Israel's Anti-money Laundering Authority IDs Real Estate Market ‘Red Flags’

List includes cash payments, use of front men, involvement of a foreigner with no connection to Israel, using funds from a country that buyer has no connection to, and deals made for unrealistic prices

File photo: Real estate for sale in Israel.
Eyal Toueg

The Israeli authority dealing with money laundering and terror financing issued a document on Wednesday listing “red flags” for identifying real estate deals suspected of involving dirty money, for the benefit of financial and business entities, chiefly banks and mortgage banks.

Such institutions are required to report suspicious activity to the authority, which is part of the Justice Ministry.

In recent years, the significant increase in the number of real estate deals and in housing prices has fueled fears of money launderers exploiting the system. The special characteristics of the real estate market, which includes large-scale deals with the option of making cash payments and the lack of obligation to register the full chain of property ownership, add to the fear.

According to the report, the lack of a developed rental market in Israel together with the rise in rental prices is liable to create an opportunity for money laundering “by long-term real estate rentals, attaining a significant return and ‘double laundering’ of illegally obtained money in the first stage through acquisition of the property, and by receiving rental fees for its use in the second stage.”

Experience in Israel and abroad showed that money laundering through real estate is done mainly through cash deals; the use of third-parties as fronts; companies that have a complicated holding structure meant to conceal the owners’ identity; the use of trusts; manipulation of property values to unrealistically high or low amounts; mixing ill-gotten funds with money obtained from a loan or mortgage; the representation of a legitimate income source from the rental; and rotational deals with straw men as a means of injecting unexplained capital.

Other signs indicating money laundering in a deal include payments by means of checks drawn to third parties who are unrelated to the deal; funds drawn or transferred from countries deemed to be countries at risk without any connection to the buyer and seller; and foreign residents or companies that are likely to transfer funds to Israel to acquire real estate who have no clear relationship with a country or are tied to a country found on the list of high risk countries. Further signs are when the property is sold several times within a short period and when the buyer was an owner in the not-too-distant past.

The head of the authority, Dr. Shlomit Wagman-Ratner, said: “Besides being a central market in the economy, which has significant economic potential, there are also risks in the real estate market that serve as fertile ground for money laundering activities.” She said the authority was moving to raise awareness among financial institutions about these risks and to provide tools for improving their ability to report suspicious activities in order to combat the phenomenon.