The great loophole of the oligarchs to hide money


“American real estate cannot be a dark repository for oligarchs’ money,” the senator said. Sheldon White House (DR.I.), which relies on the Treasury unit, known as FinCEN, to craft tough rules, POLITICO told POLITICO. “We need strong anti-money laundering safeguards for the industry,” he said, adding that there was growing bipartisan momentum in Congress for this effort.

As the United States seeks to pressure Russian companies abroad, the inherent loopholes in real estate transactions illustrate how difficult it will be to chase Russian money into the United States itself. Moreover, some of these measures create a clash with powerful industry, which warns that sweeping rule changes could end up bogging down transactions and hurting the economy.

Under current law, anyone, including a foreign national, can set up a public limited company and instruct that entity to use the money to buy residential or commercial real estate – a way for oligarchs and others to park their money in the United States. This is one of the main reasons why Treasury Secretary Janet Yellen said in December: “There is a good argument that right now the best place to hide and launder ill-gotten gains is actually the United States.

Foreigners made up 8.6% of all commercial buyers in 2021, according to data from the National Association of Realtors, and 59% of commercial real estate transactions in the United States that included foreign buyers involved all-cash purchases between 2016 and 2020.

The effort to close the anti-money laundering loopholes was already gaining momentum in Washington even before Russia invaded Ukraine. Twenty-one House legislators, including Reps. Katie Porter (D-California) and Adam Kinzinger (R-Ill.), formed the Caucus Against Foreign Corruption and Kleptocracy last June. Additionally, regulators are drafting rules to comply with the Corporate Transparency Act, which Congress passed in January 2021 over then-President Donald Trump’s veto to establish reporting requirements on individuals. real – called “beneficial owners” – behind various forms of anonymous companies.

But Russia’s war on Ukraine “adds a new urgency” to the effort, Whitehouse said.

Now representatives of the multi-trillion-dollar real estate industry are warning policymakers not to overdo it in the heat of the moment.

The National Association of Realtors, the industry’s biggest lobby group, is advocating for “tailored reforms that address specific issues,” according to spokesman Patrick Newton.

“This approach focuses on illegal activity while minimizing any negative impact on the real estate economy, which represents nearly one-fifth of the overall United States economy,” Newton said. “The NAR is confident that a focused and effective policy will prevail in the rule-making process.”

The association has endorsed the expansion of a FinCEN real estate reporting scheme, known as geo-targeting orders, but opposes the application of anti-money laundering rules already in place for banks to professionals in the real estate industry.

FinCEN published in December a prior notice plans to craft regulations extending anti-money laundering rules to real estate — part of Biden administration’s broader agenda “anti-corruption strategy” — imposing new requirements for keeping records and reporting on all-cash purchases. In 2021, all-cash acquisitions accounted for 23% of existing home purchases, or about $518 billion in transactions, according to NAR data. The industry estimates that suspicious transactions represent only a tiny percentage of this amount.

Since 2016, FinCEN has issued geotargeting orders requiring title insurance companies to file reports on cash purchases of residential real estate in a handful of cities, such as Miami and New York, where luxury markets have traditionally attracted foreign money. The threshold for these reports was initially $3 million, but has since been lowered to $300,000.

Early data from the pilot program suggests it was well targeted. According to a notice issued by FinCEN in 2017, more than 30% of transactions reported under the geo-targeting order program involved shell companies whose owners had been the subject of previous reports of suspicious activity.

Now lawmakers ranging from Waters to Sen. Marco Rubio (R-Fla.) want to expand the policy nationwide, a move the industry generally supports. But Republicans on the House Financial Services Committee last month opposed a Waters bill that would do that, arguing it was too broad and would entrap U.S. citizens who have legitimate reasons to keep their purchases anonymous.

“Giving FinCEN new authorities to surveil US citizens on behalf of Belarus and Russia, I’m skeptical,” the rep said. Patrick McHenry of North Carolina, the top Republican on the committee. “It’s more about civil liberties than anything else.”

The title insurance industry trade group — whose members enforce the reporting requirements of geo-targeting orders — supports the expansion of this program but opposes broader changes.

“We recommend that FinCEN develop tailored and specific transaction reporting requirements for cash real estate transactions involving legal persons,” rather than subjecting the industry to banking standards, American Land Title Association General Counsel Steve Gottheim wrote in a comment letter on the agency’s proposal.

Anti-corruption groups say the current crisis has sparked greater interest from lawmakers in their proposals – suggesting the tide could turn in their favor after years of pushing for tougher property rules .

“Russia’s invasion of Ukraine highlights what we already know – kleptocrats and criminals have manipulated the cracks in the armor protecting Western financial systems to protect their own ill-gotten gains,” said Erica Hanichak, director of government affairs at the Financial Coalition for Corporate Accountability and Transparency. His group advocates for ending the use of anonymous front companies and strengthening anti-corruption laws.

“These issues are not new,” Hanichak added. “National security officials identified the real estate industry as a vulnerability to money laundering 20 years ago under the PATRIOT Act. But they granted the sector a “temporary” exemption from implementing anti-money laundering programs. To date, these “temporary” exemptions are still in place. »

FinCEN estimates that $2.3 billion was laundered in the US real estate market between 2016 and 2021. In its comment letter on the notice, NAR said that figure represented less than 1% of total residential and commercial real estate sales in 2021 alone.

“While NAR recognizes that there are potential money laundering risks in real estate transactions, the vast majority of real estate sales are legitimate,” NAR President Leslie Rouda Smith wrote in the Feb. 18 letter.

Smith argued that nationwide Beneficial Ownership Reporting — identifying the true owners of anonymous businesses — would be enough to mitigate the risk of bad actors using real estate to launder money. She warned against applying the anti-money laundering requirements of the Bank Secrecy Act – including the establishment of compliance programs and a mandatory filing requirement for suspicious activity reports – to financial professionals. ‘real estate. Such a regime, she said, would be “both too cumbersome and less effective” than a requirement to register and report beneficial owners.

“Any regulations imposed on the real estate industry can inevitably slow real estate transactions as the industry adjusts to new reporting requirements, and in turn affect the performance of the U.S. economy as a whole,” Smith said. “For this reason, we encourage FinCEN to consider the overall economic impact that its regulations may have and choose the rule that is most closely tailored.”

The industry also opposes the inclusion of commercial real estate transactions due to their complex financing, which often involves buyers creating legal entities during the buying process for liability reasons.

But anti-corruption groups and some Democrats in Congress want the commercial marketplace to be subject to new rules precisely because of its complexity.

“The complicated and opaque nature of these purchases makes them riskier, and therefore worthy of hedging in the future,” Whitehouse wrote. in a letter to FinCEN Acting Director Himamauli Das in February.

FinCEN declined to comment on the regulations or what they would cover.

“[M]Oney’s money laundering risks arise from transactions in the commercial and residential real estate sectors, and both merit appropriate regulatory treatment,” the agency said in its December notice.


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