Property sector tops money laundering list in new report

The real estate sector is capital-intensive but is not properly regulated. [Courtesy]

The real estate sector has been ranked as one of the major avenues through which proceeds of crime are hidden.

The Financial Reporting Centre’s (FRC) latest report shows that the real estate sector was assessed to have a high money laundering threat in the 2021 National Risk Assessment.

The sector is capital-intensive but is not properly regulated. The assessment attributed the high risk to the attractiveness of returns in real estate investments, appreciation in land prices and the increasing demand for housing.

“The current assessment has however reviewed the rating to medium from high risk - with most investors - both domestic and international being drawn to make investments in the real estate sector. The cash-based nature of some transactions without scrutiny on the source of funds contributed to the rating,” the money laundering report, 2023, read in part.

The report, which scrutinised the level of money laundering and financing for terrorism risk, further pointed out that foreign investors may find the sector lucrative  and rewarding business as the returns are often high.

“The structural regime in the country provides that the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations are enforced on real estate agencies, instead of individual agents. This has consequently improved the registration of the reporting entities in the sector,” notes the report.

“Additionally, clients in the sector are most likely to prefer services offered by agencies, rather than individual agents. FRC has also increased the engagement with the sector through AML/CFT sensitisation as well as mobilisation for registration.” 

The 2021 National Risk Assessment Report showed that, among others, the overall money laundering threat for Kenya was medium with the potential for an increase in the future. However, the national money laundering vulnerability was medium-high.

The banking industry was assessed to have the highest impact on the national money laundering vulnerability, largely due to the important role played by banks in the economy.

The real estate sector was also assessed as posing a significant impact on the country’s national AML/CFT vulnerability. Money remittance providers, money network operators, saccos, and legal and motor vehicle dealers’ sectors were also found to be impacting the country’s money laundering threat.

This was attributed to the contribution of these sectors to the economy in general, as well as the fact that the sectors had relatively weaker frameworks on money laundering and terrorism financing oversight.

With Kenya on the grey list for the second time, regulators and the FRC are making efforts to get the country out of the infamous grey list. According to the FRC, 27 real estate agencies were flagged as posing a medium risk to the country’s money crime vulnerability.

While Kenya remains under scrutiny as a jurisdiction on the Financial Action Task Force (FATF) grey list, it raises critical questions on the effectiveness of the Money Laundering Act and points to systemic weakness in enforcement.

Statistics show that an estimated Sh6.5 trillion- twice Kenya’s GDP- is lost annually to illicit financial flows, undermining efforts toward economic growth and achieving sustainable development goals.

According to Flywheel Advisory, financial crime is evolving thus the need to develop appropriate strategies to counter money laundering and terrorism financing.

Additionally, the financial intelligence agency last year called for the need to put in place measures to detect and prevent illicit funds from being cleared through the designated non-financial businesses and professions.

These include real estate agents, casinos, betting companies, dealers in precious metals, precious stones, cars, accountants, trust and company service providers, advocates, and independent legal professionals.