What You Need to Know About Third-Party Payments in Real Estate Deals: Key Compliance Rules

Understanding Third-Party Payments in Real Estate Transactions

In the complex world of real estate transactions, third-party payments refer to funds transferred by someone who is not directly part of the sale agreement—usually not the buyer or seller. These payments are often made by relatives, businesses, employers, or investors. While they can streamline transactions or assist buyers with limited liquidity, they raise serious compliance and legal concerns that professionals must understand and manage diligently.

Why Third-Party Payments Raise Red Flags

Third-party payments can be misused for money laundering, fraudulent practices, or conflict of interest, and may obscure the source of funds. Financial institutions, brokers, and legal entities are required to verify the source and legitimacy of funds involved in a transaction. Anti-Money Laundering (AML) laws and Know Your Customer (KYC) regulations require a clear audit trail.

Key Compliance Concerns Include:

• Source of Funds Verification

• Money Laundering Risks

• Tax Evasion Concerns

• Legal Ownership Clarity

• Sanctions and Watchlist Checks

Anti-Money Laundering (AML) Rules and Real Estate

AML laws are strictly enforced in the real estate sector due to the large sums of money typically involved. AML compliance focuses on identifying beneficial owners, verifying identities, and detecting suspicious patterns. Third-party payments bypass the direct paper trail, making it more difficult to determine whether the funds are legitimate.

Critical AML Guidelines to Follow:

• Always identify the third party and establish their relationship to the buyer or seller.

• Require documented proof of fund origin, such as bank statements or notarized declarations.

• Perform enhanced due diligence (EDD) for high-risk jurisdictions or politically exposed persons (PEPs).

Regulations by Jurisdiction: What You Must Know

Each country and region has unique rules governing third-party payments in property deals. Below is a breakdown of typical international compliance rules.

United States

• Governed by the Bank Secrecy Act (BSA) and enforced by FinCEN.

• Title companies and real estate professionals must file Suspicious Activity Reports (SARs) for unexplained third-party payments.

• Geographic Targeting Orders (GTOs) apply in certain metropolitan areas with high money laundering risks.

United Kingdom

• Regulated by the Money Laundering Regulations 2017 and HMRC.

• Real estate agents must conduct Customer Due Diligence (CDD) and report suspicious transactions to the National Crime Agency (NCA).

United Arab Emirates

• Governed by the UAE Central Bank and Financial Intelligence Unit (FIU).

• Real estate firms must maintain records of transactions for at least five years and report third-party involvement in high-value deals.

Best Practices for Real Estate Professionals

1. Always Document the Third-Party Relationship

Maintain detailed records of how the third party is connected to the transaction. This includes identity verification, relationship letters, and any power of attorney if applicable.

2. Obtain a Written Declaration

Have the third party sign a declaration of payment, explicitly stating that the funds are not being provided for an undisclosed interest in the property.

3. Communicate With All Involved Financial Institutions

Ensure that the banks involved in the transaction are aware of the third party’s role, and obtain their cooperation in verifying the origin of funds.

4. Update Your Compliance Policies

Review and update internal compliance policies to cover third-party scenarios. Include guidelines for staff training, risk assessments, and reporting protocols.

Consequences of Ignoring Compliance Rules

Failure to comply with regulations on third-party payments can lead to severe legal, financial, and reputational damage:

• Hefty fines and sanctions

• Imprisonment for willful negligence

• Loss of professional licenses

• Civil litigation or contract cancellation

• Blacklist by regulatory authorities

Red Flags Indicating Suspicious Third-Party Payments

Professionals must stay alert to behaviors and transaction elements that signal potential abuse of third-party payment systems:

Common Red Flags Include:

• Payments from offshore accounts or high-risk countries

• Third-party payer unwilling to disclose identity

• Payments made in multiple smaller transfers (smurfing)

• Last-minute changes to payer or payee

• Payer has no clear relationship with buyer or seller

Technology and Tools for Compliance

Leveraging digital compliance tools and AML software can help track, analyze, and report third-party payments. These tools integrate AI-based monitoring, risk scoring, and automated reporting to streamline the process.

Recommended Tools:

• Thomson Reuters CLEAR

• LexisNexis AML Insight

• World-Check Risk Intelligence

• KYC360

• ComplyAdvantage

The Role of Legal and Financial Advisors

Attorneys, accountants, and compliance officers play a crucial role in ensuring transparency in third-party payments. They help:

• Draft legally binding declarations

• Conduct forensic accounting if needed

• Advise on tax implications and regulatory exposure

• Support the reporting of unusual or suspicious activity

How to Disclose Third-Party Payments Legally

To keep a real estate deal clean and compliant:

1. Include third-party details in the sales agreement.

2. Disclose to the mortgage lender, if any.

3. Report to authorities when thresholds are crossed or red flags are identified.

4. Get all parties to acknowledge the third-party role in writing.

Conclusion: Stay Proactive, Stay Compliant

Ignoring third-party payment compliance can spell disaster in an industry that handles trillions in global capital. Understanding the legal requirements, maintaining thorough documentation, and implementing strong internal controls are not optional—they are essential to protecting your business and reputation.

By keeping third-party payment protocols airtight, real estate professionals not only safeguard themselves legally but also maintain trust and credibility with clients and regulators alike.