How real estate is an excuse for money laundering

The juvenile son of Vishal Agarwal of Bramha Realty caused the death of two motorcycle riders by rash driving — maybe under the influence — in Kalyani Nagar of Pune at 3:00 AM on 18 May, it’s time the country looked hard at the real estate business. 

The car the rich brat was driving was a Porsche Cayenne that costs more than Rs 1.61 crore on-road in Pune. Besides the issue of bad parenting that led to underage driving, which caused the accident, we must ask where this kind of money comes from.

Richness, as well as bankruptcy, comes in a package in the real estate business. Such contrasts coinciding in one business is possible only if the dealings in the trade are fishy. Yes, you guessed it right. We’re referring to money laundering.

Money laundering in the real estate business

So, how much money is laundered? Several reports and studies provide insights into the scale of the issue in the economy:

1. General estimates
   1. There is a KPMG report that estimates that around 30-40% of real estate transactions in the country involves black money.
   2. From April 2014 to December 2020, the Enforcement Directorate (ED) attached properties worth over Rs 36,000 crore in connection with money laundering cases. Much of this was money from the property trade.
   3. The Global Financial Integrity (GFI) says that India lost about $83 billion annually to illicit financial flows between 2005 and ’14, a portion of which was funnelled through properties. Up to 30-40% of transactions in the real estate business might involve illicit funds.
2. 11 most infamous examples
   1. Unitech Ltd paid a penalty of Rs 600 crore to the ED.
   2. Amrapali Group: The ED attached assets worth Rs 187 crore of the Amrapali group following a Supreme Court-ordered audit.
   3. Supertech Ltd: The ED attached assets of Supertech Ltd worth Rs 40 crore under the Prevention of Money Laundering Act (PMLA).
   4. Sahara India Pariwar: The Supreme Court ordered Sahara to deposit over Rs 24,000 crore with the Securities and Exchange Board of India (SEBI).
   5. DS Kulkarni Developers Ltd: The ED attached DS Kulkarni Developers’ properties worth over Rs 904 crore.
   6. Nirmal Lifestyle: The ED attached assets worth Rs 55 crore belonging to Nirmal Lifestyle.
   7. Parsvnath Developers Ltd: The ED attached properties worth Rs 70 crore of Parsvnath Developers for a money laundering case related to the Saradha chit fund scam.
   8. Ireo Pvt Ltd: The ED attached assets worth Rs 2,600 crore of Ireo Pvt Ltd.
   9. Embassy Group: The Income Tax Department found the Embassy Group to have misappropriated Rs 3,000 crore.
   10. DLF Ltd: DLF Ltd. was fined Rs 630 crore by the Competition Commission of India (CCI).
   11. The CEO of the Prestige group was sacked recently after he was found to be investing in projects outside the company, including a few where his own company had the projects. This is an example of zero corporate governance.
3. How do these real estate companies do it? Well, they convert illicit gains into legitimate assets through various methods.
   1. According to a report by the NIPFP, real estate accounts for about 11% of India’s GDP and a significant portion of illicit funds. Estimates suggest that up to 30% of transactions in the sector could involve some form of money laundering.
      The Financial Action Task Force (FATF) reported that this is a sector for laundering proceeds from crime in India.
   2. Methods of money laundering in this business may involve the use of shell companies: Individuals often set up shell companies to purchase property. These entities do not engage in any legitimate business activities but are used to conceal the actual owner's identity and the illicit origin of funds. Shell companies facilitate layering, where the money is moved through a complex series of transactions, making it difficult to trace the source.
   3. Properties are bought in the name of a third party that is not the actual owner. The Narendra Modi government enacted the Benami Transactions (Prohibition) Amendment Act of 2016 to curb this practice. We’ll see later how this had had a limited impact.
   4. Buyers and sellers often underreport the sale value of a property to reduce stamp duty and capital gains tax. The difference between the actual sale price and the reported price is paid in cash (black money).
   5. Money launderers buy a property and then sell it back to the original seller or an associate at inflated prices.
   6. Developers may show inflated project costs and funnel black money into the project, thereby converting it into legitimate earnings.
   7. High-value properties provide an effective way to park large amounts of illicit funds in a single transaction.
4. The question is why the law cannot stop such money laundering. To understand this, let’s first study the laws and then explain why the laws fail.
   1. The Real Estate (Regulation and Development) Act, 2016 (RERA) mandates registering projects and agents, thereby reducing the scope for money laundering. The PMLA and the anti-benami property law are key legal frameworks aimed at combating money laundering in this sector.
   2. But the sector is opaque. Cash transactions and the use of complex structures hide the ownership and fund flows. Then, a multiplicity of authorities checking financial frauds work at cross purposes.
   3. Of course, one temporarily effective method to stop money laundering in this market segment was the demonetisation of Rs 500 and Rs 1,000 notes in November 2016, but it had a short-lived impact.
5. Conclusion
   To conclude, money laundering in the Indian real estate sector involves sophisticated methods, from shell companies and benami transactions to underreporting property values and circular transactions. The scale of illicit transactions underscores the need for continued vigilance and coordinated efforts among regulatory and enforcement agencies.