Understanding Real Estate Risks and Anti-Money Laundering Measures in the UAE

Introduction

The real estate sector significantly impacts the gross domestic product (GDP) of the United Arab Emirates (UAE), contributing up to 20% of the GDP. This sector encompasses a diverse array of residential properties, commercial real estate sales, development, and construction. Despite its legitimate and essential function, the real estate sector is also appealing to illicit actors who are interested in concealing, transferring, and investing illicit proceeds.

Illicit activities are actions that involve the illegal generation of income, including the financing of terrorism, money laundering, and other criminal offences. Individuals or entities that engage in these illegal activities are known as "illicit actors." They frequently employ legitimate sectors, such as real estate, to conceal the source of their illicit funds. The mandate requires financial entities like banks, exchange houses, and finance companies to implement anti-money laundering (AML) measures to prevent and detect illicit activities. These entities are known as Licensed Financial Institutions (LFIs). The UAE Central Bank has granted licenses to these entities.

Due to its strategic location, dynamic real estate market, and robust economy, the United Arab Emirates is a prime target for money laundering and other financial-related crimes. The UAE government has recognized these risks and has implemented stringent regulations and guidelines to combat illicit activities. Local financial institutions (LFIs) in the United Arab Emirates are required to implement anti-money laundering (AML) measures in order to mitigate the risks associated with the real estate sector. This article investigates these measures.

The Real Estate Sector in the UAE

The real estate sector in the UAE is diverse and dynamic, encompassing a wide range of activities and properties. It includes:

• Construction and Development: Building residential, commercial, and industrial properties.
• Commercial Real Estate Sales: Sale and leasing of office spaces, retail outlets, and industrial properties.
• Residential Properties: Ranging from affordable housing to luxury villas and apartments.

Over 11,500 professional real estate agents and brokers support the sector, making it an attractive investment option due to its liquidity and stable value retention. The UAE's real estate market is characterized by high-value transactions, a mix of local and international investors, and a regulatory environment that varies across different emirates.

Risks Associated with the Real Estate Sector

Attractiveness to Illicit Actors

The real estate sector is appealing to criminals for several reasons:

• Liquidity and Value Retention: Real estate assets generally maintain or appreciate in value over time, making them a stable investment.
• High-Value Transactions: Real estate transactions often involve large sums of money, allowing criminals to launder significant amounts in a single transaction.
• Enjoyment and Income: Unlike other stores of value, real estate allows for enjoyment (such as living in a luxury villa) or income generation (such as rental properties).
• Normalcy of Transactions: The purchase or sale of real estate is a common activity, providing a convenient cover for illicit transactions.

Example: A criminal organization may purchase a luxury villa using illicit funds. Members of the organization can either enjoy the property or rent it out to generate legitimate income, thereby integrating the illicit funds into the financial system.

Features Increasing Risk

Certain characteristics of the real estate sector can increase its attractiveness to illicit actors:

• Shell Companies: The use of shell companies to own real property can obscure the true owner, making it difficult to identify illicit actors.
• Subjective Pricing: Money laundering schemes can manipulate the price of real estate, which remains unfixed.
• Sequential Selling: The quick sale and resale of properties reduces suspicion when criminals use similar tactics to launder money.
• Residency Rights: In some jurisdictions, owning real estate can grant residency rights, which illicit actors may exploit to expand their criminal networks or escape investigation.

Example: A shell company may purchase a property at an inflated price and then sell it to another shell company at a deflated price. This manipulation of property values helps to obscure the true source of funds and distance the illicit proceeds from their origin.

Typologies of Illicit Activities

Illicit actors may use various strategies to launder money through the real estate sector:

• Placement of Cash: Purchasing property with illicit cash and then selling it to integrate the funds into the financial system.
• Use of Shell Companies: Hiding the True Ownership of Properties.
• Manipulation of Property Values: Inflating or deflating property prices to facilitate money laundering.
• Sequential Selling: Repeatedly selling properties to distance the funds from their illicit origin.

Example: A criminal may purchase a property with illicit cash, renovate it using more illicit funds, and then sell it at an inflated price to a shell company they control, thus laundering the money.

Regulation and Supervision in the UAE

Regulatory Framework

The regulation of the real estate sector in the UAE varies across different emirates. Key aspects include:

• Openness to Foreign Purchasers: Foreigners can purchase real estate in designated investment areas in Dubai and Abu Dhabi.
• Residency Rights: Property ownership above certain values can grant residency visas of varying lengths.
• Use of Cash: No legal restrictions on using cash to purchase real estate in Dubai or Abu Dhabi.

Example: In Dubai, foreigners can purchase real estate in designated areas and may obtain a residency visa if the property value exceeds AED 1 million. Illicit actors can exploit this openness to foreign investment to launder money and obtain residency rights.

Supervision of Real Estate Professionals

In the UAE, real estate agents and brokers must hold a license and undergo supervision to ensure compliance with AML/CFT obligations. They qualify as Designated Nonfinancial Businesses and Professions (DNFBPs) when they conclude operations for the benefit of their customers with respect to the purchase and sale of real estate. The Ministry of Economy supervises these professionals in the mainland and commercial free zones (CFZs), while the Financial Services Regulatory Authority (FSRA) and Dubai Financial Services Authority (DFSA) supervise them in the financial free zones (FFZs). For instance, the local authorities in Abu Dhabi require a real estate broker to hold a license and adhere to AML/CFT regulations, which include conducting customer due diligence and reporting suspicious transactions.

Mitigating Risks: Requirements for LFIs

Risk-Based Approach

LFIs must adopt a risk-based approach in their AML programs, dedicating resources to customers and transactions based on their assessed risk levels. This involves:

• Enterprise Risk Assessment: Reflecting the presence of higher-risk customers, including those in the real estate sector.
• Customer Risk Assessment: Assessing the risk of each customer to identify those requiring enhanced due diligence (EDD).

Example: An LFI may identify a real estate developer with operations in high-risk jurisdictions as a higher-risk customer, requiring enhanced due diligence and more frequent monitoring.

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)

CDD and EDD are critical preventive measures for managing customer risks:

• Customer Identification and Verification: Ensuring that customers have the required licenses and identifying beneficial owners.
• Understanding the Customer's Business: Collecting information to create a customer profile and understand the expected use of the LFI's services.
• Ongoing Monitoring: Ensuring that customer information is up-to-date and that transactions align with the customer's profile.

Example: An LFI should verify the identity of a real estate developer and ensure they have the necessary licenses. If the developer suddenly starts receiving large payments from high-risk jurisdictions, the LFI should investigate further and possibly file a Suspicious Transaction Report (STR).

Special Considerations for Real Estate Transactions

LFIs should perform due diligence on all transactions outside a customer's normal behaviour, especially those related to real estate. This may involve:

• Collecting Information on the Property: Ensuring the purchase/sale price is reasonable and consistent with market values.
• Understanding the Counterparty: Gathering information on the counterparty's identity and business activities.
• Identifying Source of Funds and Wealth: Ensuring the source of funds for real estate transactions is legitimate.

Example: If a customer purchases a high-value property without financing, the LFI should verify the source of the funds used for the purchase. If the funds originate from a high-risk jurisdiction, the LFI should conduct enhanced due diligence.

Suspicious Transaction Reporting

When LFIs suspect that a transaction or funds are associated with a crime, they are required to file a Suspicious Transaction Report (STR) with the UAE Financial Intelligence Unit (UAE FIU). This is a legal obligation and a critical element in combating financial crime.

Example: If an LFI notices that a customer is making large cash deposits followed by property purchases, it should file an STR with the UAE FIU, as this behaviour may indicate money laundering.

Governance and Training

An effective AML/CFT program requires strong governance and training. LFIs should have an experienced compliance officer and provide tailored training to staff on the risks associated with the real estate sector.

Example: An LFI with a large number of real estate sector customers should offer specialized training to its staff on identifying red flags and understanding the specific risks associated with real estate transactions.

Conclusion

The real estate sector in the UAE, while vital to the economy, presents significant risks for money laundering and other illicit activities. To reduce these risks and make sure they follow the rules, licensed financial institutions must use strong anti-money laundering (AML) measures, such as a risk-based approach, careful customer due diligence, and ongoing monitoring. By doing so, they can help protect the integrity of the financial system and contribute to the global fight against financial crime.