Real estate business attracts lots of unaccounted money, which may also be laundered money. If somebody purchases multiple properties through one developer or broker, there should be compulsory reporting to the Financial Intelligence Unit

The Government of India has come out with a bill, which proposes to set up a real estate regulator in every state in the country. While this is a welcome move as it has the potential to protect the interest of those willing to buy residential accommodation, there is lot that needs to be done as far as real estate business in India is concerned. Real estate business is India is highly susceptible to money laundering activities. On the face of it, real estate transactions are cash heavy and it is not possible to identify the source of cash. In addition, it is not possible to identify the owners of the property in many cases as there are innumerable benami transactions that take place in real estate. All these instances, give rise to the suspicion that real estate business in India draws laundered money from different sources.
 

Knowing all this, what can be done to prevent money laundering in real estate in India? Is it possible to stop cases of money laundering in real estate or mitigate it, at least? An interesting aspect of prevention of money laundering in real estate comes from the regulatory provision in Canada. The guidelines for monitoring of real estate transactions in Canada have been laid down by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the country's financial intelligence unit, created in 2000. It is an independent agency, reporting to the minister of finance, who is accountable to Parliament for the activities of the Centre. It was established and operates within the ambit of the Proceeds of Crime (money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations. So FINTRAC is to Canada what Financial Intelligence Unit (FIU-IND) is to India.
 

FINTRAC guidelines for real estate:  FINTRAC guidelines on real estate cover the following entities dealing in real estate business:
 

• • Real estate broker or real estate sales representative
• • Real estate developer
   

FINTRAC guidelines in Canada state that if somebody acts as a real estate broker that person/entity is subject to the obligations explained in the FINTRAC guidelines. This includes buying or selling of land, houses, commercial buildings, etc. Such activities trigger these obligations whether or not you get a commission for the real estate transaction and whether or not you have fiduciary duties regarding it. This means that even if in a transaction no commission is received, the real estate broker is still accountable for monitoring money laundering in that transaction. All real estate brokers and developers have to maintain client identification records that have been specified by FINTRAC, which includes document such as provincial health card (exceptions apply), social insurance number (SIN)—can be used for the purpose of identification of the client who has done the transaction in real estate. Similar guidelines have been set up for identification of corporations and other entities.
 

Apart from obtaining identification requirements from the client, a real estate developer or broker is expected to maintain the following details with respect to real estate business:
 

• • Large cash transaction records: Any cash transaction more than $10,000 needs to be reported as cash transaction report. If a broker knows that two or more cash transactions of less than $10,000 each were made within a 24-hour period (i.e. 24 consecutive hours), by or on behalf of the same client, these are considered to be a single large cash transaction if they add up to $10,000 or more.
   
• • Receipt of funds records: A receipt of funds record is required when a broker or developer receives any amount, whether or not it is in cash. If a broker or developer has to keep a large cash transaction record, he does not have to keep a receipt of funds record for the same transaction.
   
• • Client information records:  The client information record sets out the client’s name and address, and the nature of the client's principal business or occupation. If the client is an individual, the client information record also has to include the individual’s date of birth. If there is more than one individual purchasing or selling, the broker or the developer concerned has to keep a client information record about each individual.
   

If the client information record is about an entity, in addition to the above-mentioned information about the individual conducting the transaction for the entity, the record also has to include the entity’s name and address as well as the nature of the entity’s principal business.
 

• • Suspicious transaction report records: All suspicious transaction reporting needs to be made to FINTRAC.       
   

FINTRAC has made provisions for record keeping requirements, as well. The best part of the FINTRAC guidelines is the provision of penalty. Failure to comply with record keeping or client identification requirements can lead to criminal charges against the broker and developer. Conviction of failure to retain records could lead to up to five years imprisonment, to a fine of $500,000, or both.
 

What can be done in India: In order to curb money laundering in India, following measures can be adopted on the lines of FINTRAC model:
 

• • Ask brokers and developers to maintain know your client (KYC) document for all transactions done by them. This can be done on the lines of what is applicable for banks and financial institutions currently.
• • Ask brokers and developers to report to the Financial Intelligence Unit (FIU-IND) on lines of banks, financial institutions and intermediaries. This means they have to file a Cash Transaction Report (CTR), Suspicious Transaction Report (STR) and Counterfeit Currency Report (CCR) to FIU-IND.
• • If somebody purchases multiple properties through one developer or broker, there should be compulsory reporting done to FIU-IND.
• • Acceptance of cash can be allowed in the scenario when the cash transaction reporting (CTR) is done.
• • Introduce heavy penalty on lines of FINTRAC. 

Real estate business attracts lots of unaccounted money which may also be laundered money. Control of money laundering in real estate will make the business more transparent.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)