Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream

What do the Iranian gov­ern­ment, a fugi­tive inter­na­tion­al jew­el­er, and a dis­graced Harvard University fenc­ing coach have in com­mon? They have all used U.S. real estate to laun­der their ill-got­ten gains. In Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream, Global Financial Integrity (GFI) dives into the murky world of glob­al mon­ey laun­der­ing and demon­strates the ease with which klep­to­crats, crim­i­nals, sanc­tions evaders, and cor­rupt gov­ern­ment offi­cials choose the U.S. real estate mar­ket as their pre­ferred des­ti­na­tion to hide and laun­der pro­ceeds from illic­it activities.

To tell the sto­ry of why U.S. real estate con­tin­ues to remain a favored des­ti­na­tion for illic­it activ­i­ty, GFI built a data­base of more than 100 real estate mon­ey laun­der­ing cas­es from the U.S., UK, and Canada, report­ed between 2015 – 2020. The data­base and accom­pa­ny­ing reg­u­la­to­ry analy­sis in this report pro­vide con­clu­sive evi­dence that the cur­rent U.S. reg­u­la­to­ry approach, using tem­po­rary and loca­tion- spe­cif­ic Geographic Targeting Orders (GTOs), has crit­i­cal short­com­ings that will require com­pre­hen­sive reform before it can ade­quate­ly address the threats to the U.S. finan­cial sys­tem and nation­al secu­ri­ty. To pro­vide con­text to the analy­sis and rec­om­men­da­tions in this report, GFI com­pares the reg­u­la­to­ry devel­op­ments in the U.S. with ongo­ing prac­tices, chal­lenges, and devel­op­ments in the rest of the G7. Analyzing the prob­lem in the U.S. through this prism helps the U.S. see the mer­its and demer­its of pos­si­ble reg­u­la­to­ry approach­es in oth­er sim­i­lar­ly placed economies and lends weight to GFI’s final rec­om­men­da­tions. At the same time, this approach under­scores the con­tin­ued rel­e­vance of real estate mon­ey laun­der­ing as a sys­temic risk across the G7 and the need there­fore for solu­tions that are more cooperative.

GFI’s key find­ings on the U.S. include:

• At a min­i­mum, from cas­es report­ed in the last five years, more than US$2.3 bil­lion has been laun­dered through U.S real estate, includ­ing mil­lions more through oth­er alter­nate assets like art, jew­el­ry, and yachts;
• Gatekeepers includ­ing attor­neys, real estate agents, invest­ment advis­ers, and employ­ees of finan­cial insti­tu­tions have repeat­ed­ly facil­i­tat­ed REML by high net-worth indi­vid­u­als through will­ful blind­ness or direct com­plic­i­ty, yet the U.S. remains the only G7 coun­try that does not require real estate pro­fes­sion­als to com­ply with anti-mon­ey laun­der­ing (AML) laws and regulations;
• 60.71 per­cent of U.S. cas­es involved prop­er­ties in one or more non-GTO coun­ties, demon­strat­ing the lim­i­ta­tions of this loca­tion-spe­cif­ic reg­u­la­to­ry tool;
• Well over 50 per­cent of the report­ed cas­es in the U.S. involved polit­i­cal­ly exposed per­sons, which is par­tic­u­lar­ly prob­lem­at­ic con­sid­er­ing the lack of guid­ance from FinCEN on PEP identification;
• While com­mer­cial real estate fea­tured in more than 30 per­cent of the cas­es and gen­er­al­ly had sig­nif­i­cant­ly high­er val­ues than the res­i­den­tial real estate involved, the U.S. is yet to cre­ate any report­ing oblig­a­tions for risks in the sector;
• The use of anony­mous shell com­pa­nies and com­plex cor­po­rate struc­tures con­tin­ues to be the num­ber one mon­ey laun­der­ing typol­o­gy. Eighty-two per­cent of U.S. cas­es involved the use of a legal enti­ty to mask own­er­ship, high­light­ing the impor­tance of imple­ment­ing a robust ben­e­fi­cial own­er­ship reg­istry under the Corporate Transparency Act.

KEY RECOMMENDATIONS

GFI pro­pos­es the fol­low­ing key rec­om­men­da­tions for the U.S. real estate sec­tor in line with inter­na­tion­al best prac­tices and reg­u­la­to­ry devel­op­ments seen else­where in the G7:

• The GTOs, through a new rule-mak­ing, should be made per­ma­nent, expand­ed nation­wide, and with­out any dol­lar threshold;
• Real estate agents should be required to iden­ti­fy the ben­e­fi­cial own­er of a res­i­den­tial real estate pur­chase, when title agents are not involved in the transaction;
• FinCEN should issue guid­ance, red flag indi­ca­tors, and cre­ate report­ing require­ments for real estate mon­ey laun­der­ing typolo­gies relat­ed to com­mer­cial real estate transactions;
• Legal pro­fes­sion­als should be made the lead report­ing enti­ty for iden­ti­fy­ing mon­ey laun­der­ing risks in com­mer­cial real estate transactions;
• The U.S. should cre­ate robust AML/CFT process­es tar­get­ed at the real estate sec­tor, includ­ing but not lim­it­ed to a risk-based approach iden­ti­fy­ing and ver­i­fy­ing the source of funds and ben­e­fi­cial own­er of the client;
• FinCEN should issue guid­ance on the def­i­n­i­tion of PEPs and an advi­so­ry high­light­ing the risk of for­eign PEPs to real estate mon­ey laun­der­ing schemes. Reporting enti­ties should be required to report when a for­eign PEP pur­chas­es property;
• Investment advi­sors should be required to car­ry out client due dili­gence, includ­ing enhanced client due dili­gence where required, on all prospec­tive investors in pri­vate (real estate) funds;
• The U.S. should under­take com­pre­hen­sive gate­keep­er reform for the real estate sec­tor, by lift­ing the exemp­tion giv­en to real estate pro­fes­sion­als under the BSA and include real estate agents and legal pro­fes­sion­als who are involved in real estate trans­ac­tions under the def­i­n­i­tion of ‘finan­cial institutions’;
• The EB‑5 visa investor pro­gram needs crit­i­cal reform on the meth­ods used to iden­ti­fy the source of funds and ver­i­fy investor iden­ti­ty, includ­ing process­es to record investors that are PEPs.

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Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream