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‘A Kleptocrat’s dream’: US real estate a safe haven for billions in dirty money, report says

Based on a review of more than 100 mon­ey-laun­der­ing cas­es, a new study finds that the U.S. has become a pre­ferred des­ti­na­tion for those look­ing to stash illic­it funds through property

Abandoned build­ings at Warren Steel, Ohio, one of a num­ber of prop­er­ties across the U.S. owned by a Ukrainian oligarch

At least $2.3 bil­lion has been laun­dered via U.S. real estate trans­ac­tions in the last five years, accord­ing to a new report by a Washington, D.C.-based think tank.

By using a data­base of over 100 pub­licly report­ed real estate mon­ey laun­der­ing cas­es in the U.S., United Kingdom and Canada, Global Financial Integrity says the U.S. has become a pre­ferred des­ti­na­tion for those look­ing to use real estate to stash illic­it funds — mak­ing it a “Kleptocrat’s dream.”

Public offi­cials and their asso­ciates, known as polit­i­cal­ly exposed per­sons, were involved in more than half of the U.S. cas­es that GFI reviewed. Those PEPs include Genaro García Luna, a for­mer Mexican secu­ri­ty min­is­ter who bought mil­lions of dol­lars of U.S. prop­er­ty while accused of tak­ing bribes from the Sinaloa car­tel, and the step­son of for­mer Malaysian Prime Minister Najib Razak, who was arrest­ed in 2019 for his alleged role in the 1MDB scandal.

[Real estate] pro­vides a real­ly easy way to hide ill-got­ten gains with lit­tle over­sight and few ques­tions asked,” GFI pol­i­cy direc­tor Lakshmi Kumar told the International Consortium of Investigative Journalists. “If you’re a crim­i­nal, why would you not choose a method that allows you to flaunt your wealth open­ly, but also hide its illic­it nature?”

The U.S. was once con­sid­ered at the reg­u­la­to­ry fore­front when it came to pre­vent­ing mon­ey laun­der­ing through real estate, adding “per­sons involved in real estate clos­ings and set­tle­ments” to the Bank Secrecy Act’s def­i­n­i­tion of finan­cial insti­tu­tions in 1988. But over time, Kumar says, the coun­try lost ground to its peers in the U.K. and Europe.

This is clear­ly a sys­temic issue glob­al­ly,” Kumar said. “Everyone’s dis­cov­er­ing how easy it is to use and abuse the real estate sec­tor. The dif­fer­ence is that every­one else seems to have chart­ed a path for­ward. They have put in leg­is­la­tion they’re try­ing to fig­ure it out. In the U.S., we’re still held back.”

One of the biggest issues that the report cites is the use of geo­graph­ic tar­get­ing orders as the U.S.’s pri­ma­ry tool to iden­ti­fy poten­tial mon­ey laun­der­ing events. GTOs impose report­ing require­ments on real estate pur­chas­es, but only in nar­row­ly tar­get­ed sce­nar­ios — large cash pur­chas­es by legal enti­ties in spe­cif­ic geo­graph­ic areas.

More than 60% of the U.S. cas­es exam­ined in the report involved prop­er­ties in at least one coun­ty not cov­ered by a tar­get­ing order, which GFI says high­lights the inad­e­qua­cy of the system.

A lot of the mon­ey laun­der­ing cas­es we saw report­ed in the U.K. and Canada were real­ly con­cen­trat­ed in what you’d call real estate hubs in the coun­try,” Kumar said. “In the U.S., that was not the case. It was spread far and wide.”

Another con­cern the report out­lines is that the U.S. anti-mon­ey laun­der­ing regime is focused on res­i­den­tial pur­chas­es, when a sig­nif­i­cant por­tion of the cas­es GFI reviewed involve com­mer­cial real estate transactions.

The FinCEN Files, an inves­ti­ga­tion on glob­al dirty mon­ey flows by ICIJ and BuzzFeed News, exam­ined the impact of large-scale mon­ey laun­der­ing on mid­dle America.

ICIJ found that Ukrainian oli­garch Ihor Kolomoisky, whose case is cit­ed in GFI’s report, amassed a Midwest real estate empire with his asso­ciates, at one time becom­ing Cleveland’s largest com­mer­cial land­lords, and leav­ing behind a trail of unpaid prop­er­ty tax­es, unem­ployed work­ers and dan­ger­ous fac­to­ry con­di­tions. Kolomoisky has since been sanc­tioned by the U.S. State Department.

Kumar said that because com­mer­cial deals often involve sev­er­al par­ties and com­plex financ­ing arrange­ments, they are an easy way to stash illic­it money.

When you talk about res­i­den­tial real estate, the heart of it is iden­ti­fy­ing who is the ben­e­fi­cial own­er, [because] if you find out who the ben­e­fi­cial own­er is, it also tells you who the crim­i­nal is,” Kumar told ICIJ. “In a com­mer­cial real estate invest­ment, you don’t have to own the major­i­ty stake to be a crim­i­nal. You can own 2% of a $500 mil­lion prop­er­ty, and you are [still] laun­der­ing mil­lions through it.”

The report also delves into the involve­ment of “gate­keep­ers” in real estate trans­ac­tions and the direct role of real estate agents, lawyers and accoun­tants in facil­i­tat­ing illic­it trans­ac­tions. But GFI also points to reg­u­lat­ing pri­vate invest­ment advis­ers as a more under-the-radar way of tack­ling real estate mon­ey laundering.

Investment vehi­cles are one of the key meth­ods in which to invest in com­mer­cial real estate in this coun­try,” Kumar said. “And pri­vate equi­ty, ven­ture cap­i­tal [and] hedge funds have no [anti-mon­ey laun­der­ing] require­ments — so that becomes a black box, because you don’t know who is bring­ing what mon­ey into this coun­try and how.”

The report pro­pos­es major over­hauls to the U.S.’s anti-mon­ey laun­der­ing pro­gram to fill these gaps, includ­ing replac­ing GTOs with more strin­gent report­ing require­ments on real estate trans­ac­tions across the coun­try, robust imple­men­ta­tion of the ben­e­fi­cial own­er­ship reg­istry passed this year as part of the Corporate Transparency Act, and urg­ing the U.S. Treasury to issue spe­cif­ic reg­u­la­tions regard­ing pur­chas­es by for­eign PEPs.

ICIJ.Org By Sean McGoey

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