Economy & Business
Money laundering in property and jewellery
Taiwan has implemented regulations designed to combat money laundering and terrorist financing through the real estate, precious metals and jewellery markets but enforcement will be difficult
By Paul Shelton
When criminals hit roadblocks in their criminal activities, they will simply look for other avenues to perpetrate their crimes and accumulate their wealth. Yet, it is their accumulated wealth that provides at least some discomfort for the criminal class. Usually, their wealth is initially accumulated in the form of cash. But cash causes problems for criminals. Depositing large sums of cash into bank accounts, whilst it still occurs, will likely raise legitimate questions from financial institutions (FIs) who annoy criminals by asking about its origins.
Breaking cash up into smaller amounts in an attempt to avoid detection is extremely time consuming and with FIs maintaining sophisticated tracking and monitoring systems, it is just as likely to be flagged as suspicious activity to regulators and law enforcement agencies.
So, criminals need to launder their cash and they need to do so in ways that will not attract suspicious activity reports or currency transaction reports.
As a form of criminal activity, money laundering (ML) is in a league of its own. Whilst there is no clear data on the overall cost of money laundering in Taiwan, sources estimate that worldwide, somewhere between US$800 billion and US$2 trillion is laundered annually. Even taking the lower amount, that, is an estimated NT$25 trillion per year.
It is because of utterly staggering annual amounts like this that we see almost daily efforts by organisations such as the Financial Action Task Force (FATF), global, regional, and local law enforcement agencies and Taiwan to adopt a broad approach in the fight against ML, terrorist financing (TF), and all manner of financial crime.
For the purposes of this article the focus is on two areas favoured by criminals, and the efforts that Taiwan is making to meet its international obligations in combatting financial crime, in real estate, and precious metals and jewellery.
Under FATF’s Recommendation 22, the real estate sector falls under the Designated Non-Financial Business and Professions (DNFBP) category.
There are certain characteristics of the real estate sector which make it attractive for potential misuse by money launderers or terrorist financiers. Criminals use a variety of techniques to launder money through real estate, including shell companies, shady financing schemes, and overvalued or even undervalued prices.
Nevertheless, with real estate, the ML and TF activities often involve almost basic techniques, such as the use of complex loans or credit finance, the use of non-financial professionals (people willing to put their name to schemes for some ‘cut’ of the proceedings) and the use of corporate vehicles.
Investigating real estate transactions for money laundering can be a demanding process. At a minimum, it should involve performing complex tasks such as screening politically exposed persons (PEP) and sanctions screening, checking ultimate beneficial ownership, and verifying the origin of funds. All of these can be complex even for FIs but when the burden is placed on real estate agents it really does become a question of whether real estate agents and their firms have the knowledge and capacity to perform these tasks.
There are numerous schemes that criminals and money launderers use to hide their funds through real estate and these schemes should create red flags in the minds of real estate agents. These red flags can involve:
- Using an anonymous buyer, whose purchase is covered by a trust, a shell company, third parties or extremely complex company structures to hide the ultimate beneficial seller or owner.
- Manipulating the value of the property. Overvaluation can result in a larger loan, allowing the criminal to legitimize more funds as they pay for the mortgage. Undervaluation can mean that some illegal cash is being paid to the seller under the table.
- Discrepancies between the income or assets of the buyer and the value of the real estate. Buyers with little or no income or documented wealth should be considered as suspicious in a real estate transaction.
- Colluding with realtors and mortgage brokers with bribes being paid for their involvement in the criminal activity.
- Purchases by family members of politically exposed persons, or sanctioned individuals.
Taiwan’s regulations for real estate agents
Taiwan’s Ministry of the Interior (MOI) has provided Taiwan’s real estate industry with regulations on best practice in the form of “Regulations Governing Anti-Money Laundering and Counter-Terrorism Financing of Land Administration Agents and Real Estate Brokerages”. These regulations were promulgated as of June 2021.
The following is brief summary of the most salient points of the 20 articles in these real estate regulations:
- Real estate brokerages shall carry out anti-money laundering and counter-terrorism financing tasks in accordance with these regulations while engaging in acts related to a real estate transaction.
- Real estate brokerages shall establish internal control measures and auditing systems according to ML and TF risks. High-level executives or other personnel shall launch operation and control procedures against ML and shall perform such procedures on a regular basis.
- Real estate brokerages shall regularly organise or participate in on-the-job training programmes on anti-money laundering and counter-terrorism finance.
- Real estate brokerages shall compile and regularly update their money laundering and terrorism financing risk assessment reports.
- Auditing procedures shall be established and when compiling the risk assessment reports real estate brokerages shall take into account such risk factors as customers, the nature of products or services, whether high-risk countries or areas are involved, and payment methods.
- The MOI shall each year inspect real estate brokerages.
- Real estate brokerages shall verify the identity of customers (both natural persons or legal persons, meaning a company or association)
- Real estate brokerages shall verify the identity of the customers by themselves and cannot entrust a third party to execute.
- Real estate brokerages shall establish policies and procedures for watch list filtering.
- Real estate brokerages shall conduct ongoing customer due diligence (CDD) and even enhanced due diligence (EDD) if necessary.
- Real estate brokerages shall file suspicious transaction or suspicious currency reports.
- Real estate brokerages shall retain transaction records.
- The Chinese Association of Real Estate Brokers, and Real Estate Marketing Agency Association of the ROC shall organise training sessions, seminars, or presentations regarding anti-money laundering and counter-terrorism financing each year, and shall report the implementation status to the MOI for recording.
The detailed nature of the real estate regulations indicates the importance of real estate transactions in the fight against ML and TF and is evidence of Taiwan’s understanding of the legitimate concerns of FATF with the real estate sector. The word ‘shall’ has been purposely underlined to indicate an imperative action or obligation that must be undertaken.
However, in the real market, do Taiwan’s real estate brokerages really adhere to the real estate regulations? Interviews with some recent local home buyers within the Taipei market would suggest not. Purchasers indicated that the real estate agent made no enquiries, conducted no form of questionnaire, and gathered little or no evidence from them. At most, the only involvement of the real estate agent was to locate a property that met the needs of the purchaser.
Hence, this raises the question as to whether the real estate regulations are mere window dressing since there seems little public evidence of adherence or enforcement.
Precious metals & jewellery
As we’ve seen ML crimes affect a wide range of industries, but jewellery dealers are among the most sought-after victims by thieves. Jewellery pieces and precious stones and metals are susceptible to ML and TF due to their liquidity, value, transportability and negotiability on the global market.
As far back as 2007, FATF was growing concerned about the precious metals and jewellery industry and the vulnerability of these industries to ML and TF. In 2008, FATF issued “Guidance on the Risk-Based Approach for Dealers in Precious Metals and Stones”, developed in close consultation with representatives of the dealers in precious metals and dealers in precious stones industries.
As with real estate, precious metals and jewellery are regarded as a DNFBP. The guidance was written applying FATF’s well known risk-based approach but FATF itself cautioned that some countries should in fact apply a rule-based approach as more appropriate.
The guidance was written at a high level to recognize the differing practices of dealers in precious metals and dealers in precious stones in different countries, and the different levels and forms of monitoring that may apply and FATF encouraged each country and its national authorities to establish a partnership with its dealers that will be mutually beneficial to combating ML and TF.
The primary target audience of this guidance was dealers in precious metals and dealers in precious stones themselves when they conduct activities which fall within the ambit of the FATF Recommendations. For the purposes of the guidance, the term "dealer" encompasses a wide range of persons engaged in these businesses, from those who produce precious metals or precious stones at mining operations, to intermediate buyers and brokers, to precious stone cutters and polishers and precious metal refiners, to jewellery manufacturers which use precious metals and precious stones, to retail sellers to the public, to buyers and sellers in the secondary and scrap markets.
A walk down almost any street in central Taipei provides ample evidence of the bewildering array of jewellery and the precious metals and precious stones used in their creation. Go to the weekend jade market in the Da’an district and even more is on display with an abundance of diamonds glistening under the halogen lights.
Diamonds are meant to be “a best friend” and yet global research has often highlighted evidence that the diamonds trade is subject to considerable vulnerabilities and risks, creating a challenge for both stakeholders within the industry and relevant national authorities for ML and TF.
The diamond trade has existed for centuries and has developed a unique culture and trade practices, which have their own characteristics and variations across countries and continents. However, the international diamond trade has also changed in the last few decades. The South African behemoth, De Beers, no longer holds a diamond monopoly as smaller diamond dealers have entered the market, distribution channels have become more diverse and new trade centres have emerged with billions of dollars' worth of diamonds, and financial transactions going in and out of newly founded bourses and their ancillary FIs.
Even the internet, as in all other facets of life, is rapidly taking its place as a trading platform for diamonds. With these significant changes in the "diamonds pipeline" structure and processes there is undoubtedly also an increase in ML and TF risks and vulnerabilities.
Taiwan regulations for precious metals & jewellery
In April 2021, the Ministry of Economic Affairs (MOEA) published the “Regulations Governing Anti-Money Laundering and Countering the Financing of Terrorism for Jewellery Businesses”.
These regulations establish internal control and audit systems based on their ML/TF risks and business scale. Provisions include some familiar terminology:
- Jewellery businesses shall undertake customer due diligence (CDD) at the start of doing business with a customer and on a regular basis for regular customers.
- CDD applies in any cash transaction greater or equal to NT$500,000 and the jewellery business shall report all such cash transactions to the Investigation Bureau of the Ministry of Justice within 5 business days. The reporting information mentioned in the preceding paragraph shall be maintained in their original forms for at least five years.
- CDD also applies to the confirmation and adequacy of a customer’s identification data and records shall be maintained and kept up to date.
- Jewellery businesses, should, where necessary ensure that transactions are consistent with the nature of the customers’ business and if necessary, the source of funds.
- Jewellery businesses shall report suspicious ML transactions within ten business days upon discovery of any suspicious ML transactions.
- Education and training shall be arranged or participated in for anti-money laundering and countering the financing of terrorism including pre-job training for new employee to understand the relevant regulations and responsibilities.
- Risk assessments of ML and TF risks shall be prepared and updated every two years.
- The CDD process by must be undertaken by the jewellery businesses themselves, they cannot entrust a third party to perform this process.
- The MOEA shall perform on-site or off-site inspections of jewellery businesses.
The bullet points above represent just a summary of the articles and indicate a recognition of the importance of precious metals and jewellery transactions in the global fight against ML and TF. Again, there is a preponderance of ‘shall’, indicating clearly that the MOEA requires action. But again, there is a niggling sense of lots of very good intentions but very little public evidence of adherence or enforcement. Consider the sheer number of jewellery outlets in Taipei alone, from department stores, small family run businesses, global high-end brand stores and Da’an’s famous market and then ponder the ability to ensure any semblance of adherence and enforcement.
It is not a coincidence that both sets of regulations were promulgated in 2021. There can be little doubt that both sets of regulations stem from the ML and TF mutual evaluation of Taiwan in 2019, which identified these two industries as requiring attention. The two sets of regulations at least overcome part of the identified gap. However, if there is no adherence and enforcement of the regulations then it is likely to remain an issue at the next mutual evaluation, which cannot be far off. Without greater enforcement will Taiwan be able to maintain its highly regarded reputation as a bastion against ML and TF?
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.