Corruption and money laundering in the real estate sector
Institutional Communication Service
6 September 2022
A corruption scandal hit the news at the end of August in Brazil involving President Jair Bolsonaro and his family. Investigative journalists found that Bolsonaro, his three sons — all politicians —, his siblings, and his two ex-wives purchased, since the 1990s, a total of 107 properties, and about half of them were paid (either totally or partially) in cash. To explore this topic in more detail, we propose the interview with Fabiano Angelico, researcher at GRIP (Public Integrity Research Group) and PhD student at the Università della Svizzera italiana in cotutelle with the Business Administration School of São Paulo at the Getulio Vargas Foundation (FGV/EAESP) in Brazil.
The phenomenon of buying properties in cash is widespread and concerns policymakers and policy regulators. Can you tell us more?
Using cash is one of the most common techniques for criminals to launder dirty money because it becomes more difficult for authorities to trace back the origin of the funds. In that sense, buying properties in cash allows criminals to launder large amounts of money through a small number of operations — after all, properties are valuable assets. Moreover, when real estate units are purchased to launder ill-gotten funds, it becomes a serious social problem with implications in various policy areas. As dirty money enters the real estate sector, it distorts the market, affecting housing affordability and forcing families to live far away, impacting public transportation, for example. Scholars and practitioners working with tax policies are also concerned about practices that hide the actual owner of properties via complex, opaque legal structures, which might be associated with tax avoidance or even tax evasion. Besides urban planning and taxation, there are challenges around governance, regulation, and criminal justice.
Your doctoral thesis focuses on corruption and money laundering in the real estate sector: why do corrupt people and money launderers like to buy real estate so much?
Corrupt and money launderers target the real estate market because, on the one hand, it is naturally attractive, and, on the other hand, accountability institutions face various barriers, diminishing the risks for criminals. Like all of us, criminals should like the idea of enjoying a lovely penthouse by the beach or beautiful second houses for vacation. Additionally, investing in real estate is usually profitable and safe — hence the proceeds of a crime may bring even more profits! Accountability institutions, on the other hand, face numerous constraints. Firstly, there is little to no transparency on transactions and ownership in many countries, making it hard for investigators to identify the beneficial owner, i.e., the natural person who buys and owns properties. Because of that opacity, the actual price of a property might be calculated in a pretty subjective way, opening room for under or overvaluation or inaccurate documentation in notaries. Moreover, financial intelligence units argue that private actors fail to issue detailed and thorough suspicious reports. Finally, most cases involving corruption, money laundering, and luxury real estate are related to influential people with relevant networks, making it hard for institutions to prosecute and sanction adequately.
Criminals use various techniques to launder money through the real estate industry. What are the consequences? How can this phenomenon be intercepted and stopped?
The consequences can be numerous and grave, not only in policy areas such as urban planning and tax policy, as mentioned above, but also because money laundering is often associated with serious crimes such as corruption, drug trafficking, and human trafficking. How to intercept and stop? Numerous proposals are on the table, all easily prescribed but not so easily implemented. Firstly, some scholars, particularly from the anthropology and sociology fields, argue that social and cultural aspects are important. In that sense, there should be a social consensus that the real estate market is highly relevant to society and vital to the well-being of families, as we saw during the pandemic when the motto "stay home" was widespread. How can one stay home for a long time when not many people can buy or rent a comfortable house because prices are so high? Second, governance scholars and practitioners prescribe transparency and regulation over transactions and ownership. Availability of information on transactions will arguably avoid or at least reduce price manipulation or inaccurate data. In contrast, data on real estate ownership may allow society and investigators to detect crimes more efficiently. Third, the private sector, including all actors involved in the construction and commercialization of properties, should be aware of their responsibilities regarding raising red flags to authorities. Fourth, with full respect to the due legal process, officers should be given the capacity and autonomy to investigate and sanction adequately.
Do we know the situation in Switzerland and other countries?
There are various reports about gaps and loopholes in the United States, Canada, United Kindom, Australia, and countries from the so-called Global South. Financial centres are particularly hazardous because of the financialization of the real estate market, which allows for complex legal structures to operate, hiding the assets' real owners. In that sense, as one of the leading financial centres worldwide, Switzerland should also be alert. In a technical study I coordinated before my PhD studies, I found over 200 legal persons registered in financial centres worldwide owning thousands of properties in Sao Paulo, Brazil, worth a total of 2.7 billion US dollars. While a Caribbean country (British Virgin Islands) was the primary origin of legal persons holding real estate titles in my home city, Switzerland ranked fifth. Of course, the fact that a foreign legal person purchased a commercial building or a luxury apartment in a given country is not a red flag. Still, when this legal person is registered in countries serving as financial centres, and when it is difficult for authorities to find out who is the natural person behind this legal structure, there should be a risk of illicit acts, such as tax evasion or money laundering. This means that legal persons registered in countries like Switzerland or having bank accounts here might be vehicles for money laundering crimes in another country. In terms of the Swiss real estate market, given that Switzerland is a pleasant and safe country, with good services, as well as a prestigious touristic destination, there is also a risk that kleptocrats or other types of criminals from abroad buy properties here, particularly second houses.