Guidance on Compliance with the Money Laundering Regulations in Real Estate Brokerage

FINANSSTILSYNET Postboks 1187 Sentrum 0107 Oslo

CIRCULAR: 11/2019

DATE: 02.09.2019

THE CIRCULAR APPLIES TO: Persons who have permission to conduct real estate brokerage Real estate brokerage companies Lawyers who have provided security to conduct real estate brokerage activities Legal assistants who meet the conditions to conduct real estate brokerage activities

Guidance on Compliance with the Money Laundering Regulations in Real Estate Brokerage

Table of Contents

1. Introduction 3
2. Money Laundering and Terrorist Financing through Real Estate Brokerage 3
3. When is the Broker Subject to the Money Laundering Regulations? 4
4. Business-oriented Risk Assessment 5
5. Routines 11
6. Organization 14
7. Customer Due Diligence 15 7.1 Who the Customer Due Diligence Measures Apply To 15 7.2 Timing of Customer Due Diligence 15 7.3 Information on the Purpose and Intended Nature of the Customer Relationship 16 7.4 Special Provisions on the Origin of Funds 16 7.5 Confirmation of Identity – Natural Persons 16 7.6 Persons without Valid Identification 18 7.7 Confirmation of Identity – Persons Acting or Disposing on Behalf of the Customer 19 7.8 Confirmation of Identity – Legal Persons 19 7.9 Confirmation of Identity – Beneficial Owners 20 7.10 Documentation 21
8. Simplified Customer Due Diligence 21
9. Enhanced Customer Due Diligence – High Risk of Money Laundering or Terrorist Financing 22
10. Enhanced Customer Due Diligence – Politically Exposed Persons (PEP) 23
11. Ongoing Follow-up 24
12. Rejection and Termination of Customer Relationships 24
13. Duty of Investigation 25
14. Reporting Obligation 26
15. Disclosure Ban 27
16. Execution of Suspicious Transactions 27
17. Requirements for Systems Enabling Rapid and Complete Responses to Authorities 28
18. Third-party Controls and Outsourcing 28
19. Information Sharing 29
20. Registration and Storage of Information 29
21. Training 30
22. Screening against Sanctions Lists 30

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1 Introduction

Real estate brokers, real estate brokerage companies, as well as legal assistants and lawyers conducting real estate brokerage activities, must prevent and detect transactions related to the proceeds of criminal offenses or related to terrorist financing. Further rules on this follow from the money laundering regulations.

1. The measures in the money laundering regulations are intended to protect the financial and economic system and society as a whole. The Financial Supervisory Authority's assessments of how certain provisions of the law should be understood are set out in this guidance, which replaces Circular 6/2016.

The Financial Supervisory Authority has prepared a general guidance (Circular 8/2019), which provides further supplementary and detailed guidance on compliance with the money laundering regulations.

The Supervisory Board for the Legal Profession has issued a guide for compliance with the money laundering regulations for practicing lawyers.

2. This circular applies to lawyers when they conduct real estate brokerage activities.

3

It is the individual reporting entity conducting real estate brokerage activities that is responsible for ensuring compliance with the money laundering regulations. The Financial Supervisory Authority will follow up on compliance through supervision.

2 Money Laundering and Terrorist Financing through Real Estate Brokerage

The purpose of money laundering is to conceal the origin of proceeds from criminal offenses. Money laundering is characterized by such proceeds being integrated into the legal economy and thus appearing legitimate. Proceeds from a criminal offense can be money generated from organized crime, such as drug trafficking, robbery, prostitution, human and/or arms smuggling, or from other forms of crime such as embezzlement, white-collar crime, tax evasion, fraud, or corruption.

Terrorist financing involves participation in a terrorist act or participation in the establishment or maintenance of a terrorist organization. Terror can be financed with funds of both legal and illegal origin. Terrorist acts are often financed through a combination of saved funds, legal income, legal and illegal fundraising, and various forms of criminal activity.

Real estate is capital-intensive, and money laundering of large amounts can be carried out in a single operation. Large illegal amounts can be invested in real estate, and then re-invested and integrated into the legal economy with relatively little risk of loss upon later sale or rental of the property.

Real estate brokerage companies assist sellers and buyers with property transfers/leases and transactions, such as settlement of purchase prices and payment of rental income. These are types of services that can be used by criminals to launder illegal funds.

4. In addition to ordinary real estate brokerage activities, the broker may undertake assignments to estimate the value of real estate. Such valuations can be used by criminals in the money laundering of illegal funds.

Similarly to other criminal acts, terrorist acts are often financed through a combination of legal income and proceeds from crime.

5. There is thus a possibility that funds paid from the company's client account may be used to finance terrorism. The assessment of the risk of terrorist financing will largely coincide with the assessments made for money laundering.

Real estate brokerage companies and lawyer-brokers are expected to be familiar with public risk assessments6 describing the risk of money laundering and terrorist financing through real estate brokerage activities. The most common methods of money laundering are:

• Cash payment (either to the company's client account, or as part of partial settlements directly between the parties).
• Transfers of illegal funds to the client account from financial institutions.
• Other use of the client account (e.g., fictitious loans between the parties where the use of the client account creates legitimacy around the transactions, or payments from the client account to parties other than the parties in the trade, so that the seller's net proceeds are evaded from taxation/creditor pursuit).
• Illegal funds are incorporated into the property (e.g., the property is renovated with illegal funds or the use of black labor).
• Manipulation of the property's value.
• Loan fraud (possibly in combination with repeated transactions with short or long intervals between each transaction, or that the transactions occur between the same parties).
• Use of straw men, complex corporate structures, foreign companies, or blank deeds.

3 When is the Broker Subject to the Money Laundering Regulations?

Real estate brokers and real estate brokerage companies are subject to the money laundering regulations in the "exercise of their profession." This means that the money laundering regulations must be complied with regardless of the type of assignment the real estate brokerage company undertakes. The regulations must thus be complied with both when carrying out real estate brokerage assignments covered by the concept of real estate brokerage in the Real Estate Brokerage Act § 1-2 (2), when carrying out assignments for services not directly related to real estate brokerage assignments, including valuation and advisory assignments, and in any real estate brokerage-unrelated business, cf. Real Estate Brokerage Act § 5-1.

Lawyer-brokers are also subject to the money laundering regulations in the "exercise of their profession." However, for lawyer-brokers, the duties are limited to, for example, when they carry out a transaction on behalf of the client concerning real estate, or when they assist in the planning or execution of a transaction in connection with the purchase and sale of real estate or business.7 This means that the money laundering regulations must be complied with for all types of real estate brokerage assignments, cf. Real Estate Brokerage Act § 1-2 (2). The same applies to valuation assignments when this is part of the planning or execution of a real estate transaction or business, cf. Money Laundering Act § 4 second paragraph letter c) third alternative number 1. The Financial Supervisory Authority assumes that valuation assignments are generally carried out in situations where the client has a plan for a real estate transaction, even if the plan may be more or less concrete from case to case. Consequently, all lawyer-brokers' valuation assignments are covered by the money laundering regulations.

4 Business-oriented Risk Assessment

According to the Money Laundering Act § 7, real estate brokerage companies and lawyer-brokers must identify and assess the risk of money laundering and terrorist financing related to their business. The purpose of the risk assessment is to have a systematic mapping and description of the company's risk of being used for money laundering and terrorist financing. This shall form the basis for the routines that the company must establish to prevent and detect money laundering. The risk assessment is thus the starting point for the company's compliance with the money laundering regulations.

The risk assessment must be prepared individually and specifically for the company. If the risk assessment is acquired from group management, franchisors, industry associations, or other suppliers, the risk assessment must be adapted to the company.

The risk assessment must be documented and kept up to date. Before the company offers new services or starts using new technology, the risk of money laundering and terrorist financing must be assessed specifically. To have a defensible risk assessment, this must also be updated where new risks are discovered by the company itself, or appear in public risk assessments describing the risk of money laundering and terrorist financing through real estate brokerage activities. The company should at least annually take a position on whether the risk assessment covers the company, or if it needs to be updated.

The Money Laundering Act does not explicitly require board approval of the risk assessment.

Since the company's board must approve the routines that are to be prepared based on the risk assessment, cf. section 5 below, the company's board must nevertheless be aware of the risk assessment.

7. Other cases where lawyers are subject to the money laundering regulations are discussed in the Supervisory Board's circular.

The risk assessment must at least cover all the topics in the Money Laundering Act § 7 second paragraph:

a) Own business, including in particular the nature and scope of the business

Under this alternative, the risk of the business activity must be described. Topics that are relevant will, for example, be:

• Number of employees and competence level, organization (including any branch offices) and turnover.
• Which services are offered (real estate brokerage services for the sale of new or used housing/leisure properties, agricultural properties, commercial properties, settlement services for other real estate brokerage companies or private parties, preparation of valuations, other real estate brokerage-related or real estate brokerage-unrelated tasks), and which market segments the business targets. In the general description of the nature of the business, it will be natural to look at the Financial Supervisory Authority's risk assessment of the different business areas within the real estate brokerage industry, cf. note 6.
• Whether parts of the tasks that naturally belong to the real estate brokerage assignment are outsourced.

Example: The risk assessment can, for example, be carried out by first identifying different risk categories based on criteria specified in § 7 second paragraph and giving a description of these. Then, the inherent risk identified in each category is described, and the probability of this risk materializing and the consequence it has for the company's risk of being used for money laundering if the situation occurs is specified. Probability and consequence will give a risk score for each risk category, which in turn will give the company a pointer on where it is necessary to implement measures. Then, a short description is given of which measures are to be implemented to reduce the risk, so that the residual risk is acceptable. The measures described here must be developed into routines that are to be used in case processing and controls, cf. section 5 below.

A schematic presentation of the risk assessment can look like this:

• Use of broker systems, and possibly also the use of web-based solutions for establishing customer relationships and customer contact.

b) The company's products, services, and customer relationships

Relevant topics are primarily related to the services the company provides:

• Purchase assignment housing (brokerage and advisory services for housing/new housing and leisure houses for the buyer). Risk may arise alone or in combination with other factors, e.g., if the client is resident in a tax haven and there is uncertainty about the origin of funds.
• Purchase assignment commercial (brokerage and advisory services for offices, warehouses and logistics, development projects, apartment buildings, trade, hotels, community buildings for the buyer). Risk may arise alone or in combination with other factors, e.g., if the client is a foreign investor, or there are difficulties in obtaining a correct and real valuation of values. The risk may be lower where external advisors are involved, e.g., where due diligence is carried out by a lawyer or audit firm.
• Sales assignment housing (brokerage and advisory services for housing/new housing and leisure houses for the seller). Risk may arise alone or in combination with other factors, e.g., where one of the parties in the trade is an entrepreneur in a high-risk industry (construction, cleaning, restaurants and nightlife, rental of labor, grocery/kiosk without franchise affiliation, car wash/car care/car repair, transport, fishing, oil/gas, or cash-intensive businesses),8 or the seller has acquired the property shortly before and renovated it before sale, or a contract position is resold with profit that can be evaded from taxation.
• Sales assignment commercial (brokerage and advisory services for offices, warehouses and logistics, development projects, apartment buildings, trade, hotels, community buildings for the seller). Risk may arise alone or in combination with other factors, e.g., where one of the parties in the trade is an entrepreneur in a high-risk industry, are foreign investors, or there are difficulties in obtaining a correct and real valuation of values, or there is a short time between acquisition and resale. Commercial property is particularly relevant for money laundering due to large values and the possibility of high returns. Sale of shares in real estate companies requires accounting knowledge, and it can thus be more complicated and thus open for manipulation. It can also be more difficult to keep track of previous transaction values. The risk can be somewhat reduced by using external advice, such as due diligence carried out by a lawyer or audit firm.
• Settlement assignment (assignments limited to managing settlement for other real estate brokerage companies or private parties, where the company does not assist in the sales process). Risk can particularly be related to poorer knowledge of the parties in the trade and the property, including because the settlement is carried out without the parties meeting the settlement broker. If the real estate trade is mediated by companies with real estate brokerage concessions, the risk may be lower since the sales brokerage company carries out its own customer due diligence.
• Valuation assignment (individual or periodic assessments of property value). The risk can be related to incorrect assumptions/information from the client (e.g., manipulation of existing lease agreements, incorrect assumptions for future use, such as renovation/re-zoning or tenants, etc.). There can also be risk associated with favors and corruption of the broker.
• Rental/subletting assignment housing. There may be some risk related to payment occurring directly between the parties.
• Rental/subletting assignment commercial. Risk can be related to fictitious lease agreements, subletting to high-risk industries, or the sublessor paying below price with a corresponding duty to upgrade premises (which is done with illegal funds), where money laundering is carried out upon receipt of the sublease.
• Transaction execution. Regarding payments to the client account, risk can be linked to:
  • Payment from others than the buyer (including also payment from other companies than the buyer's company, e.g., payments from the parent company, or directly from beneficial owners).
  • Payment with cash or remittances.
  • Payments from abroad, e.g., from tax havens.
  • Loans from unusual sources.
  • The origin of equity is unknown.
  • Buyer and seller carry out settlement entirely or partially between themselves.
  • Any repayment shall be made to a different account than the payment came from.
  • Early payment before a year-end.
  • Complex transactions (e.g., the seller provides credit, or settlement is made in something other than money).
  • Demand for other services than normal (e.g., confirmations of settlement/equity).

Regarding payments out, risk can be linked to payments being made to others than the seller or registered mortgagees, or to an account in a tax haven, with the risk of evading proceeds from taxation or creditor pursuit. There can also be risk related to the redemption of private mortgages based on fictitious debt relationships.

Next, the risk must be assessed based on the different types of customer relationships the company has within housing and commercial property:

• Seller. Any risk may arise alone or in combination with other factors, e.g., if the sales object was acquired with illegal funds, or such funds have been added to the property through renovation or complex ownership structure leading to uncertainty about beneficial owners.

8. National Risk Assessment 2018

• Buyer. Any risk may arise alone or in combination with other factors, e.g., if the purpose of the purchase is renovation and quick resale of the property, use of a straw man and where the actual customer has high risk, uncertainty related to the origin of funds, the buyer wants to pay part of the purchase price directly to the seller, etc.
• Landlord/Sublessor. In housing rental, the risk is normally considered low. In commercial leasing, risk can be linked to manipulation of property value, e.g., by using fictitious contracts or artificially low rent because the tenant (sublessor) is to carry out upgrades which are again done with illegal funds.
• Tenant/Subtenant. In housing rental, the risk is normally considered low. In commercial leasing, risk can be linked to fictitious lease agreements, possibly with over/under price, or subletting to subtenants in high-risk industries, or use of artificially low rent because the subtenant is to carry out upgrades which are again done with illegal funds.

c) Type of customers and customer groups

Topics that can be assessed under this alternative are:

• Natural persons. The category includes several groups, e.g., Norwegian citizens, foreign citizens, incapacitated persons, etc. Risk may arise alone or in combination with other factors, including that the customer is a PEP (politically exposed person) or known criminal, or comes from, or is resident in, a foreign country, or uses an attorney – and where there may be uncertainty related to the origin of funds or possible tax evasion.
• Politically Exposed Persons – PEP. The category includes cases where the customer, the person acting on behalf of the customer, or the beneficial owner, is a politically exposed person. The category also includes close family members and known associates of a politically exposed person. The risk is linked to money laundering of proceeds after corruption.
• Sanctioned customers. The category includes natural and legal persons listed by the EU and/or UN, and where the risk is linked to terrorist financing.
• Criminal customers. The customer has a criminal background, or is a member of a group that commits crime, or the customer is closely related to such a person. The risk can, for example, be related to uncertainty regarding the origin of funds.
• Known customers. The category includes customers known to the broker from previous customer relationships or as known actors in the market, and where the risk is linked to the broker not carrying out real customer due diligence or assessments.
• Norwegian administrative bodies or publicly owned companies. Initially, the risk is considered low, but there may be some risk related to corruption.
• Foreign administrative bodies or publicly owned companies established in the EU/EEA. Initially, the risk is considered low, but there may be some risk related to corruption.
• Listed companies. Initially, the risk is considered low, but the risk can be influenced by which country the company is registered in.
• Securities funds/management companies for securities funds. The category includes real estate actors who themselves acquire the property with funds that the fund's customers have paid into the fund. The management company is itself a reporting entity and must thus carry out customer due diligence towards its own customers. There can be some risk related to uncertainty about beneficial owners, as well as the origin of funds.
• Alternative investment funds, arrangers, and AIF managers. The category includes real estate actors who arrange on behalf of a buyer's company to be established, where the trade with the company is conditional on financing that the arranger obtains by approaching the market. Both the arranger (typically a securities company) and the AIF manager are reporting entities and must thus carry out customer due diligence towards their own customers. There can be some risk related to uncertainty about beneficial owners, payments from others than the buyer's company (e.g., from the arranger or directly from beneficial owners), as well as the origin of funds.
• Privately owned real estate companies. The category includes companies with a portfolio of own-owned properties, where the company is often controlled by a few people or is family-owned. Risk may arise alone or in combination with other factors, e.g., difficult-to-access ownership and control conditions based on different share classes, or payments to/from other companies than those involved in the trade, or transfers from companies to owners, etc.