Costa Rica criticized for lack of oversight of money laundering in the real estate sector

November 13, 2014
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The global monitoring organization Financial Action Task Force (FATF) is currently conducting an evaluation of money laundering activities associated with drug trafficking in Costa Rica. They are particularly focused on the real estate industry.

According to a report entitled “Illicit Financial Flows from Developing Countries: 2002-2011,” prepared by the Global Financial Integrity organization, money laundering accounts for 22 percent of Costa Rica’s gross domestic product.

The report presents a comparison of the country’s 2011 GDP according to the World Bank and the average flow of illegal money between 2002 and 2011.

It says the flow of illegal money between 2002 in 2011 in Costa Rica amounted to $64 billion. By comparison, during the same period Mexico’s flow was $476 billion, and Panama’s was $40 billion.

On Nov. 4, the Costa Rican Drug Institute (ICD), the Chamber of Realtors and the U.S. Treasury Department held a workshop in San José aimed at realtors to train them on how to avoid being used in money laundering operations.

Román Chavarría, head of the ICD’s Financial Intelligence Unit, spoke of the legal requirements intended to prevent money laundering and the risks faced by those who interact with money launderers.

Money laundering involves legitimizing funds by disguising the original source of the money and the ultimate purpose of money obtained illegally. These practices often end up being integrated by various means into the country’s overall economy as a way of making the process appear above reproach.

Chavarría explained that Costa Rica hasn’t taken the steps necessary to restrict cash brought into the country, unlike other countries in the region. “That’s why [money launderers] use Costa Rica, because we don’t have those restrictions; they’re looking for countries that haven’t protected themselves.”

The last time FATF, which is based in Paris and was founded in 1989, assessed Costa Rica’s efforts to control these practices was in 2006. The purpose of the current effort is to evaluate whether the recommendations of that assessment are being implemented, and if they’re effective.

Read a copy of the 2006 report in Spanish here

One of the principal practices that allows this industry to prosper in Costa Rica, particularly when it comes to real estate, is the use of intermediaries to represent others who wish to remain anonymous. This practice was highlighted as one of the reasons the country scored so poorly in FATF’s last report. These people may be unknowingly part of the laundering process as a means of buying and selling real estate, without disclosing the real parties in the deal.

“We have come across thousands of these people who act as a representative of a company, and are registered as officers of companies. It is the realtor’s responsibility to know who he or she is really dealing with, and who the owners of these companies are,” Chavarría said.

Costa Rica also scored poorly on security measures associated with business transactions and nonprofit professions. Chavarría recommended a variety of measures, such as making sure realtors know their clients, and maintaining detailed files on clients that include reliable information from reliable sources. He also pointed out that “it is not the same to do business with people of nationality ‘X’ as with those of nationality ‘Y.’”

“At this point in the game it is unacceptable for a person to approach a realtor or law firm and seek their services by placing $50,000, $100,000, or $150,000 on the table in return for finding them a property, with no concern for where it even is. Especially if the person is from a high-risk country known for the presence of traffickers or manufacturers of drugs, arriving with that kind of cash,” he said.

“This is precisely why you need to manage your risk and implement best-business practices to avoid being used to launder money. You must require the best documentation possible,” Chavarría said.

Furthering Costa Rica’s poor grade was the observation that realtors have no workable system for reporting suspicious transactions, and there is no obligation to do so.

Financial institutions – banks, stock exchanges, pension funds – do have such a reporting mechanism, as outlined in Law 8204, which is specifically focused on money laundering and the financing of terrorism.

According to the Costa Rican Banking Association, financial institutions report about 300 cases annually of suspicious activity associated with laundering income and attempts to legitimize capital to the UIF and ICD.

Chavarría also explained that auto agencies already have a mechanism in place to report suspicious activities and are planning a meeting on Nov. 27 between agencies and the ICD.

There is also a national plan supported by the World Bank in the works to attack money laundering, which includes bankers, accountants, lawyers, real estate agents, federal police and gun shop owners.

“The state cannot do this on its own; the private sector must also be involved,” he said.

The segments of Costa Rica’s business that are considered to be of highest risk are real estate, casinos, lawyers, notaries, accountants and dealers in precious metals, but Chavarría is of the opinion that the country will probably end up identifying others, such as football teams, auctions and pawn shops.

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