HomeWorldAmericasU.S. Real Estate A Safe Haven For Dirty Billions, Report Says

U.S. Real Estate A Safe Haven For Dirty Billions, Report Says

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According to a new report released by a Washington, D.C.-based think tank, at least USD 2.3 billion has been laundered through real estate transactions in the United States over the past five years.

Using a database of over 100 publicly reported real estate money laundering cases in the United States, the United Kingdom, and Canada, Global Financial Integrity claims that the United States has become a preferred destination for those looking to use real estate to stash illicit funds, making it a “kleptocrat’s dream.”

More than half of the cases reviewed by GFI in the United States involved public officials and their associates, also known as politically exposed persons. Among the PEPs are Genaro García Luna, a former Mexican security minister 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,” explained GFI policy director Lakshmi Kumar to 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 United States was once thought to be at the forefront of regulatory efforts to prevent money laundering through real estate, adding “persons involved in real estate closings and settlements” to the definition of financial institutions in the Bank Secrecy Act in 1988. However, Kumar claims that the country has gradually lost ground to its peers in the United Kingdom and Europe.

“This is clearly a global issue,” Kumar stated. “Everyone is realising how easy it is to exploit and abuse the real estate industry. The difference is that everyone else appears to have plotted a course forward. They’ve enacted legislation and are trying to figure it out. In the United States, we are still held back.”

One of the most serious issues raised in the report is the use of geographic targeting orders as the primary tool for detecting potential money laundering events in the United States. GTOs require reporting on real estate purchases, but only in narrowly defined scenarios involving large cash purchases by legal entities in specific geographical areas.

More than 60% of the US cases examined in the report involved properties in at least one county that were not covered by a targeting order, highlighting the system’s inadequacy, according to GFI.

You can own 2% of a USD 500 million property and still launder millions through it

– Lakshmi Kumar

“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 told me. “In the United States, this was not the case. It was widely distributed.”

Another point of concern raised in the report is that the US anti-money laundering regime focuses on residential purchases, despite the fact that a significant portion of the cases reviewed by GFI involve commercial real estate transactions.

The FinCEN Files, an ICIJ and BuzzFeed News investigation into global dirty money flows, looked at how large-scale money laundering affects middle-class Americans.

ICIJ discovered that Ukrainian oligarch Ihor Kolomoisky, whose case is mentioned in GFI’s report, amassed a Midwest real estate empire with his associates, once becoming Cleveland’s largest commercial landlords, while leaving a trail of unpaid property taxes, unemployed workers, and hazardous factory conditions. Kolomoisky has since been sanctioned by the United States State Department.

Kumar claimed that because commercial transactions frequently involve multiple parties and complex financing arrangements, they are an easy way to hide illicit funds.

“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 said in an interview with ICIJ. “Being a criminal does not require you to own the majority stake in a commercial real estate investment. “You can own 2% of a USD 500 million property and still launder millions through it.”

The report also investigates the involvement of “gatekeepers” in real estate transactions, as well as the direct role of real estate agents, lawyers, and accountants in facilitating illicit transactions. However, GFI suggests that regulating private investment advisers is a more discreet approach to combating real estate money laundering.

“Investment vehicles are one of the key methods in which to invest in commercial real estate in this country,” said Kumar. “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.”

To close these gaps, the report proposes major overhauls to the United States’ anti-money laundering programme, such as replacing GTOs with more stringent reporting requirements on real estate transactions across the country, ensuring robust implementation of the beneficial ownership registry passed this year as part of the Corporate Transparency Act, and urging the Treasury to issue specific regulations regarding purchases by foreign PEPs.

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