ANTI CORRUPTION HOTLINE

The surprisingly effective pilot program stopping real estate money laundering in the US

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This pho­to shows 650 5th Avenue on Tuesday, May 30, 2017, in New York. A U.S. gov­ern­ment lawyer told a New York jury on Tuesday, May 30, 2017, that the Manhattan office build­ing near Rockefeller Center has long been ille­gal­ly run by Iran. (AP Photo/Mary Altaffer)

Criminals love US real estate. It’s been well doc­u­ment­ed.

Thanks to a loop­hole in the PATRIOT act, which forces banks to do con­sid­er­able due dili­gence on any client but was nev­er extend­ed to the real estate sec­tor, any ne’er-do-well can set up a shell com­pa­ny to buy prop­er­ties in cash with­out ever reveal­ing their iden­ti­ty.

Iran exploit­ed the flaw to use a $500 mil­lion Manhattan sky­scraper as a slush-fund for 22 years. Potential mon­ey-laun­der­ers have used it to anony­mous­ly snap up $1.5 bil­lion worth of apart­ments either owned or brand­ed by the Trump Organization. And the crim­i­nals who stole bil­lions from Malaysia’s state devel­op­ment bank employed it to buy swaths of prop­er­ties in New York and Los Angeles.

The Treasury set up a pilot pro­gram to tack­le this in 2016, with a rather mod­est mea­sure: It forced title insur­ance com­pa­nies to find out who actu­al­ly owned LLCs buy­ing lux­u­ry real estate in a hand­ful of US cities, and to give that infor­ma­tion to the Treasury.

Despite being unam­bi­tious in scope, the pro­gram seems to have had con­sid­er­able suc­cess. The Treasury said last year it has pro­vid­ed “valu­able data” on real estate pur­chas­es by peo­ple tied to “for­eign cor­rup­tion, orga­nized crime, fraud, nar­cotics traf­fick­ing, and oth­er vio­la­tions.”

It also seems to have had an effect on the mar­ket. Since the scheme start­ed, there has been an almost 70% drop in com­pa­nies buy­ing real estate with just cash, accord­ing to an aca­d­e­m­ic paper pub­lished last year. Those fig­ures sug­gest that “anonymi­ty plays a sig­nif­i­cant role” in peo­ple using secre­tive shell com­pa­nies to buy prop­er­ty, and mon­ey-laun­der­ing was a “like­ly cause” for want­i­ng that secre­cy, Ville Rantala, a finance pro­fes­sor at Miami Business School and co-author of the paper, told Quartz after the paper’s pub­li­ca­tion last sum­mer.

Despite this suc­cess, the scheme still isn’t per­ma­nent. Anti-cor­rup­tion activists breath a sigh of relief every six months when the Treasury renews it. What’s more, it only applies to 12 cities. The fact that the Treasury keeps expand­ing the scope—they began by mon­i­tor­ing just Manhattan and Miami—to include even the likes of Honolulu and Seattle, sug­gests either that shady real estate busi­ness is more wide­spread than pre­vi­ous­ly thought, or that crim­i­nals seek­ing anonymi­ty are going to increas­ing­ly far-flung places to escape the author­i­ties’ watch­ing eye.

The idea that the pilot reg­u­la­tions should be imple­ment­ed nation­wide and per­ma­nent­ly is a “no-brain­er,” said Zoe Reiter, Transparency International’s act­ing US rep­re­sen­ta­tive. “We know that they gen­uine­ly deter laun­der­ing of dirty mon­ey in the real estate mar­ket with­out impact­ing clean invest­ment. The cost-ben­e­fit ratio for Americans is only pos­i­tive.”

In a state­ment, a Treasury spokesman said the orders have a statu­to­ry lim­it of 180 days before they have to be renewed. However, that doesn’t stop them from expand­ing the reg­u­la­tions across the United States. The Treasury could also tack­le the issue by end­ing the “tem­po­rary” exemp­tion from the PATRIOT Act’s strict reg­u­la­tions giv­en to the real estate sec­tor when the law was passed near­ly 18 years ago.

This is more than just a moral issue—it has nation­al secu­ri­ty impli­ca­tions. Rantala point­ed to Russians hit by sanc­tions after the Kremlin’s efforts to sway the 2016 pres­i­den­tial elec­tion. “If there are these kinds of loop­holes, it’s hard to know whether peo­ple tar­get­ed by sanc­tions may be able to make pur­chas­es in the US—so there’s real­ly cause to be con­cerned about anony­mous buy­ers,” he said.

By Max de Haldevang
Original arti­cle: QUARTZ

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