The most significant risk was, and remains, the investment of foreign proceeds of crime in Australian property; that is, where foreign investors, including public officials, use funds obtained through fraudulent or corrupt conduct to purchase real estate.
Investment of foreign proceeds of crime
In its Mutual Evaluation Report of Australia, the Financial Action Task Force (FATF) referred to the lack of oversight regulating real estate agents’ and lawyers’ compliance with anti-money laundering and counter-terrorism financing legislation, notwithstanding this being a high-risk area for money laundering.
The FATF taskforce’s recommendations are widely recognised as the international standards for combating money laundering and terrorism financing. According to the Mutual Evaluation Report, Australia is seen as an attractive destination for foreign proceeds [of crime], particularly corruption-related proceeds flowing into real estate, from the Asia-Pacific region.
The Foreign Investment Review Board (FIRB) noted in its 2014 Annual Report that foreign investment in real estate increased sharply compared to approvals granted in the 2013 financial year.
In dollar terms, $74.6 billion was approved in 2014 compared to $51.9 billion in 2013, with the bulk of the increase attributed to the purchase of residential real estate.
While American investors are the largest investors in Australia, the country with the most rapid growth in foreign investment is China. An ABC Four Corners report from October 2015 estimated real estate investments by Chinese investors were as much as $12 billion in the 2015 financial year.
Precisely who is responsible for combating the risk of proceeds of crimes being invested in Australia by foreign nationals is currently less than clear. While the FIRB must review and approve foreign investments in Australia, its view is that considering the origins of the funds invested is outside its scope. There is also no requirement for AUSTRAC to check the source of incoming funds unless there are obvious concerns of serious crimes.
Without clear accountability and reporting at a federal agency level, it is difficult to quantify the extent of the risk and its impact; however, it has been estimated that $1.7 trillion of corrupt and criminal proceeds were spent by Chinese investors around the world between 1992 and 2012.
What does all this mean for Australian vendors?
By accepting the purchase proceeds which could become the subject of the proceeds of crime, there is a risk of seizure of the assets by foreign government and enforcement agencies.
A 2014 joint operation between the Australian Federal Police and their Chinese counterparts saw assets seized from individuals identified by the Chinese. Interestingly, some of these individuals were naturalised Australian citizens and permanent residents, making the potential connection to criminal activity in China difficult to identify.
From a property developer perspective, there is also the risk of negative impact on the financial viability of a development project, particularly if the funding of the project is dependent on pre-selling to overseas investors.
Traditional fraud and corruption risks
While foreign investment is seen as more of an emerging risk, more traditional fraud risks still exist within the sector.
Fraudsters continue to acquire, gear and sell property using false identification and lending documentation to deceive the various State Land Titles Offices, legitimate buyers and sellers, and, of course, banks and other financiers. These fraud risks should not be dismissed in favour of focusing on the emerging risks.
Recent examples of such fraud include:
- Stolen identities: An organised crime network in Perth attempted to sell a home using the stolen identities of the real owners. The attempt was only discovered when the real estate agent confirmed a change of contact details with the original details on file and the real owners alerted the real estate agent.
- Forged documents: An attempt was made to purchase a luxury home for $6 million in Victoria using a false bank cheque. The real estate agent performed due diligence on the purchaser when considering his offers on the property, and noted that his history appeared “flimsy.”
- Fraudulent transfer: A director of a company fraudulently transferred the title of a parcel of land belonging to the company to himself and his spouse. One of the company’s shareholders subsequently sought an order for the land to be transferred back to the company as it was procured by fraud.
- Mortgage fraud – broker: Two mortgage brokers created and used false documents to support home loan applications on behalf of their clients, resulting in $110m worth of loans to their customers and commissions for the brokers.
- Refinancing fraud: By using a set of fraudulent title deeds, a group were able to refinance Rugby House for $14.4 million, purchasing gold bullion from the Perth Mint with the proceeds. The fraud was discovered when the Perth Mint and its security company became suspicious of the transaction.
- Trust account fraud: An estate agent is alleged to have misappropriated funds in the agency’s trust account over a six-month period totalling $2 million. This resulted in clients of the agency missing settlement dates and subsequent financial loss. The agency was placed into external administration in the wake of the investigation.
What can individuals and organisations do?
A review of Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act that began in 2014 should lead to improvements in the anti-money laundering regime; meanwhile, there are actions that individuals and organisations can undertake to protect themselves when conducting real estate transactions.
As lenders, real estate agents, and developers should:
- Consider the risks – perform a high level risk assessment of the potential client. This may be in a checklist format to ensure consistent application of basic criteria across all potential client groups.
- Know who you’re dealing with – once an initial risk assessment has been completed, you should consider whether further due diligence is needed to clear any red flags or concerns identified, and know who you’re dealing with.
- Ensure controls are in place and operating effectively – effective controls may help identify fraud perpetrated by third parties external to the organisation, but it is important to note that fraud may not always be perpetrated by third parties external to an organisation. It is likewise important to ensure you have the appropriate internal controls in place to manage and assess risks and that they are operating effectively to prevent or detect internal fraud.
Vendors and buyers should:
- Know who you’re dealing with – due diligence of a potential buyer and vendor can be invaluable to flag potential issues of concern.
- Ask what your advisors do on your behalf – whether it is your real estate agent, lawyer or conveyancer, it is worth asking what they do on your behalf in terms of due diligence on the prospective buyer.