This blog dives a bit deeper into one of the subjects in the Continuous monitoring of clients for Financial institutions; detecting risk in ‘Commercial’ Real Estate.

Detecting ‘Commercial Real Estate’

The FATF evaluation of the Netherlands (2022) has indicated that the amount of unusual transactions reported in the ‘real estate sector’ is lower then expected. This while there are approximately 9000 realtors, 3400 notaries and a lot of financial institutions who’s daily business is to deal with real-estate transactions. Now why should this be a problem?

The Dutch National bank states: “Commercial real estate activities are a good example, because by their nature they carry a higher risk of fraud and money laundering due to the relatively high value of real estate, the often non-transparent pricing and the complexity of transactions”. Next to transparency and volume, there is also the added notation that for investments, the involvement of non-dutch Trust offices or creating a completely new company is not uncommon. If you mix these components up, you know that there are loopholes for criminals to exploit. For financial institutions this means that they have to be extra careful with Real Estate transactions. This can be clients who are just starting their housing careers with their first house and mortgage, it can be someone or a company that manages a whole portfolio of housing and industry rentals or it can be a company that is developing real-estate for lease or sales.

What are we looking for in a real-estate portfolio?

You have a couple of questions to see what is deviant behavior when looking at Real Estate risk:

• Is the value of the property in accordance with the market price?
• What parties are involved and are they hitting any filtering bells?
• What is the source of funds for leasing or acquiring the property?
• How often does the property change ownership?
• And is there a network of common transactions to be identified?

Based on these questions you can already start with a risk based approach regarding the risk that a customer poses to the financial institution. For instance, are we talking about a Russian Oligarch who wants to avoid sanction legislation or is it just a privileged Dutch YUP that is given a ‘jubelton’ by it’s parents to acquire that nice condo in the city center.

However retrieving detailed information from clients can take a lot of time and additional time to investigate this. This becomes more complex when the client case complexity increases. So, Identifying and analyzing real-estate of a customer can become quite time-consuming pretty fast without it necessary being a material risk in case of a specific client.

How to speed up an investigation?

There is hope on the horizon; extensive use of data. If you want to make your CDD/KYC process more efficient, there is great opportunity with the power of data. You can source from your customers transactions, but also from structured databases such as Kadaster. However, this only provides you with a limited perspective. When you really start using data and start combining data sources you can spot patterns and create a client profile which will stay up-to-date.

One of the companies that Coduce has worked with shows a great example of effectively combing data sources to identify risks; Propertyinfo.

Since many years now they have connected multiple data sources to create a database that contains every real-estate transaction in the Netherlands. They have combined the data in a way that let’s you:

• Look up a customer and quickly find the basics; owning any real-estate, the way it’s financed and some metadata like WOZ-value and energy label.
• Check if there are any changes in the client profile; sold a house, move to another place or acquired something new
• Check if there are any signals that might increase the risk; quick transactions of a property, large delta’s in pricing with the market or the last transactions, and who is involved in these transactions.

So if you utilize the power of data it becomes much easier to:

• Know if someone is getting their first house, first investment or are actually active in commercializing their real-estate portfolio.
• Know who has Beneficial ownership of the real-estate, which might go hand-in-hand with complex structures of transactions
• ABC Transactions where the price is driven up artificially.
• Check how financing is set-up and if the source of funds seems plausible.

Want to spend less time on Real Estate investigations?

If you need any help with detecting real-estate risk, speeding up onboarding processses and working more data driven, feel free to reach out to us through any of our channels or directly get silven@coduce.nl (+31 614 638 0880) involved.

sources: Risk-based Approach Guidance for the Real Estate Sector (fatf-gafi.org)