CDD best practices for the US real estate sector

The US real estate sector is one of the largest in the world, with an estimated value of $113.6 trillion in 2023. As such, its unsurprising that US authorities have expressed concerns about the role of illicit finance in high-end residential purchases. The National Money Laundering Risk Assessment 2022 (NMLRA 2022) report by the Department of the Treasury pointed out how criminals have been using shell companies and all-cash purchases to obscure the origin of illicit funds and invest in luxury properties in cities like New York and Miami.

In light of these illicit finance risks, chapter four of our Guide to AML/CFT Reforms in the US Real Estate Sector outlines a financial crime checklist for real estate businesses. With a volatile global economic and sanctions environment piling further pressure on compliance teams, this article explores five customer due diligence (CDD) best practices for the US real estate sector.

Real estate best practices: Customer due diligence

In the real estate industry, CDD plays a crucial role in preventing money laundering and terrorist financing. By identifying and addressing potential risks, real estate professionals can reduce their exposure to financial crime and minimize their exposure to legal penalties and regulatory scrutiny. But what specific actions can compliance teams take to ensure their CDD measures are both effective and efficient? 

1. Understand the risk environment

Money laundering and terrorist financing are incredibly dynamic threats. Businesses can’t afford to simply check boxes on a pre-determined list of potential issues. Instead, real estate firms of all types should ensure they understand the risk environment in which they operate.

The Financial Action Task Force (FATF) highlights three criteria for firms to consider: 

• Customer risks: Clients can be categorized into three levels of risk – low, medium, and high. Low-risk clients may include first-time buyers in small cities, while medium-risk clients can be individuals with an average net worth. High-risk clients usually involve high net-worth individuals, foreign politically exposed persons (PEPs), or luxury property buyers. Firms should adopt a risk-based approach and customize their risk management measures based on the client’s risk level. For example, performing enhanced due diligence (EDD) on high-risk clients is crucial.
• Geographic risks: It’s vital to identify high-risk jurisdictions highlighted by organizations like FATF, such as North Korea, Iran, and Myanmar. Organizations must understand the implications of operating interests overseas concerning these jurisdictions.
• Product/service/channel risks: With the rise of online platforms in real estate transactions, firms must recognize the potential for fraud prevention measures. Especially for non-face-to-face interactions, it’s essential to implement preventive measures to guard against impersonation and fraud.

2. Implement effective controls

After conducting a risk assessment, companies must determine what type of anti-financial crime framework is necessary. Comprehensive anti-financial crime programs include appointing a senior compliance officer and creating governance structures, policies, and procedures, among other things. However, given the current focus of the US government on identifying beneficial ownership and enhancing CDD standards, companies should prioritize the following areas:

• Identity verification (IDV): Companies should implement secure mechanisms to collect, verify, and store personal data to prevent fraud, money laundering, and sanctions evasion.
• Know your customer (KYC) measures: Organizations need to establish processes for collecting, assessing, and securely storing client’s economic and financial profiles. This will help them to gain a deeper understanding of their clients’ needs and inherent risk levels.
• Screening: It is important to conduct thorough screening checks on clients and beneficial owners, including sanctions lists, political exposure, and adverse media mentions. This will ensure compliance with US sanctions laws.
• Ongoing monitoring: Organizations should continuously monitor client behavior for consistency with CDD/KYC information. They should also be prepared to file suspicious activity reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) for suspicious behavior.

3. Apply controls to business partners

When dealing with real estate transactions, it is important to extend CDD and KYC measures to other firms involved in the transaction, especially when dealing with less-established partners. To identify any additional risk factors, it is recommended to implement know your business (KYB) practices when conducting deals involving business partners.

4. Strategically leverage technology 

Technology is pivotal in enhancing CDD processes by streamlining, automating, and improving various aspects of customer risk assessments and compliance. Technologies to consider implementing into the CDD process include:

• Machine learning (ML): ML algorithms can analyze large datasets and customer profiles to identify patterns associated with high-risk behavior. This helps assess customer risk levels more accurately and enables a more targeted CDD approach. 
• Cloud computing: Cloud-based CDD solutions can quickly scale to handle large volumes of customer data and transactions, ensuring organizations can accommodate growth without significant infrastructure investments.
• Application Programming Interfaces (APIs): Firms can leverage third-party CDD services via APIs, accessing specialized tools and databases for identity verification, risk assessment, and screening.

To ensure the best results, selecting reliable technology partners who offer high-quality risk data and adaptable platforms is important.

5. Calendarize regulatory deadlines and milestones

As a real estate business in the US, it is crucial to stay informed about the latest regulatory changes and key dates. Make sure to keep track of the filing deadlines for beneficial ownership information (BOI), which run from January 1, 2024, to January 1, 2025. Additionally, it is important to monitor updates from FinCEN regarding final rules on access, changes to CDD, and real estate reporting and recordkeeping. 

Firms can proactively manage compliance and financial crime risks by following these detailed best practices while meeting evolving regulatory demands.