About one in five suspicious activity reports banks file with federal regulators over concerns about a residential real estate transaction show signs of money laundering or tax evasion, according to a new Treasury Department report.
The report found evidence of money laundering or "structuring" — transactions involving incomplete or falsified records — in 20 percent of suspicious activity reports involving residential real estate transactions between 1996 and 2006.
The Treasury Department’s Financial Crimes Enforcement Network also detected a steep increase in the incidence of filings that might involve money laundering after 2004, to more than 50 percent.
FinCEN’s report looked at a random sample of 1,095 suspicious activity reports, of which 747 involved residential real estate transactions. Of those, 151 described suspected structuring or money laundering.
Extrapolating those results to the 4.2 million total suspicious activity reports filed during the 11-year study period (most of which did not involve real estate transactions) suggests that bankers flagged 26,925 residential real estate transactions because they suspected money laundering or structuring, the report said.
Last month, FinCEN reported that banks filed 52,868 suspicious activity reports involving suspected mortgage fraud in 2007, up 42 percent from 2006 (see story).
But money laundering in residential real estate is likely to be a bigger problem than those numbers suggest, the report said, because banks are less likely to detect money laundering and file suspicious reports than when they are victimized by mortgage fraud schemes.
While perpetrators of mortgage fraud schemes often abscond with the proceeds of a loan obtained on an inflated property and default on the mortgage, money launderers "strive to project an image of normalcy by continuing to make regular and timely payments on the mortgage loan, thereby integrating his illicit funds," the report said.
While banks are "virtually certain" to file suspicious activity reports when they are victims of mortgage fraud schemes that deprive them of revenue, they may have difficulty in even identifying fraud perpetrated by money launders, FinCEN experts concluded.
Many falsified loans are only identified when they are bundled together for sale to wholesale lenders, who may identify problems in the loans that obligate the original lending institution to repurchase them, even though they continue to perform, the report said.
While mortgage fraud schemes may require the collusion of appraisers, loan originators, and title and escrow firms, it’s easier to launder money through residential real estate without the help of industry insiders by using straw buyers and layered accounts, the report said.
FinCEN analysts said that about 75 percent of suspects in the sample of potential money laundering and structuring schemes examined in the study were not employed in residential real estate or lending.
The 25 percent of reported suspects who were employed by or had ties to the industry included builders and contractors (5.6 percent), escrow companies (3.1 percent), real estate companies (3.1 percent), title companies (3.1 percent), mortgage companies (2.5 percent) and bank officers (1.9 percent). Attorneys and loan brokers each made up 1.2 percent of suspects, while development companies, landlords, settlement services providers and timeshare companies each accounted for less than 1 percent of suspects.
Money laundering — disguising the source of illegally obtained funds or concealing the proceeds of legitimate businesses to evade taxes — involves three steps: placing funds into financial institutions or the economy; layering the funds through multiple transactions (sometimes using money orders or cashiers checks); and integrating the money back into legitimate business earnings.
Money launderers may take out unnecessary loans to disguise illicit funds as the proceeds of business loans. The report — intended to raise awareness of the issue among financial institutions and real estate professionals — details numerous examples of how residential real estate transactions are used to launder money, and how such attempts are sometimes detected.
In one instance, a bank reported that one of its loan officers had supplied false reference letters to nonresident aliens on dozens of mortgage loans. After the employee resigned, the bank determined the loan officer had a business relationship with the real estate agent involved in the sale of all of the properties and with a real estate appraiser.
The bank suspected the real estate agent might be the actual owner of the properties, and feared it was facing multiple loan defaults. But all of the loans continued to perform — an indication that straw buyers may have been used to obtain dozens of mortgages that were then used to launder illicit funds as the loan payments are made, FinCEN concluded in its report.
In another instance, a bank made a series of residential real estate loans totaling more than $6.5 million through two mortgage companies. Most of the loans were refinance or home equity loans. In each case, the borrowers demanded rescission of the loans. When the banks refused, the borrowers immediately paid off the loans, suggesting a layering scheme, FinCEN concluded.
In another case, a bank reported that it had declined a borrower’s $2 million mortgage loan application after discovering, through an Internet search, that the applicant had been implicated in a scheme to launder millions of dollars originating in Russia.
FinCEN’s report also details numerous cases of suspected money laundering for purposes of tax evasion.
One bank reported that a law enforcement official who also owned a business used more than $40,000 in cash to purchase a bank check payable to a mortgage company. FinCEN analysts said the report may illustrate an attempt to launder cash from a business to avoid paying taxes, but could also suggest "public corruption."
In another case, a bank reported a property was flipped several times among related individuals in a one-month period, and that one person who did not hold title to the property was able to secure a refinance loan of more than $600,000. The bank could not determine the motive for the transactions, but suspected money laundering or tax evasion.
The report, "Suspected Money Laundering in the Residential Real Estate Industry," is a follow up to a December 2006 FinCEN study, "Money Laundering in the Commercial Real Estate Industry."
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