FinCEN issues alert on Russian sanctions evasion in real estate market
January 30, 2023
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FinCEN alert targets Russian CRE sanctions evasions
FinCEN reminded banks of red flags to watch for to detect CRE market money laundering, particularly by sanctioned Russian elites.
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Takeaway 1
The CRE market’s complex financing methods and unique ownership structures make it conducive to hiding money laundering schemes.
Takeaway 2
The alert targets Russian elites and is the fourth Russia-related warning FinCEN has issued since Russia invaded Ukraine.
Takeaway 3
Banks must verify the beneficial owners of legal entity customers and are well-positioned to identify and report suspicious activity.
The Financial Crimes Enforcement Network (FinCEN) issued an alert to financial institutions advising them to look out for attempts by Russian elites to evade sanctions through the U.S. commercial real estate sector. The alert includes potential red flags and typologies that point to attempted sanctions evasion. It also reminds financial institutions of their Bank Secrecy Act reporting and customer due diligence (CDD) obligations
CRE market alert
Why sanctioned elites choose real estate
The commercial real estate (CRE) market’s complex financing methods and unique ownership structures can make it difficult for financial institutions to detect illicit funds hidden in real estate investments. For example, CRE transactions nearly always involve private companies or institutional investors as buyers or sellers. Trusts, shell companies, pooled investment vehicles, and other legal entities are regularly used on both sides of CRE transactions. Third parties who invest on behalf of sanctioned individuals can generate stable returns without drawing public attention. But money laundering is widespread in residential real estate as well.
According to a report by Global Financial Integrity, more than $2.3 billion has been laundered through U.S. real estate in the past five years. One contributing factor to CRE’s popularity with money launderers is that cash continues to be readily accepted – even preferred – for real estate purchases in the U.S. Historically, non-financed property purchases haven’t required information on the source of funds or identification of a beneficial owner. The National Association of Realtors estimated that non-financed real estate transactions represented about 19 percent of existing residential sales for 2020 and 2021.
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Safety measures
FinCEN efforts to target sanctioned Russian elites
FinCEN’s alert is the fourth Russia-related warning it has issued since Russia invaded Ukraine in 2022. This latest action further complements federal efforts to isolate sanctioned Russian elites, oligarchs, their family members, and the entities through which they act from the international financial system.
Last year, FinCEN expanded its Geographic Targeting Orders (GTOs), which provide valuable data on the purchase of residential real estate that helps detect money laundering and other illicit activity through the purchase of real estate. The GTOs require U.S. title insurance companies to identify the beneficial owners behind shell companies used in non-financed real estate purchases.
Real estate purchases are particularly effective money laundering vehicles when they involve the shell companies that this GTO aims to negate. At the end of 2021, the Biden administration announced they would pay closer attention to corruption in the real estate market, focusing on all-cash commercial and residential real estate transactions.
Residential real estate transactions conducted with cashier’s checks, certified checks, traveler’s checks, personal checks, business checks, money orders, funds transfers, or virtual currency now require beneficial ownership review. The purchase amount threshold for the GTOs to apply remains at $300,000, where it has been set since 2018 when it was determined that money laundering is widespread within all residential real estate, not only on higher-end, expensive properties.
Red flags
How banks are poised to help stop sanctions evasion
According to FinCEN, foreign investment in CRE surged to $72.6 billion in 2021, nearly doubling the previous year’s figure. Foreign investment as a share of total U.S. sales volume averaged nearly 14 percent between 2014 and 2018. Despite high inflation and growing concerns about a recession, much of the world still sees the U.S. as a safe haven for investment.
When working to finance CRE projects, banks have CDD obligations to verify the beneficial owners of legal entity customers. The latest alert reminds banks that they are frequently well-positioned to identify and report suspicious activities — including those among CRE customers that might involve politically exposed persons — as part of their sanctions compliance program. Sanctioned individuals may try to use pooled investment vehicles or offshore funds to avoid due diligence processes since banks aren’t typically required to verify the identities of individuals who own less than 25 percent of a fund. Banks should beware of market participants who keep lowering their stakes to avoid detection while still maintaining control of the fund.
FinCEN encouraged financial institutions to consider the following red flags for real estate sanctions evasion:
- The use of an offshore private investment vehicle to purchase CRE involving PEPs or other foreign nationals (mainly family members or close associates of sanctioned Russian elites and their proxies) as investors.
- Any customer declining to answer questions about the ultimate beneficial owners or controllers of a legal entity or arrangement.
- Multiple limited liability companies, corporations, partnerships, or trusts with slight name variations involved in a transaction with ties to sanctioned Russian elites and their proxies.
- Purchases of CRE through trusts or other legal entities and arrangements that involve friends, associates, or family members of sanctioned Russian elites and their proxies.
- Ownership of CRE through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose.
- Transfers of assets from a PEP or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation.
- Implementation of legal instruments (e.g., deeds of exclusion) that could be intended to transfer an interest in CRE from a PEP or Russian elite to a family member, business associate, or associated trust following a legal event such as an arrest or an OFAC designation of that person.
- Ownership disclosure notices from private investment funds or other companies that indicate sanctioned individuals or PEPs who previously owned more than 50 percent of a fund have changed their ownership to less than 50 percent.
- Information indicating there is limited discernable business value in the CRE investment or that the investment is outside of the client’s regular business operations.
No single financial red flag indicator confirms illicit or suspicious activity, so financial institutions should consider each transaction's relevant facts and circumstances in keeping with their risk-based approach to compliance.
Use this checklist to help sanctions staff stay updated and in compliance with Russian sanctions
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