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Money laundering finds many avenues. Money gained from illicit activities by terrorists, drug lords, arms dealers and other criminals is washed through car sales, yacht purchases, jewelry and art acquisitions, and deposits in banks that — wink, wink — look the other way, even in sports betting.
But perhaps nowhere is this criminal enterprise more prominent than in real estate, both residential and commercial.
A new report from Global Financial Integrity, a Washington-based think tank that studies the flow of illicit finances, says America has become a “safe haven” for money laundering. The group says that “at a minimum,” $2.3 billion has been laundered through real estate over the last five years. And given that GFI only studied cases already reported or adjudicated, it ventured that the total value of property purchased with laundered money is even more “staggering.”
That’s one reason why President Joe Biden issued a National Security Study Memorandum in early summer that established countering corruption as a core national security interest. Among other things, he said his administration will lead efforts to “make it increasingly difficult for corrupt actors to shield their activities.”
Biden aims to “significantly bolster” the government’s ability to combat corruption, including all forms of illicit finance, and to “hold accountable” individuals, transnational criminal organizations and their facilitators. He would freeze and recover stolen assets and, where possible, return those assets to citizens who were harmed by scams.
The president also is urging the Treasury Department to revoke the regulatory exemption for real estate agents, who are not currently required to identify their ultimate clients or to report suspicious activity. The U.S. is the only major economic member of the G7 that does not impose anti-money laundering rules on real estate professionals.
Banks must report suspicious activity, and in certain cities, title insurance companies are required to identify the persons behind shell companies buying houses for $300,000 or more with cash or virtual currency. But not realty agents.
If necessary, the president says he will propose legislation to modernize, coordinate and otherwise improve the fed’s ability to prevent money laundering.
A review of the Biden memorandum by attorneys at O’Melveny, a worldwide law firm based in Los Angeles, says the top-down directive should result in an increase in enforcement actions that will “put considerable burdens” on market players.
“Where the Justice Department finds evidence of misconduct,” the lawyers wrote in a recent newsletter, “companies should also expect to see an increase in the number and scope of monitorships imposed, the prevalence of which had nose-dived during the last administration.”
The changes can’t come soon enough for GFI President Tom Cardamone. “It is clear that despite their best efforts, the U.S. government’s attempt to address money laundering — particularly the use of real estate — has fallen short of what is required to address this growing problem,” he says.
The GFI report says real estate money laundering isn’t confined to big gateway cities where luxury property markets are concentrated. Rather, it also occurs in Alaskan cities, Boston’s suburbs and Midwestern manufacturing towns.
And while anonymous shell companies and complex corporate structures remain the most popular schemes, a “broad array” of gatekeepers such as attorneys, realty agents and title agents enable the perpetrators, “either through willful blindness or direct complicity,” GFI reports.
Complicity was the case in Illinois recently, where a licensed real estate broker used structured cash deposits from a suspected drug trafficker to purchase residential properties. He used his own name to conceal the true buyer, and submitted fictitious proof-of-funds letters during settlement. He earned thousands in commissions — and also 14 months in prison.
GFI analyzed 125 cases reported between 2015-2020 in the United States, Canada and Great Britain for its report, concluding that the current approach in this country — using geographic targeting — is “inadequate to address” money laundering in the real estate sector. In 60% of the cases, the property involved was outside targeted counties.
Of the 56 U.S. cases covered in “Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream,” 82% involved money from abroad. And numerous cases involved “politically exposed persons” who “plundered, looted and laundered the assets of their home countries.”
For example, millions have been laundered by various Russians, the Kolomoisky family from Ukraine, the Maduro regime in Venezuela and Teodoro Obiang from Equatorial Guinea. In one instance, $100 million embezzled from Kuwait’s Department of Defense was used to buy a 157-acre Beverly Hills property known as “The Mountain.”
Residential properties accounted for the bulk of the identified cases, but the values of the commercial properties were “markedly higher,” the report found. Some of the income-producing properties identified included office parks, hotels, a mental health facility, supermarkets and condominium developments. One enterprising drug trafficker bought a wind turbine.
And yet, at this time, commercial real estate is not subject to any reporting requirements.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at firstname.lastname@example.org.