Regulators and governments are increasing their focus on the real estate sector in their fight against financial crime. Anti-money laundering (AML) and counter-terrorist financing legislation is beginning to expand into real estate transactions in key jurisdictions around the world, including Nigeria.
The Nigeria real estate sector has almost become a melting point of money laundering, scam and all kinds of financial crimes. Multiple investigations by the Economic and Financial Crimes Commission (EFCC) has shown that corrupt politicians and businessmen fancy the real estate sector as a safe haven for stolen funds.
Money laundering is the process used to camouflage the illegal origin of funds generated by illicit or criminal activities. By successfully laundering the proceeds of criminal activities, the illicit gains can be enjoyed without fear of their being confiscated. In real estate, money laundering involves using such funds to pay for the transaction (predicate offence of money laundering). Real estate plays a role (mainly) in the third and final stage of the money-laundering cycle, after the placement and the layering phases.
According to an EU report, abuse of the real estate sector (property in the form of land or buildings) has long been described as one of the oldest known ways to launder ill-gotten gains. Real estate is as attractive to criminals as it is to any investor (prices being generally stable and likely to appreciate over time) and is also functional (the property can be used as a second home or rented out, generating income). Real estate also provides a veneer of respectability, legitimacy and normality. This applies to both residential and commercial properties as part of a reliable and profitable investment strategy.
Real estate transactions can involve large sums and are subject to more limited scrutiny with regard to money-laundering risks than financial sector transactions, as non-financial sector rules are much more limited.
In many Nigerian cities, you will find a lot of mansions unoccupied, largely because they have been tied down with ill-gotten funds.
Apart from money laundering, another dimension of illegalities in the real estate sector is small arms procurement using the sector to fund some bandits and insurgents.
Other Illegal Practises and Scams in Real Sector
With high demand for accommodation and its subsequent short supply, there are increasing rates in property scams in the nation’ s real estate market spaces, thereby sending shivers up the spine of investors and would be investors.
Fraudsters are exploiting the desperation of prospective homeowners and tenants to have roofs over their heads and secure cheaper accommodation to defraud victims.
There has been an upswing in the fraud schemes since the coming of online platforms and money transfer in the banking sector. The social media has also been badly hit, as different groups have been created to fleece members. Most victims have been tricked to wire down payments to an account for pending real estate transactions.
Globally, the wire fraud schemes, especially E-mail Account Compromise (EAC) has turned into a $12.5 billion industry, according to United States’ Federal Bureau of Investigation (FBI). In Nigeria, senior officials of the EFCCC couldn’t ascertain the amount lost over a five-year period, but believe that the financial loss is huge.
In major cases, some claim to be marketing consultants with mandate to sell property in choice areas such as Banana Island, Ikoyi, Asokoro and Lekki worth billions of naira. Others collude with unscrupulous elements to market non-existing landed property. They also hand out allocation letters, but in reality, the land has encumbrances.
The common cases involve tenants paying for rental apartments without taking possession of the property. Such matters abound with security agencies, and over N200million may have been lost in that process yearly. Most of these fraudsters use known property platforms on the internet and social media to perpetrate their crimes.
Hackers also break into e-mail account to obtain information about upcoming real estate transactions. After monitoring the account to determine the likely timing of a close, the hacker will send an e-mail to the buyer, posing either as the title company representative.
A lot of Nigerians abroad have fallen victims in the process of buying property at home. Advanced fee fraudsters have cornered substantial part of the money transferred. FBI says, a total non-U.S. exposed dollar loss was $671,915,009. According to World Bank report, Nigerians living abroad sent home $22bn in 2017, a 16.4 per cent increase from the amount they repatriated in 2016.
Potent Risks of Illegal Practises to Real Sector and the Economy
The socio-economic effects of criminal financial flows on the legal economy and society are enormous. They cover the following elements: distortions in resource allocation from high-yielding investments to investments that run a low risk of detection, distortion of prices, notably in the real estate sector, unfair competition, risks of supplanting licit activities, negative impact on direct foreign investment, corruption, risks of real sector volatility, and strengthening of skewed income.
Distortions of real estate prices and the concentration on limited sectors may have an impact beyond those areas and lead to increases in real estate prices, thus pricing people with legal sources of funds out of the market. Driving up the prices of real estate reduces housing affordability, something that has been witnessed in several cities in both developed and developing countries.
This impacts not only those people rendered unable to purchase housing but also renters. In both cases, this can affect decisions about where to live, among other factors, resulting in a change of neighbourhood and the related displacement of less affluent households.
Tackling the Problem
Speaking to HousingNews, the President of Real Estate Developers Association of Nigeria, REDAN, Ugochukwu Chime revealed how the association is working with the Economic and Financial Crimes Commission EFCC and Special Control Unit on Money Laundering – SCUML since 2010 in making sure that the Nigerian real estate sector which was rated in 2016 by international assessors as a medium high risk area for terrorism financing and for money laundering is sanitised.
Chime mentioned that in recent years there has been an increase in that collaboration.
He said; ‘’In Abuja and many cities in Nigeria, there are a lot of houses abandoned by the owners because of the source through which the money was gotten. So because of the high level of illicit funds that are flowing into the sector, it became necessary that REDAN will arise and work together with SCUML to put in place a mechanism to control in the inflow of funds, both for developments and for the purposes of those who are buying those houses, so that we will be able to ensure that our sector does not become the preferred sector for such illegal activities.’’
In tackling the issue of arms procurement and funding of insurgents through the real estate sector, he said, ‘’what we have done is to have a provision in our membership form that requires every member to be registered with SCUML and to be able abide with the policies and regulations and the procedures of SCUML in terms of control of money laundering and in terms of suspicious activities reporting,’’ he added.
REDAN is working collaboratively to find a mechanism to ensure that both SCUML and REDAN have an alignment of internal mechanisms. Under this arrangement, any developer that wishes to register with SCUML will also be required to register with REDAN.
‘’REDAN will do proper due diligence in our form and be able to ensure that we know your office. If you are developing an estate, we will be able to endorse it and know the source of your funding, and ensure that you comply with the extant laws, especially the anti-money laundering and terrorism financing act 2011. And we will also be able to ensure you understand the risk to which you are putting your organisation because if your company is found to be a source of money laundering, it has very serious legal consequences. And that is why we are working with SCUML and other agencies to make sure that we enhance training of our members so that they know the risk of non-compliance and be motivated to comply,’’ he said.
He said that one of the key information they have shared with SCUML is the knowledge about the three groups that operate in the real sector. These groups are the professional estate surveyors and valuers; the brokers who intermediate between sellers and buyers of properties, e.g lawyers, estate valuers, estate agents etc; the third group are the business investors who came in a few decades ago to build mass housing, affordable housing, and high end housing.
‘’So what we are doing is to ensure that we anticipate this growth and paradigm shift in home ownership approach and the sectorial activities in the real estate sector with a view to ensuring that developers are compliant with extant laws and are complaint with that which will ensure not only that we will have shelter but that will have employment, economic growth and above all, we do not become a conduit for money laundering and for political exposed persons to take away public money through the sector,’’ Chime said.
For defaulters and developers who fail to register with REDAN, the government has established effective mechanisms that will clamp down on them. Going further, Chime said, it will be illegal to develop properties without having an association to regulate what you are doing.
‘’Many have been duped, houses are collapsing and all kinds of indecent activities are happening in the sector because the perpetrators are not part of the guidelines that are being issued. This is what we want to change.’’
In tightening the noose at REDAN, Chime stated that every member of the association must renew their membership every year, and for that to happen they must have done some professional development in terms of training to know what is expected of them by various regulatory agencies operating in the sector.
