Real estate transactions have been universally linked with money laundering, as the latter is usually a safe conduit for the re-interjection of illicit funds into the economy due to its high transaction volume, large sums of money involved, and the possibility of anonymity. In perpetrating the act of money laundering, funds from illicit sources or schemes such as corruption, embezzlement, drug trafficking, human trafficking, gambling etc. are legitimized through property assets. The susceptibility to money laundering is regrettably not limited to the real estate sector but extends to other sectors. However, there has been an outrageous spread of money laundering over years in the real estate sector using shell and front companies to enshroud the real identity of the person(s) engaged in property transactions.
In recent times, several agitations have arisen from the abuse of the real estate market as a tool in the malicious scheme of money laundering. Some of the key elements that have promoted the susceptibility of black money in the Nigerian real estate sector include, a dearth of transparency in the market, ranging from the over-pricing or underpricing of properties, the use of shell companies to purchase properties, lack of adequate regulations and punishments for defaulters in the sector, and the appealing nature of the Nigerian real estate sector as an investment scheme.
In 2021, it was statistically reported by the Chairman of the Economic and Financial Crimes Commission (EFCC), Abdulrasheed Bawa, that 90 per cent of money laundering is done through the real estate sector. It is for these facts that this article x-rays the legal obligation and best practices in applying anti-money laundering measures within the real estate sector.
To forestall the flow of black money into the real estate sector, The Money Laundering (Prevention and Prohibition) Act, 2022 (the Act or MLA 2022) provides for an effective, extensive legal and institutional framework to combat money laundering and terrorism financing in the country. The MLA 2022 also stipulates the threshold to make or accept cash payments. The Act expressly cites the prohibition of cash payment on transactions exceeding 5 million Naira or 10 Million Naira (or its equivalent) for individuals and corporates, respectively, except in a transaction through a financial institution (FI). The Act also spells out the obligation on financial institutions to disclose transactions exceeding 5 million Naira or 10 Million Naira (or its equivalent) for individuals and corporates, respectively. The highlighted restrictions/obligations of the Act are considered a huge force to be reckoned with in the fight against illicit financing in the property sector.
Dealers in real estate, estate developers, estate agents and brokers, amongst others, have been enlisted under the nomenclature of the Designated Non-Financial Business and Profession (DNBP). The MLA 2022, in the quest to curb money laundering, provides salient obligations to be overseen by the DNBPs which previously had no compliance obligations under the repealed Money Laundering (Prohibition) Act, 2011. Some of these obligations include:
• Identification and verification of customers and personal representatives: Customer verification is debatably the most paramount anti-money laundering measure (AML) requirement, as it alone can abate money laundering in the real estate sector. With the increased number of fraudulent activities, institutions are expected to uphold utmost proactiveness in ensuring security using identification documents as may be prescribed in any relevant regulation. This Know-Your-Customers (KYC) requirement is especially important for the FIs and DNBPs under the Act. Real estate businesses and professionals are required to implement proactive anti-money laundering measures to prevent money laundering such as utilizing reliable, independent source documents and data/information.
• Undertaking due diligence in the course of business: The Act makes it sacrosanct for FIs and DNBPs to ensure customer due diligence when establishing business relationships, carrying out occasional transactions above the applicable designated threshold prescribed by relevant regulations, performing occasional electronic transfer of funds also known as wire transfer, complying with relevant reporting obligations in respect of underlying suspicion of money laundering or terrorist financing regardless of any exemptions or thresholds and scepticism about the veracity or adequacy of previously obtained customer identification data. In addition, FIs and DNBPs are to make certain that documents, data, or information collected under the customer due diligence process are kept up-to-date and relevant. This AML measure could be executed through periodic reviews of existing records, particularly for higher-risk categories of customers or business relationships.
• Implementation of appropriate risk management systems: This approach is geared towards applying enhanced and simplified measures to manage and mitigate higher and lower risks open to FIs and DNBPs.
• Record keeping: Under the Act, FIs and NDBPs are mandated to preserve and keep all records of transactions, both domestic and international, for a retention period of 5 years following the completion of the transaction. These records are expected to be at the disposal of competent and regulatory authorities such as judicial persons, the Nigerian Financial Intelligence Unit (NFIU) or the Special Control Unit Against Money Laundering (SCUML).
• Mandatory disclosure by financial institutions and designated non-financial businesses and professions: The Act provides for the mandatory disclosure of illicit activities encountered or suspected during business transactions. Financial institutions shall report to the NFIU while the designated non-financial business and profession shall report to the SCUML in writing within 7 days, of any single transaction, lodgment or transfer of funds above the required threshold for individuals and corporates. Furthermore, legal professionals and notaries are not exempted from mandatory disclosure and the invocation of client confidentiality shall not apply in connection with the following – “the purchase or sale of property or any business, the managing of client money, securities or other assets, the opening or management of bank, savings or securities accounts, the creation, operation or management of trusts, companies or similar structures; or anything produced in furtherance of any unlawful act.”
One of the standout practices of the MLA 2022 is the establishment of the SCUML, a department under the EFCC, responsible for the supervision of DNBPs in their compliance with the provisions of the Act, relevant laws, and applicable regulations. The functions of the SCUML with respect to these DNBPs have been highlighted in section 17(2) of the Act, and include the actualization of the following best practices:
• Registration, certification, monitoring and supervision of the DNBPs.
• Ensuring compliance with laws and regulations by taking necessary enforcement actions.
• Conducting off-site, on-site, and on-the-spot checks, and inspections of DNBPs for the purposes of money laundering control and supervision.
• Establishing and maintaining a comprehensive database
• Receiving cash-based transaction reports and currency transaction reports
• Sensitizing DNBPs regarding their responsibilities under the Act.
In addition to the legal obligations set out under the Act, real estate businesses, professionals and other DNBPs should be encouraged to employ the use of technology to promote a more sophisticated security system as an anti-money laundering measure to abate the practice of money laundering in these sectors.
Internal compliance with anti-money laundering measures is another best practice that ought to be upheld by the Financial Institution and the DDNBPs in the combat of money laundering with great repercussions for defaulters.
Money laundering has eaten deep into the roots of the Nigerian real estate sector without concrete efforts to mitigate the same, prior to the enactment of the Money Laundering (Prohibition and Prevention) Act 2022. Anti-money laundering measures are crucial in the real estate sector to prevent further illicit transactions spanning into the Nigerian commercial system, a gateway for disrepute. The implementation of the provisions against money laundering is set out to curb money laundering not only within the real estate sector but across all other institutions to promote a reputable market structure.
Marvis Oduogu is a Team Lead at Stren & Blan Partners and supervises the Firm’s Real Estate and Construction Sector. Chiamaka Ibeh is an Associate in the Firm’s Commercial Dispute Resolution, Labour, and Employment Departments, while Ibitola Akanbi is an Associate in the Firm’s Real Estate and Construction Sector.
Stren & Blan Partners is a full-service commercial Law Firm that provides legal services to diverse local and international Clientele. The Business Counsel is a weekly column by Stren & Blan Partners dedicated to providing thought leadership insight on business and legal matters.