Are oligarchs hiding money in US real estate? Ownership information is a missing link, research says

As law­mak­ers pro­pose unmask­ing those pur­chas­ing New York prop­er­ty through LLCs, recent analy­sis finds short­com­ings in fed­er­al over­sight of mon­ey laun­der­ing in the hous­ing market.

As U.S. author­i­ties boost efforts to seize Russian oli­garchs’ assets in the wake of Russia’s war on Ukraine, New York leg­is­la­tors are propos­ing a bill to make prop­er­ty own­er­ship more transparent.

Two law­mak­ers intro­duced leg­is­la­tion last month that would require any per­son pur­chas­ing prop­er­ty in New York through a Limited Liability Company, or LLC, to dis­close their iden­ti­ty to the state and include the infor­ma­tion in their tax returns. LLCs, busi­ness struc­tures that shield their own­ers from per­son­al lia­bil­i­ty, are pop­u­lar in the finan­cial secre­cy world because they allow prop­er­ty buy­ers to mask their identity.

In New York, a long­time hotspot for stash­ing for­eign wealth, shell com­pa­nies have been used to pur­chase lux­u­ry prop­er­ties, allow­ing the real own­ers to remain anonymous.

“Leaks such as the Panama Papers and the Pandora Papers have also revealed the extent of which mon­ey is laun­dered glob­al­ly for the pur­pos­es of tax avoid­ance through anony­mous shell cor­po­ra­tions such as LLCs,” the bills says, cit­ing inves­ti­ga­tions by the International Consortium of Investigative Journalists for show­ing how finan­cial secre­cy has cre­at­ed local, nation­al and inter­na­tion­al pub­lic pol­i­cy problems.

Lawmakers also high­light­ed New York Times report­ing on how shell com­pa­nies have obscured a stream of for­eign wealth into elite New York real estate, whose own­ers includ­ed peo­ple under inves­ti­ga­tions or sanc­tions “for crimes such as mon­ey laun­der­ing and embezzlement.”

“LLC laws have enabled these indi­vid­u­als, whose pur­chas­es may have oth­er­wise been scru­ti­nized by inter­na­tion­al legal or tax author­i­ties, to pur­chase assets in New York through anony­mous and prac-tical­ly untrace­able shell cor­po­ra­tions,” says the pro­posed leg­is­la­tion, intro­duced by State Sen. Brad Hoylman and Assemblymember Emily Gallagher.

Recent analy­sis exam­ines the U.S. government’s over­sight of mon­ey laun­der­ing in real estate, and points to the impor­tance of enforced ben­e­fi­cial own­er­ship report­ing to make the fed­er­al pro­gram more effective.

The research, pub­lished by the Anti Corruption Data Collective and the Brookings Institution,  looks at a U.S. Treasury pol­i­cy, enact­ed in 2016, that impos­es an anti-mon­ey laun­der­ing rule on high-end cash pur­chas­es of res­i­den­tial homes in a hand­ful of real estate hot spots, includ­ing Manhattan. The pol­i­cy, called Geographic Targeting Orders, was imple­ment­ed fol­low­ing con­cerns that for­eign dirty mon­ey was being used to secret­ly pur­chase mul­ti-mil­lion dol­lar homes in the U.S. GTOs were seen as a suc­cess and expand­ed to 20 more coun­ties in 2018.

But the new analy­ses found that the GTOs have had very lit­tle effect in deter­ring cash pur­chas­es of hous­es via opaque shell com­pa­nies. The researchers ana­lyzed data from online real estate com­pa­ny Zillow on res­i­den­tial real estate pur­chas­es in the coun­ties where the pro­gram was intro­duced. While the Treasury said that the mea­sure has pro­vid­ed valu­able infor­ma­tion about sus­pi­cious pur­chas­es, the stud­ies say there is no indi­ca­tion that cash-only real estate buy­ers even tried to skirt the rules by pur­chas­ing hous­es below the price thresh­old or using trusts or oth­er finan­cial enti­ties not cov­ered by the pol­i­cy. Researchers said they couldn’t iden­ti­fy any prop­er­ty seizures result­ing from the pro­gram and that the Treasury has not report­ed any cas­es where GTO data assist­ed law enforce­ment in pros­e­cut­ing known mon­ey laun­der­ing cases.

While Brookings notes that deter­rence was nev­er the main goal of the GTO pro­gram, which instead sought to gath­er infor­ma­tion about sus­pi­cious pur­chas­es and pass it to law enforce­ment, the authors con­clude that valid ben­e­fi­cial own­er­ship infor­ma­tion on real estate buy­ers is a miss­ing link in the policy’s effectiveness.

“In the wake of Russia’s inva­sion of Ukraine, the need for high qual­i­ty own­er­ship infor­ma­tion is greater than it has ever been before,” Brookings’ report said, cit­ing KleptoCapture, a new U.S. Justice Department pro­gram, as an exam­ple. “But the suc­cess of these ini­tia­tives will depend on, and will be lim­it­ed by, the qual­i­ty of the infor­ma­tion already gar­nered by the GTO program.”

Likewise, the ACDC report said “the lack of overt enforce­ment and val­i­da­tion of the own­er­ship infor­ma­tion failed to cre­ate a suf­fi­cient deter­rent effect to dri­ve out par­tic­i­pa­tion in the sec­tor by illic­it actors” by the GTO program.

The analy­sis comes at a time when the Treasury is propos­ing new reg­u­la­tion relat­ed to mon­ey laun­der­ing in real estate and there’s renewed inter­est in tar­get­ing the assets of oli­garchs, includ­ing their prop­er­ty in the United States.

For exam­ple, Russian oli­garch Oleg Deripaska, a close ally of President Vladimir Putin, had secret­ly pur­chased a man­sion in Washington, D.C., pay­ing $15 mil­lion cash, and more than $47 mil­lion for prop­er­ty in Manhattan using shell com­pa­nies, the Washington Post report­ed in 2017. The U.S. Treasury sanc­tioned Deripaska in 2018, and he lost an appeal to lift the sanc­tions ear­li­er this week.

Ukrainian oli­garch Ihor Kolomoisky and his asso­ciates amassed a ruinous Midwest real estate empire, at one time becom­ing Cleveland’s largest com­mer­cial land­lords, ICIJ found in a 2020 exposé. The find­ings were part of the FinCEN Files inves­ti­ga­tion with BuzzFeed News on glob­al dirty mon­ey flows. Kolomoisky was sanc­tioned by the U.S. State Department last year.

The U.S. real estate mar­ket was called a “Kleptocrat’s dream” in a report last year by Global Financial Integrity, a Washington, D.C.-based trans­paren­cy advo­ca­cy group, which found that at least $2.3 bil­lion had been laun­dered in the pre­vi­ous five years through U.S. prop­er­ty purchases.

Last year, ICIJ’s Pandora Papers inves­ti­ga­tion found bil­lions of dol­lars of prop­er­ty pur­chas­es made through off­shore shell com­pa­nies. Hundreds of com­pa­nies in the leaked files list­ed own­ing real estate as a pur­pose. Secret invest­ments includ­ed mil­lions poured into U.S. rental prop­er­ties by a wealthy reli­gious order dis­graced by a sex­u­al abuse scan­dal, a rul­ing family’s London prop­er­ty empire, and a lux­u­ry Monaco apart­ment owned by a woman who report­ed­ly had a child with Putin.

Original source of arti­cle: icij.org