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Money Laundering and Mortgages: How To Keep Yourself Safe

Bret Hood
Feb 24, 2020
Photo credit: Getty Images/zazdravnaya

Surjit Singh and Rashjeawar Singh, a father and son from Dublin, Calif., recruited straw buyers to purchase properties in and around Dublin, Calif. The Singhs purchased at least 14 properties and were able to collect origination fees and commissions on approximately $9.3 million worth of real estate. The Singhs, as part of the scheme, created fraudulent loan applications and supporting documents in order to induce lenders to fund the mortgages. The Singhs also set up various limited liability companies (LLCs) to receive some of the commissions and fees trying to avoid further scrutiny of the transactions. As you would expect, the fraud was eventually discovered and the Singhs were sentenced to 11-plus months in prison in 2018.
 
After serving 25 years as a special agent in the FBI, Michael “Bret” Hood became a member of the ACFE faculty, as well as an adjunct professor of forensic accounting for the University of Virginia and Mt. St. Mary’s UniversityThis is just one example of how mortgage brokers and other real estate professionals can fall into money laundering traps. If you don’t take steps to protect yourself and your colleagues, a similar incident could occur in your organization.
 
Real estate has always been appealing to money launderers. Real estate is often the preferred destination for a financial criminal’s ill-gotten gains for the same reason real estate is attractive to any investor: Real estate prices are generally stable and will appreciate over time. Real estate is also functional; a money launderer could use the property as a second home or rent it out, earning income from the investment. High-dollar transactions allow money launderers to legitimize millions of dollars in illicit transactions in a single step, and they do not mind paying the high commissions and origination fees to do so.
 
As late as 2012, some mortgage lenders and originators were not subjected to the provisions of the U.S. Government’s Bank Secrecy Act, but the Financial Crimes Enforcement Network (FinCEN) changed the rules. Now, even non-bank residential mortgage lenders and originators are required to, among other things, identify specific information about their customers, maintain appropriate records, and maintain an adequate Anti-Money Laundering (AML) program. Yet despite these rules, how much has really changed?
 
Money launderers have clearly not backed off in their real estate purchases. In 2015, the “Towers of Secrecy” investigations in the New York Times exposed the scale of foreign dark money clouding Manhattan’s glittery skyline. More than half of the $8 billion spent annually on New York real estate worth more than $5 million involved shell companies. Money launderers utilize shell companies because they serve multiple purposes and the United States is leading the charge. The U.S. has 10 times more shell companies than the next 41 jurisdictions combined, according to the World Bank.
 
Money laundering consists of three stages commonly identified as placement (getting the money into the banking system), layering (moving money around to hide its’ source), and integration (utilizing the money as if it were from legitimate sources). With real estate transactions, the most common stage encountered is integration, but with a little help from corrupt or willfully blind professionals, both placement and layering can also be accomplished. Fictitious loans, false loan applications, fraudulent attestation letters, and simultaneous closings can produce a paper trail designed to deceive other financial professionals as well as governmental and regulatory authorities.
 
One of the biggest red flags for mortgage brokers is the utilization of shell companies or LLCs for the purchase or sale. Shell companies, despite their legitimate uses, allows buyers and sellers to hide their true identities by masking ownership in deep layers or by placing ownership in countries and states, which lack transparency. When setting up a limited liability company (LLC) in states like Delaware, Nevada and Wyoming, the owner doesn’t even have to list their name. They have to name a director and an agent, but that person can be anybody, and there are companies that exist simply to serve as director of LLCs where the beneficial owner doesn’t want to be named. As you would expect, the anonymity provided by shell companies is very attractive to criminals who are seeking to legitimize ill-gotten gains.
 
There are efforts underway to mandate greater accountability via transparency through the open sharing of beneficial ownership of LLCs, but until that happens, mortgage brokers are at risk for knowingly and unknowingly participating in illicit transactions. FinCEN has now required financial institutions, including non-bank residential and mortgage lenders and originators, to verify the identity of beneficial owners who are utilizing LLCs in a real estate transaction. Verifying beneficial ownership of foreign LLCs may be quite difficult. Some mortgage brokers may be forced to rely on paperwork submitted by the lender of borrower, which may not be the best verification method. The World Bank has tried to address this issue by setting up a site that could assist mortgage brokers and other financial professionals in identifying beneficial ownership in LLCs established in countries outside the United States (https://Star.WorldBank.org/Content/Beneficial-Ownership-Guides). The published guide lists 24 countries detailing what information is available and how you can go about requesting said information. While the list is certainly not all-encompassing, it can give you a reference point to determine what is and isn’t available, as well as the processes used in the referenced country to set up LLCs.
 
Photo credit: Getty Images/artisteerWhen you come across an LLC formed in a country that is not on the World Bank’s list, the Financial Action Task Force (FATF) is yet another tool for mortgage brokers to utilize. At the FATF Web site (FATF-GAFI.org), there is a list of countries that are on “monitored” and “call for action” status. FATF officials have identified these countries as lacking in effective money laundering controls. If you, as a mortgage broker, see funds coming to/from these countries or if LLCs are registered in these countries, it should serve as a red flag to take further steps to ascertain whether or not the transaction is utilizing legitimate funding.
 
In addition, the FATF regularly audits countries as to their money laundering efforts and controls.  The reports and findings are available on the Web site and could be a good source of information if you have a mortgage application in the name of an LLC in that country.
 
The increased scrutiny on LLCs has caused money launders to adapt to the regulatory climate. Straw buyers have developed into a viable alternative for real estate transactions to include mortgage applications. When property is bought for laundering, it is usually placed in the name of a third party, such as a relative, associate, relative of an associate or a corporation. FinCEN recognized that real estate is a money laundering haven and issued Geographic Targeting Orders (GTOs) to identify certain high dollar transactions in various American markets. The findings have proved revelatory. As of May 2, 2017, over 30 percent of the real estate transactions reported under the GTOs involved a beneficial owner or purchaser representative that had been the subject of unrelated Suspicious Activity Reports (SARs) filed by U.S. financial institutions. Examples of behavior include known criminal organizations utilizing straw buyers to acquire high-end luxury properties.
 
The most dangerous quandary facing mortgage brokers today, however, is something called willful blindness, which can be caused by bounded ethicality, systematic and predictable ways in which people engage in unethical acts without their own awareness that they are doing anything wrong. Enterprising money launderers will often combine techniques and utilize straw buyers with foreign LLCs to create a tangled web that is difficult for the mortgage broker to trace. A long-term money launderer will want to set up companies to then use to open corporate bank accounts, without having to put their name on anything that would be public. Typically, they hire a law firm in the tax haven jurisdiction to establish a company, using the names of local nominees to be the directors of record, so no trace of the true owner is publicly available. The legally registered company is then used to open bank accounts, like several in different jurisdictions. The fees generated by these high-dollar real estate transactions are substantial and your brain has a natural tendency to both consciously and unconsciously overlook certain relevant information especially when there is a significant monetary gain involved.
 
In the 2008 financial crisis, sub-prime mortgages played a central role in the market collapse and subsequent recession. At every stage of the lending, structuring and purchase chain, the key actors had incentive to understate and under-investigate mortgage-backed securities (MBS) risk. In hindsight, experts are suggesting that bankers, financiers, regulatory authorities, and mortgage brokers should have seen the collapse coming. Charles K. Whitehead, the Cornell Law School Myron C. Taylor Alumni Professor of Business Law and Bernard S. Black, the Northwestern University Nicholas D. Chabraja Law Professor affirmed this idea. We collected evidence that the risk of a non-prime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the originators, securitizers, rating agencies, money managers, and institutional investors who participated in the markets for nonprime lending and related mortgage-backed securities (non-prime MBS). Those who did not see the risk, we argue, were willfully blind.
 
Although you strive to be ethical, your mind doesn’t always cooperate. Bounded ethicality works against you because you will frequently discount the decisional impact of your wants and desires as well as the normal stresses and pressures in life. People tend to mispredict how they will behave in the future, often overestimating the extent to which they would engage in socially desirable behaviors.
 
In order to combat the natural processes in your brain that lead to bounded ethicality, you could pursue something created by Kriti Jain and referred to as consequential reflection, which is the technique of prompting people to reflect on the positive and negative consequences of their decisions. By getting people to stop and reflect on what they are about to do, you would be activating the conscious part of the brain, which is where more rational-based decision-making takes place.
 
Very few mortgage brokers intend to commit fraud and those who do tend to believe that they won’t be caught. Bounded ethicality and willful blindness are enablers that assist people in rationalizing the strange LLC or the mysterious bank transfer the straw buyer uses to make the down payment on the multi-million dollar property. When there are high stakes involved or when the ordinary stresses and pressures of life get in the way, you are more likely to make decisions that you will come to regret. If you take a moment to think about what you are doing, carefully consider the information and documentation before you, and take the time to pursue consequential reflection, you may be able to avoid the dangers that come with questionable mortgage transactions.

After serving 25 years as a special agent in the FBI, Michael “Bret” Hood became a member of the ACFE faculty, as well as an adjunct professor of forensic accounting for the University of Virginia and Mt. St. Mary’s University. During his tenure with the FBI, Bret worked many complex financial crime, money laundering, corruption and major cases such as the 9/11 terrorist attack, the HealthSouth fraud and the Maricopa Investments case. Bret is a federal-court certified expert in money laundering and financial crimes. Currently, Bret serves as an instructor, investigative consultant, and as an expert witness for 21st Century Learning & Consulting LLC (21puzzles.com). He may be reached by e-mail at [email protected].

This article originally appeared in the January 2020 print edition of National Mortgage Professional Magazine.


 
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