As published on gfintegrity.org, Monday 9 August, 2021.
WASHINGTON D.C. – A new report on money laundering in the United States finds that more than US$2.3 billion was laundered through U.S. real estate over a recent five-year period and that commercial real estate is involved in many of those transactions. The study, titled “Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream,” dives into the murky world of global money laundering and demonstrates the ease with which kleptocrats, criminals, sanctions evaders, and corrupt government officials use the U.S. real estate market to hide and launder proceeds from illicit activities.
To better understand the extent of real estate money laundering in the U.S. and identify trends, Global Financial Integrity (GFI) analyzed 125 cases reported between 2015 – 2020 in the U.S., the UK and Canada. Through a combination of case analysis and regulatory analysis, GFI provides conclusive evidence that the current U.S. approach of using Geographic Targeting Orders (GTOs) is inadequate to address money laundering in the real estate sector.
President and CEO of GFI Tom Cardamone says “it is clear that despite their best efforts, the U.S. government’s attempt to address money laundering – particularly the use of real estate – has fallen short of what is required to address this growing problem. More needs to be done, including requiring real estate agents and lawyers to report certain purchases to the Treasury Department, so that the United States rises to global best practice.”
The report irrefutably establishes that real estate money laundering in the U.S. is not just concentrated in areas typically considered luxury residential property markets and covered by the GTOs. It also occurs in the cities of Alaska, the quiet suburbs of Boston and the steel mills of the Midwest and exposes a series of vulnerabilities that remain unchecked. These cases also show that while anonymous shell companies and complex corporate structures remain the most popular money laundering techniques, a broad array of gatekeepers such as attorneys and real estate agents enable real estate money laundering, either through willful blindness or direct complicity.
The findings of the report underscore the continued need to prioritize the implementation of the U.S. beneficial ownership registry. At the same time, the study demonstrates that the registry alone will not solve the critical regulatory gaps that exist which allow real estate money laundering to flourish in the U.S.
Gatekeeper reform, clear directives to tackle money laundering in commercial real estate, and better guidance on politically exposed persons are equally essential to address the root of the problem.
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;
60 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;
Gatekeepers including attorneys, real estate agents, and investment advisers are integral facilitators of real estate money laundering schemes, yet the U.S. remains the only G7 country to not impose AML requirements on real estate professionals;
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.
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.