Major crackdown: Internal Affairs and Inland Revenue target these practices in the property industry

As a bull market draws substantial funds into housing, the property industry’s high risk of money laundering has attracted the attention of the Department of Internal Affairs. Meanwhile, the Inland Revenue Department has also taken action over excessive expense claims by property professionals. Recently, Internal Affairs’ anti-money laundering unit issued its first public warning to a major New Zealand real estate agency chain.

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Internal Affairs’ anti-money laundering unit said: “Property is a high-value asset frequently used by criminals, both domestically and overseas, to launder money and invest the proceeds of crime. Businesses have an obligation to establish sound business processes to prevent misuse. This is also the first formal warning issued to a real estate agency since the AML/CFT Act came into force.”

The scope of the AML/CFT Act has continued to expand since its full implementation in June 2013. Banks, insurers, non-bank deposit takers, securities firms, investment companies, currency exchange businesses and other financial institutions are now regulated under the Act, as are financial advisers, stockbrokers, custodians, lawyers, accountants, sports and horse-racing betting operators, casinos, high-value goods dealers and trust service companies.

According to relevant statistics, NZ$130,000,000 in illicit funds is laundered within New Zealand each year, and the property sector is regarded as a key market where money launderers conceal their illegal assets.

The real estate agency’s managing director, Mordaunt, responded directly yesterday to Internal Affairs’ public warning about the company. Mordaunt said: “The AML/CFT Act is still new legislation for us. I think Internal Affairs is making an example of us to warn others. Our industry has been subject to the Act for only two years. We feel we have been very compliant and efficient, given that we are still learning.” Asked whether the non-compliance concerned individual offices or regions, or extended nationwide, he said Internal Affairs had simply reviewed the company’s business processes. “Accountants, lawyers and real estate agencies are all learning as things evolve … They simply reviewed our business processes and identified some areas for improvement.”

Internal Affairs said: “The findings of our review of the company raised concerns, and we have a responsibility to act. Continued breaches of the AML/CFT Act may result in civil and criminal penalties. Under civil penalties, individuals face fines of up to NZ$200,000, while companies or organisations face fines of up to NZ$2,000,000. Under criminal penalties, individuals face fines of up to NZ$300,000 and 2 years’ imprisonment, while companies or organisations face fines of up to NZ$5,000,000.” The agency must take immediate remedial action, and Internal Affairs will monitor it closely.

Pidgeon, from an Auckland law firm, said: “Any professional services business with a trust account faces a risk of money laundering. Criminals may use trust accounts to launder illicit funds because holding money on behalf of third parties makes the destination of funds less transparent.”

Pidgeon said: “With a real estate agency, a buyer can deposit money into a trust account and then abandon the transaction.” She warned: “If you are not careful enough, money launderers will exploit the opportunity because the funds appear to come from a reputable third party.”

Pidgeon called on all companies in this sector to do their part to safeguard the integrity of the financial system.

Real Estate Institute chief executive Bindi Norwell said the organisation had worked closely with the property industry to help ensure it was prepared and understood its obligations.

“We have held seminars, jointly organised several nationwide roadshows, produced information sheets and established strong working relationships with several anti-money laundering service providers that can support our members in this area.”

She said: “Since 1 January 2019, we have regularly reminded the relevant businesses and individuals of their anti-money laundering obligations.”

“The warning to this real estate agency came as a surprise, but the chain is a respected organisation. We trust it will treat the warning as an urgent matter and look forward to any non-compliance being rectified as soon as possible,” she said.

John Waymouth, a barrister specialising in property law, said compliance systems and processes were considered an essential part of business operations for property businesses with obligations under anti-money laundering legislation. Many other real estate agencies had already adopted third-party verification systems, appointed fully trained compliance managers and provided thorough training for their sales teams. It was therefore surprising that a nationwide agency had failed to meet the requirements.

Based on what we have learned today, Inland Revenue and Internal Affairs appear intent on tightening oversight of property professionals. The booming property industry faces opportunities from the bull market alongside growing challenges within the sector.