State of Financial Crime 2023 Report

Investigation Finds 60% of French Riviera Real Estate Firms Are Ignoring Russia Sanctions

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On January 12, 2023, the French Ministry of the Economy announced a “punch action” is currently underway to verify compliance with asset-freezing measures by real estate professionals in the Alpes-Maritimes. Conducted by the General Directorate for Competition, Consumer Affairs, and Fraud Prevention (DGCCRF), the investigation began in September 2022.

Following the Russian invasion of Ukraine in February 2022, the EU has imposed nine sanctions packages and has gradually strengthened asset-freezing measures with the inclusion of new individuals and entities on the lists of sanctioned persons. However, according to the DGCCRF, 60% of French Riviera real estate agencies were unaware of their freezing obligations or not implementing them as required.  

The Ministry notes that follow-up checks are in progress.   

Compliance Failings

In October 2022, the European Commission issued its Supranational Risk Assessment Report (SNRA) to the European Parliament and Counsel regarding the risk of money laundering and terrorist financing affecting the internal market. The report noted that a recent study by the European Commission found there are nearly 31,000 companies in Europe with Russian beneficial owners. 1,400 of them have ownership (up to 5%) held by 33 individuals subject to recent sanctions. The study also found that the companies were mainly active in the real estate, construction, hotel, financial, and energy sectors. 

As a result, the report urged Member States to ensure their competent authorities conduct sufficient unannounced spot-checks on real estate professionals. 

The DGCCRF’s investigation follows the SNRA’s guidance. In addition to not meeting freezing obligations, the DGCCRF discovered multiple other compliance failings in the Alpes-Maritimes real estate sector, including:

Risk-Based Approach Guidance for the Real Estate Sector

According to the Financial Action Task Force’s updated guidance for the real estate sector, the following policies should be devised, implemented, and reviewed to ensure compliance professionals have a complete picture of who their customers are at the onboarding stage and throughout the account’s lifecycle:

  • Simplified due diligence (SDD) –  A real estate professional’s business may implement SDD measures when warranted if it has been reasonably established that the customer and transaction represent a lower degree of ML/TF risk.
  • Customer due diligence (CDD)CDD involves more than client verification processes, and a real estate business should gather and assess all relevant information to ensure that the company:
    • Can verify the identity of every customer and those claiming to act on their behalf
    • Has taken all sufficient measures to determine the identity of the beneficial owner
    • Fully understands the client’s circumstances and business, such as the expected nature of transactions, including their ad hoc nature
  • Enhanced due diligence – A real estate business should consider applying EDD measures when certain geographical, client, and transactional risks are present, particularly when:
    • Clients have links to high-risk jurisdictions
    • Complex ownership structures are deliberately used to obfuscate beneficial ownership
  • Beneficial ownership – Entities should have a clear and concise policy and relevant training for real estate professionals to lodge a suspicious transaction report (STR) when the identity of the beneficial owner has not been satisfied due to a lack of CDD information

Prospects for 2023

In our State of Financial Crime 2023 survey, we asked 800 C-suite and senior

compliance decision-makers across North America, Europe, and Asia Pacific how Russia’s invasion of Ukraine impacted their organization’s business. Our data for France showed that 38% of firms implemented asset-freezing measures, 48% shut down onboarding processes in Russia, and 60% changed their business model. 

To prepare for further geopolitical volatility, compliance teams should have appropriately comprehensive and agile screening tools in place. In our survey, 96 percent of firms told us real-time anti-money laundering (AML) risk data would improve their response to sudden sanctions regime changes. Having identified the need, they should ensure they work with vendors that can deliver for them. 

Key Takeaways

As the sanctions landscape continues to evolve, firms should provide appropriate training and guidance for compliance staff to help them understand the latest sanctions measures, how to handle affected clients and/or transactions, and updated communications. 

Compliance staff should also ensure they are familiar with implementing freezing measures, as highlighted by the Autorité des marchés financiers (AMF). Pursuant to European regulations and Article L. 562-4 of the Monetary and Financial Code, real estate professionals that identify a client subject to a freezing measure must implement the measures “without delay.” Firms must also notify the Directorate General of the Treasury and the person or entity in question.

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Originally published January 19, 2023, updated January 23, 2023

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