Real estate crackdown in South Africa

The Financial Intelligence Centre (FIC) is cracking down on money laundering conducted through real estate deals, with fines of up to R900,000. 

This is feedback from Bianca Neethling, BDO South Africa’s compliance manager, and Paul Baddrick, BDO South Africa’s head of real estate. 

According to the Global Financial Integrity report, South Africa lost over R100 billion in illicit outflows, of which a significant portion was attributed to money laundering. 

The country also ranks 7th in the top worst-offending countries for anti-money laundering (AML) events in the last decade.

Within the first few months of the year, money laundering has become a major focus for financial law enforcement agencies, as eliminating it is key to South Africa’s removal from the Financial Action Task Force’s (FATF) greylist. 

On 24 February 2023, South Africa was placed on FATF’s list of “jurisdictions under increased monitoring”, known as the greylist and gave the country a list of 40 recommendations. 

In October 2023, FATF conducted an exercise to determine the country’s progress since being added to the greylist. 

It found that South Africa has made significant progress in addressing most concerns but failed to adequately improve the coordination of anti-money laundering legislation and provisions relating to combating the financing of terrorism. 

Thus, financial regulators and law enforcement agencies have shifted their focus towards this and, in particular, the role of real estate in money laundering. 

The FIC has taken the lead by issuing fines of up to R900,000 – within the first three months of the year. 

Neethling and Baddrick said these penalties underscore a critical need for vigilance and precision in navigating the regulatory landscape, particularly three pivotal sections—21, 42, and 28A of the AML framework. 

• Section 21: Unveiling the Ultimate Beneficiary

AML compliance lies predominantly in the imperative to determine the Ultimate Beneficial Owner (UBO) of real estate transactions.

Section 21 demands meticulous scrutiny to unveil the true actors behind corporate entities. 

Failure to adhere to these standards not only exposes vulnerabilities to money laundering but also undermines the transparency essential for building trust in the real estate market.

• Section 42: Develop and Implement a Risk Management and Compliance Programme

In the realm of financial integrity, robust risk management and compliance protocols are the bulwarks against illicit activities. 

Section 42 mandates the development and implementation of Risk-based Compliance Programmes (RMCP) tailored to the unique contours of the real estate sector. 

Neglecting this imperative not only leaves firms vulnerable to regulatory sanctions but also compromises their ability to detect and deter money laundering activities effectively.

• Section 28A: Vigilance against Terrorist Financing

The fight against money laundering extends beyond financial crimes to include the critical task of combating terrorist financing. 

Section 28A underscores the obligation to scrutinise clients against the Terrorist Financing Suspect List (TFS List), erecting a crucial barrier against the proliferation of illicit funds to fund nefarious agendas. 

Failing to uphold this obligation not only jeopardises national security but also undermines the integrity of the real estate sector as a whole.

How to protect yourself

• Conduct Business Risk Assessment specific to the real estate business – This identifies vulnerabilities in transactions that criminals might exploit. It evaluates factors such as large cash purchases of high-value properties, complex ownership structures involving shell companies, unexplained cash or rapid wire transfers and identifying areas known for money laundering activity.

• Develop / enhance the business RMCP – an RMCP acts like a personalised security system. It starts with a thorough assessment of your business’s vulnerabilities and then, based on the identified risks, enables the development of tailored procedures. This targeted approach ensures efficient regulatory compliance, while safeguarding the business from illegal activities.

• Conduct quality due diligence procedures on clients – This acts as a background check on clients and transactions and includes client identification, understanding the origin of funds, transaction monitoring, and screening of clients.

• Provide employee training – Real estate employee training for Anti-Money Laundering (AML) compliance equips them to be vigilant watchdogs. It educates them on red flags like high-value cash purchases, complex ownership structures, and unusual payment methods. Training also covers reporting procedures for suspicious activity, ensuring employees know how to escalate concerns and protecting the company from money laundering risks.

Neethling and Baddrick suggested real estate professionals take a proactive stance towards AML compliance by investing in robust due diligence mechanisms and building a culture of compliance that permeates every facet of operations. 

Collaboration across industry stakeholders, regulatory bodies, and law enforcement agencies is paramount in fortifying the defences against money laundering and terrorist financing.