Bahrain’s real estate sector remains a key vulnerability for money laundering despite regulatory initiatives. The high-value, illiquid, and complex nature of property transactions, coupled with enforcement gaps and exploitable loopholes, enables illicit funds to be laundered. This report analyzes laundering mechanisms, regulatory limitations, and systemic challenges undermining transparency and accountability.
Cash Transactions and Layered Payments
One of the most straightforward money laundering techniques in Bahrain’s real estate involves using large cash payments. Criminals often purchase properties through multiple smaller cash deposits across different bank accounts to evade regulatory reporting thresholds. Although Bahrain’s Real Estate Regulatory Authority (RERA) Resolution No. 3 of 2019 mandates that most transactions be conducted via designated escrow accounts, small cash payments (below BD 2,000) remain allowed, creating gaps for layering illicit funds through fragmented cash deals. This fragmented approach complicates the tracing of money origins and enables criminals to integrate illegal proceeds without detection.
Use of Third Parties and Ownership Obfuscation
A critical method facilitating money laundering is the employment of third parties or nominees to mask the true ownership of properties. Criminals use “clean” intermediaries or offshore entities as fronts, distancing themselves from illicit transactions. This practice allows the concealment of ultimate beneficial ownership (UBO), severely complicating asset confiscation and enforcement efforts. Bahrain, similar to other jurisdictions, struggles with the transparency of ownership structures, especially involving offshore companies that lack stringent UBO disclosure requirements. This opacity is exploited to shield illicit activity and launder proceeds with minimal scrutiny.
Loans, Mortgages, and Loan-Back Schemes
Loan and mortgage arrangements provide another veneer of legitimacy to illicit real estate purchases. Criminals may acquire properties using loans, only to repay them rapidly using illicit funds, thus “cleaning” the money. Furthermore, loan-back schemes—where the buyer “borrows” from a foreign offshore company under their control—are employed to layer illegal funds within apparently legitimate financial transactions. These structuring tactics enable the layering stage of money laundering, effectively embedding dirty money in seemingly credible financial instruments linked to real estate.
Property Valuation Manipulation
Manipulating property valuations through under- or over-valuation is a prevalent tactic. Corrupt appraisers or complicit sellers intentionally misstate property values to facilitate illicit cash flow concealment or inflate property prices to justify large loan amounts that can be repaid with dirty money. Though Bahrain has adopted valuation standards based on international best practices, enforcement gaps and conflicting interests among property valuers enable this method to persist. The lack of rigorous independent verification allows laundering through uneven pricing, distorting the financial trail.
Renovation and Leasing for Integration
Money laundering in Bahrain’s real estate also involves artificially increasing property value through funded renovation projects paid for with illicit money, which are difficult to track. Additionally, criminals rent properties to themselves or associates, channeling illicit funds under the guise of rental income, thus integrating “clean” profits into the financial system. These schemes provide a façade of legitimate income, complicating detection by authorities seeking suspicious financial flows from real estate.
Regulatory and Enforcement Shortcomings
Despite regulatory improvements like the introduction of RERA’s Resolution 3 aimed at curbing money laundering risks, critical enforcement challenges remain. Licensees are required to conduct customer due diligence on buyers and verify the sources of funds; however, compliance gaps persist. The appointment of RERA-approved compliance officers is mandated to oversee AML implementation, yet resource constraints and insufficient regulatory powers reduce the effectiveness of oversight. Moreover, the real estate sector’s understanding and adoption of AML best practices remain patchy, causing regulatory loopholes and inconsistent application of anti-money laundering controls.
Systemic Vulnerabilities of Bahrain’s Real Estate Market
Bahrain’s open financial environment and strategic location make it a regional transit point for illicit funds, further increasing risks of laundering through real estate. The use of anonymous shell companies and the involvement of politically exposed persons (PEPs) and corrupt actors exploit weaknesses in transparency and enforcement. Moreover, Bahrain’s relatively lenient disclosure norms for beneficial ownership compared to international standards enable criminals to obfuscate property ownership. This systemic vulnerability undermines efforts to build a resilient, transparent property market free of illicit finance.
Persistent Challenges Demand Stronger Measures
Bahrain’s real estate market facilitates money laundering through multiple well-established methods including cash layering, ownership concealment via third parties, loan-based layering, valuation manipulation, and rental income laundering. These methods thrive in an environment hindered by regulatory enforcement gaps, limited transparency on beneficial ownership, and compliance challenges among real estate professionals. Although regulatory efforts like RERA Resolution 3 serve as steps forward, more stringent anti-money laundering frameworks, enhanced beneficial ownership transparency, robust enforcement, and improved real estate sector education are imperative to mitigate Bahrain’s ongoing vulnerability to real estate money laundering.