations (together, AML Laws) and the Criminal Code Act 1995 (Criminal Code). These laws capture a wide range of conduct such as receiving, possessing or disposing of money or other property that is the proceeds of crime or may become an instrument of crime.

The Criminal Code makes it an offence to ‘deal with’ money or other property that is, or is likely to become, proceeds of crime or an instrument of crime. ‘Deal with’ is defined as receiving, possessing, concealing or disposing of money or other property, as well as importing, exporting, or engaging in a banking transaction relating to money or other property. An ‘instrument of crime’ is money or other property used in the commission of an offence.

The requisite mental element for the Criminal Code’s money laundering offence is knowledge (the defendant is aware or believes that money or property is the proceeds of crime or will be used to commit an offence), recklessness (the defendant is aware of a substantial risk that money or property is the proceeds of crime or will be used to commit an offence) or negligence (the defendant has failed to exercise due care to ensure that money or property is not the proceeds of crime).

For a company, the required mental elements of the crime are proven if the company is shown to have expressly, tacitly or impliedly authorised or permitted the commission of the offence. Authorisation can be proved by showing that the corporation failed to create and maintain a corporate culture that required compliance with the Criminal Code. Negligence can be proved by showing inadequate corporate management or supervision of an agent of the company. The mental elements of the money laundering offence mean that it is vital for developers to have a process in place to review investors and the source of their purchase funds as well as a training program that actively encourages and maintains an appropriate corporate culture.

Penalties under both the AML Laws and the Criminal Code depend on the value of the money or property involved. Penalties under the Criminal Code additionally depend on the state of mind of the defendant when the offence was committed. The Criminal Code deals with money of a higher value than the AML Laws and it also deals with property. From July 31, 2015, the maximum penalty for a corporation under the Criminal Code is A$1.35 million where the value of the money or property involved is over A$1 million.

In addition to penalties, proceeds of crime can be confiscated under the Proceeds of Crime Act. Under this legislation, the onus is on the developer to prove that the purchase moneys were not the proceeds or an instrument of crime. Confiscation can be ordered even if the purchase moneys were received unknowingly and have been dissipated within the business. This can be a substantial burden for developers who have not undertaken adequate due diligence in relation to investors.

The Criminal Code also criminalises bribery of a foreign public official and bribery of a Commonwealth public official. Australian State and Territory legislation prohibits private sector bribery.

In some circumstances, a company’s involvement in money laundering may also constitute bribery or aiding and abetting bribery.

From July 31, 2015, the maximum penalty for a company under the Criminal Code for a bribery offence will be A$18 million, three times the value of the benefit the company has obtained from the conduct, or 10 per cent of the company’s annual turnover, whichever is the greater.

Earlier this year, Transparency International published Corruption on your doorstep: How corrupt capital is used to buy property in the UK. The report sets out the organisation’s key findings regarding international investment in UK property markets, including a recommendation that the UK Land Registry make transparency a requirement over the owners of shell companies investing in UK property.

In a similar vein, Australia’s booming property markets have a growing reputation as some of the most lucrative for international money laundering, particularly for money flowing from the Asia-Pacific region. This means that Australian property development businesses should be vigilant when it comes to governance obligations under Australia’s antimoney laundering laws. A failure to do so may result not only in significant fines, seizure or tracing of purchase moneys but also significant reputational damage.