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Understanding KYC/AML compliance within the real estate ecosystem in Luxembourg

Published on
Jan 12, 2024
Written by
Real Estate

Due to its massive financial potential, the real estate industry attracts a variety of actors, ranging from investors to agents and brokers to property developers and many more. In 2022 the European real estate market was valued at USD 234.5 billion with an expected compound annual growth rate of 9 % from 2023 to 2028. The construction sector in Luxemburg generated EUR 8.6 billion in 2019 alone, demonstrating the financial force of just one fraction of the whole real estate market overall.

Although the real estate market is bearing massive potential and is one of the few absolute power house industries, the current economic and geopolitical situation is challenging for everyone in this sector. The slow but still steady increase of inflation worldwide is raising prices for construction materials, energy bills and workforce alike. Additionally, the ongoing geopolitical situation creates an increased amount of uncertainty for real estate developers and investors alike, as sanctions against Russia aggravated already high energy costs and the shortage of building materials. Since the beginning of 2022 it also became much harder to estimate the financial situation of individuals and their ability to purchase real estate based on interest rates that spiralled upwards, therefore making it incredibly hard for real estate developers to be sure that their properties will be sold in a timely manner after completion. The situation for the rental market however is different. While more and more people can’t afford to buy property, they are looking to rent. The increasing demand for rentals exacerbates the housing crisis in Europe additionally and makes it more difficult for individuals to find an affordable place to live as competition is high.  

Although the real estate market is facing many different challenges at the moment, this industry still bears massive growth potential and revenues – but therefore also represents a lucrative area for fraud in the shapes of money laundering, terrorist financing and other financial crimes. That is why the real estate industry and its participants became subject to high levels of scrutiny from authorities due to the potential risk of malfeasance.

In order to further prevent criminals from using the real estate industry as scapegoat for their financial schemes, changes were made towards the law of 12 November 2004 against money laundering and terrorism financing (Anti-money laundering law) in Luxembourg in 2020. Those changes are bringing property developers within its scope by including them in the definition of professionals subject to the AML Law, meaning that they will be held accountable for doing their due diligence and risk assessments of all parties included in the process. Before the amendment only real estate professionals including agents had to comply with the AML Law but the changes on March 25th, 2020 also holds agents when acting as intermediaries (amount of rent ≥ 10,000 euros monthly) in the rental of the real estate as well as real estate promoters accountable to prevent fraudulent activities.

This blog post aims to provide an overview of Know your Customer (KYC), Anti-Money-Laundering (AML) Beneficial Owner (BO) and Counter-terrorist financing (CTF) compliance requirements within the real estate industry in Luxembourg and how kodehyve supports and empowers real estate actors in meeting said requirements through digitalisation of these processes.

Requirements regarding real estate transactions

Apart from mandatory KYC and AML requirements that are in place for real estate, Luxembourg also enforces even more specific requirements applying to all transactions linked to a real estate project, such as the reinforced due diligence including thorough client risk assessment and regular monitoring of suspicious transactions and activities. To be able to spot said ominous transactions real estate professionals are required to have procedures in place which detect and report these to the appropriate authorities such as the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg.

To ensure that the source of where the money stems from is legitimate, real estate professionals are required to provide information on the source of funds for the transactions and the beneficial owner of the property. Further, any transaction exceeding an amount of €10,000 in cash payments are required to be reported due to an increased risk of money laundering activities, since cash payments can usually not be traced back to its origin.

Compliance areas and its impact on business operations

Making sure that all transactions, actions, processes as well as all business units act compliant towards KYC, AML, BO and CTF requirements can be a massive undertaking for companies and require significant time and resources to set it up for success. For the real estate industry, this involves internal controls. Risk management procedures and specifically designed training programs for employees to ensure every action they take is compliant. Making sure that these processes run as smoothly as possible in the background is incredibly important for businesses, since failures in compliance related matters can result in unpleasant delays for both parties and can lead to lost business opportunities as well as penalties.

Beneficial ownership information is one of the most important requirements for real estate professionals to be compliant with, since it affirms that this person is the legitimate owner of the property or project. Although it can be complex and quite time-consuming to obtain and verify beneficial ownership information, any actor in the real estate industry in Luxembourg is required to do so in order to prevent himself from risking legal and/or reputational damages. Not taking the gathering of this mandatory information seriously may also contribute to proliferation of financial crime, putting the industry and other real estate professionals at risk of also having to deal with fraudulent people.

Since the real estate industry is an opportunity for criminals to launder and redirect money, the threat of unintentionally financing terrorism through negligent due diligence is high. Therefore, real estate actors are also required to implement processes to support the countering of the financing of terrorism (CTF). For instance, this extensive procedure includes monitoring all made transactions and running them against official sanctions lists to spot potential suspicious activities. Not ensuring to have set up these processes can cause potential harm to national security.

All that being said, it is incredibly important for real estate actors to take compliance and due diligence with utmost attention. Those disregarding the importance of a seamless compliance process and therefore might fail to comply with the KYC, AML, BO and CTF requirements specific to Luxembourg can face massive legal and reputational risks, if authorities are able to identify non-compliant areas within a business. Consequences such as fines, imprisonment and significant reputational damage would be the consequence for the real estate actor and their company – potentially resulting in having to close one’s business.

How kodehyve can help in easing the compliance process for real estate professionals

Following all compliance requirements and setting up a process can be tough, especially whenever laws are being adjusted to eliminate any possibilities for money laundering and other criminal activities.

To make compliance streamlined and digitalised, kodehyve, in collaboration with leading Luxembourg law firm KLEYR GRASSO, developed and recently launched a comprehensive standalone compliance platform. This platform is dedicated to help real estate professionals in conveniently and efficiently executing their compliance and due diligence activities, while being in absolute accordance with the recent changes within the Anti-Money laundering Law from 2020.

By offering such a ground-breaking solution, kodehyve contributes to de-risking all activities within the Luxembourg real estate ecosystem by digitalising and streamlining the compliance process for all participating parties. Additionally, having such a strong legal partner as KLEYR GRASSO ensures that the platform covers all necessary and legally required steps to comply without leaving any gaps.

kodehyve comply makes it effortless for all real estate professionals to avoid non-compliance behaviours, associated penalties and offers a great deal of benefits to its user such as a smooth and delightful user experience to investors involved in a project by being able to request checks remotely, an increased accuracy of verification of all required documents, a GDPR-compliant software protecting all data involved and reducing costs along the compliance process through a fully digitalised experience.

About kodehyve comply

kodehyve comply is a comprehensive standalone compliance platform, enabling real estate professionals of all kinds to conveniently and efficiently execute their compliance and due diligence activities so as to comply with KYC/AML/CTF/BO regulation and seamlessly manage the entire compliance lifecycle of their partners, investors and customers.

More information here.

Contact us to get started here.