Why AML for Real Estate Entity in Bahrain ?

The actual process of money laundering is a three step process that is initiated by introducing the illegal proceeds into the financial system, e.g., breaking up large amounts into small deposits or by purchasing financial instruments, such as money orders, which is referred to as placement. This is typically followed by distancing the illegal proceeds from the source of the funds through layers of financial transactions, referred to as layering, and finally by returning the illegally derived proceeds to the criminal from what appears to be a legitimate source, known as integration. A real estate transaction can be used in any one of the three stages of money laundering. For example, if an individual purchases a home and uses illegal funds as part of the down payment, this would be considered integration.

Real estate is attractive to money launderers for several reasons:

• It allows large amounts of money to be laundered in one transaction
• It is relatively easy in some jurisdictions to conceal the identity of the ultimate owner of a property
• The overheated property markets in many global cities means that an ‘investment’ won’t lose its value and will most likely appreciate

Money laundering through real estate can take a number of forms:

• Cash deposits. Using cash to buy a property is an unsophisticated, but often effective, method of money laundering. Regulatory reporting thresholds for cash purchases are avoided by making payments from a number of different bank accounts. For this reason, RERA have added a clause in Resolution 3 of 2019 that requires all transaction conducted by developers to be through the designated Escrow Account, except for the Market research license in which they can accept the down payment amount in cash. Other licensees are prohibited from dealing in amounts exceeding BD 2,000 in cash, such amounts exceeding BD 2,000 must be dealt with through the banking system.
• Third-party purchases. Criminals may use a ‘clean’ third party to distance themselves from a property transaction and disguise ownership, by using them as legal owner of a property and/ or using their bank account to deposit and then withdraw money to buy a property. A further problem for authorities is that a third-party purchase complicates asset confiscation. For this reason, and according to FATF requirements, all licensees mut do due diligence (KYC measures), prior to entering into any transaction, not only to their customer, but to the ultimate beneficiary of the transaction
• Loans and mortgages. Mortgages and loans add a veneer of legitimacy to a real estate deal. A criminal may take out a mortgage to buy a property then settle in full a few months later. Loan-back schemes are a variation of this approach; a criminal ‘borrows’ their own funds from a foreign offshore company that is, in fact, under their control. The loan is used to buy real estate and repayments are made from illicit funds money to buy a property
• Under-and over-valuation. This requires the involvement of a vendor or real estate agent who under- or over-estimates the value of a property, with the difference settled in secret cash payments. RERA have issued the Bahrain Valuation Standards based on international best practices which are mandatory for all licensed valuers.
• Renovation. Illicit funds are used to pay for renovations of a property and increase its value.
• Leasing. A property is rented to a tenant, who is provided with illicit funds to cover the payments. An alternative is for the criminal to make regular deposits into an account as fictitious rent, giving the appearance of legitimate income.

As per National Risk Assessment Report which was based on Financial Action Task Force (“FATF”) recommendation designated Real Estate as Moderate risk for AML.

Based on the above RERA passed Resolution No. (3) of 2019 On Obligations related to Procedures of Money Laundering and Terrorism Financing Prevention in Licensed Real Estate activities