Rossana Duarte Fernandes
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, São Paulo
rossana@mattosfilho.com.br

Alexandre Soares Andrade
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, São Paulo
​​​​​​​alexandre.andrade@mattosfilho.com.br

Introduction

Real estate assets have a specific nature of their own, and have little or no relation with conventional investments, such as stock and corporate or government bonds. As a rule, (1) real estate assets are more likely to be illiquid and, therefore, are more likely to have liquidity premiums; (2) real estate assets require major investments for their acquisition and development; (3) real estate assets involve high transaction costs in connection with structuring investments and divestments; (4) real estate assets have their own pricing mechanisms, in particular in case of first-class, exclusive or atypical assets; (5) the profitability of real estate assets is associated with the compensation for their use and specific investments; and (6) real estate assets are subject to less regulatory control, when compared to stock exchange traded conventional investments.

The size of the global real estate market is estimated at $9.6tn in accordance with the latest report published by Morgan Stanley Capital International for years 2019/2020.^[1] The limited relation with conventional investments makes real estate assets strategic for the purpose of diversifying portfolios, reducing volatility and improving the yield per risk unit for a number of institutional investors and sovereign funds. As a result, international transactions are usual in this market. In addition, due to its own characteristics, the market attracts strategic investors who find opportunities for expressive gains on the basis of the assumption of specific risks (eg, need to make assets compliant, development of real estate, vacancy, liquidity), microeconomic forecasts (eg, increase in the demand for a given real estate segment) or macroeconomic forecasts (eg, emerging markets’ growth expectation).

Because this is a global market, the prevention of its undue use for the criminal conducts of money laundering and terrorism financing is an increasingly frequent topic, and market participants are required to adopt the prevention techniques currently available.

On 29 June 2007, the Financial Action Task Force (FATF), published a report called Money Laundering and Terrorist Financing Through the Real Estate Sector in which it made a warning about the vulnerability of the real estate market on a global scale, and particularly in emerging countries, to money laundering and terrorism financing. Among other things, the report indicated (1) that it is historically easy to conceal the source of funds and the beneficial owner in real estate transactions; (2) the low level of monitoring of real estate transactions by registrars, notaries, and other intermediaries and advisers for the purpose of preventing money laundering and terrorism  financing; (3) the growing complexity of real estate transactions and their integration with the capital markets; and (4) the difficulty in monitoring and understanding price changes in the real estate market.^[2]

The FATF concluded that the focus of vulnerability may be significantly reduced by simply requiring the intermediaries of the real estate market, such as registrars, notaries, real estate agents, entities engaged in real estate marketing or purchase and sale (eg, real estate developers, real estate parceling companies, real estate agencies, building companies, real estate auction firms, real estate management firms and housing cooperatives), accountants, auditors and different types of consultants and advisers to adopt compliance rules in order to prevent money laundering and terrorism financing.

Since then, what has been observed on a global level and also in Brazil as an emerging country and recipient of substantial global investments in the real estate market is an increase in the complexity of the compliance rules applicable to real estate market intermediaries, as discussed below. In this sense, Brazil has taken a core role in terms of the regulations that have been adopted, which is not seen in many other countries, such as the obligation applicable to notaries and registrars to report suspicious transactions to the Council for Financial Activities Control (‘COAF’), the Brazilian financial intelligence unit.

Brief history of the anti-money laundering and counter-terrorism financing regulation in the real estate market

The history of anti-money laundering regulation in the real estate market is associated with the development of international anti-money laundering policies, whose key rules (hard law) are the treaties resulting from the 1988 Vienna Convention,^[3] the 2000 Palermo Convention^[4] and the 2003 Merida Convention,^[5] as well as a number of guidance documents, recommendations and manuals (soft law) from a range of international organizations, including the FATF, an intergovernmental organization created in 1989 to expand knowledge, assess best techniques and oversee the implementation of anti-money laundering and counter-terrorism financing laws and regulations.

It was only after the 2003 Merida Convention that the list of persons under an obligation to cooperate to prevent money laundering was expanded, causing the signatory states to establish strict administrative controls over private sectors that are sensitive to money laundering, including the real estate market. The 1988 Vienna Convention and the 2000 Palermo Convention were dedicated to characterising the crime of money laundering, originally associated with drug trafficking and subsequently expanded to fight organised crime and establishing an obligation on each signatory state to create their own Financial Intelligence Units (FIUs) tasked with investigating money laundering.

In turn, in FATF’s 40 recommendations prepared between 1990 and 2012, the FATF suggested that real estate agents, notaries, lawyers and accountants should, depending on professional confidentiality, be subject, among other things, to the diligence duties relating to clients and third parties retained, the obligation to preserve documents and to report suspicious transactions to the relevant FIU and other regulators within their states. In addition, in 2007 and 2008, the FATF issued reports on (1) a vulnerability of the real estate sector to money laundering and terrorism financing,^[6] as discussed in the introduction, and (2) the risks involved in the activities of real estate agents in connection with preventing money laundering and terrorism financing.^[7]

In Brazil, until the enactment of Law No 12.683/2012,^[8] little was specifically addressed in relation to the real estate market and, as per item X of section 9 of Law No 9613/1998^[9] and then in effect COAF Resolution No 14 of 23 October 2006,^[10] only entities engaged in real estate marketing and purchase and sale (eg, real estate developers, real estate parcelling companies, real estate agencies, building companies, real estate auction firms, real estate management firms and housing cooperatives) were subject to the duties to know their clients, keep records and report to COAF the financial transactions specified in Law No 9613/1998, then the key Brazilian anti-corruption law, which was drafted and amended in the context of the Vienna Convention and the Palermo Convention.

In line with the principles of the Merida Convention, Law No 12683/2012 was drafted after the third round of FATF’s assessment of Brazil (2010) and in addition to expanding the characterization of the crime of money laundering to include any attempt to make any funds resulting from any unlawful activity to seem lawful (detaching it from any all-inclusive list of preceding crimes), it also expanded the list of persons under an obligation to know their clients, keep records and report to COAF and expressly included public registries, among which real estate registry offices, and persons who, even on a non-regular basis provide advisory, consulting, accounting, audit or assistance services of any kind in real estate transactions, and purchase and sale of property and business premises, such as notaries, real estate agents, accountants and auditors.

The implementation of the control mechanisms to be adopted by each one of the persons contemplated by the new list of persons under an obligation to comply with Law No 12683/2012 depends, to a great degree, on the issuance of specific rules by the regulators of each professional category involved. So far, regulation has been adopted in connection with the obligation to cooperate with, and report to, COAF applicable to real estate agents and entities engaged in real estate marketing and purchase and sale under COFECI Resolution No 1336/2014, issued by the Federal Council of Real Estate Agents (‘COFECI’),^[11] accountants and auditors, under CFC Resolution No 1530/2017, issued by the Federal Accountants Council (‘CFC’),^[12] and recently, notaries and registrars, under Rule No 88/2019 of the National Council of Justice (‘CNJ’).^[13]

Obligation to report to COAF and other duties

COFECI Resolution No 1336/2014, CFC Resolution No 1530/2017 and CNJ Rule No 88/2019 created an obligation on notaries, registrars, real estate agents, entities engaged in real estate marketing and purchase and sale, accountants and auditors to establish and implement anti-money laundering and counter-terrorism financing policies consistent with the size of their operations, for the purpose of reporting suspicions in transactions reviewed by them to COAF.

Such policies should contain, among other things, procedures and controls to (1) engage in efforts to know clients, beneficial owners, politically exposed persons (for notaries and registrars) and other persons involved in the transactions in which they take part; (2) identify transactions and proposed transactions and gather information on the purpose and nature of the relations involved in the deals; (3) select, train and monitor employees and disseminate such procedures and controls to their personnel; and (4) prevent conflicts between business and corporate interests and the anti-money laundering and counter-terrorism financing mechanisms.

Notaries and registrars have to keep and preserve information and documents for a minimum period of five years after the performance of their functions, and have access to the Register of Beneficial Owners of the Brazilian Federal Revenue in order to identify beneficial owners, and the Financial Activities Control System to check the electronic register of politically exposed persons (PEP), and in case data are not found in the systems, they may take a specific declaration from their users in relation to their beneficial owners and/or their qualification as a PEP.

Reporting to COAF is mandatory and is a task that has to be done irrespective of any analysis or any other consideration, and in case of notaries or registrars, reporting should take place on the first business day after the performance of any notarial or registration action in case of transactions in which payment is made in cash in an amount greater than (1) BRL 30,000 for notaries and registrars; (2) BRL 50,000 or in case of share capital contributions, BRL 100,000 in a single calendar month, for accountants; and (3) BRL 100,000, for real estate agents and entities engaged in real estate marketing or purchase and sale.

Reporting to COAF is equally required (1) from registrars, in connection with the registration of successive transfers of the same asset within not more than six months, if the difference between the value declared on each occasion is greater than 50 per cent, and (1b) in relation to a title containing a difference greater than 100 per cent between an asset’s tax appraisal value and its declared value, or the asset value and the (greater or lower) declared value; and (2) from notaries, where a power-of-attorney is drawn up granting full power to manage a business either on an irrevocable basis or without an obligation to render accounts, irrespective of whether the power-of-attorney is for one’s own benefit or its effective period is indefinite or not.

COFECI Resolution No 1336/2014, CFC Resolution No 1530/2017 and CNJ Rule No 88/2019 also provide that, without prejudice to compulsory reporting, such persons may report to COAF other transactions they deem suspicious in terms of money laundering and terrorism financing, as specified in such resolutions and/or rules, or also in the FATF’s general guidance, reports, studies and training to the real estate market.

This is the case, for example, with transactions in which it is not possible to identify the beneficial owner or the source of funds, and transactions that are apparently legitimate but in relation to which it is not possible to verify the source of funds or the economic or legal grounds, or also transactions involving related parties. Transactions with indications of values that are inconsistent with market values, substantial capital gains in a short period, clauses that establish conditions inconsistent with market practice, and transactions involving complex real estate finance (eg, back-to-back loans) or also involving offshore entities located in tax havens and countries specified as high risk by the FATF are also deemed suspicious.

The international anti-money laundering and counter-terrorism financing policies in the real estate market will increasingly require more active cooperation on the part of the real estate market’s intermediaries in connection with monitoring and reporting suspicious transactions to the FIUs of their respective countries, resulting in the growing complexity of the compliance rules applicable to each intermediary, in accordance with the role played in the real estate market and the size of their operations, requiring the creation, maintenance and updating of compliance policies in accordance with the international best practices adopted for the real estate market.