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Tuesday
Oct062015

Let's close the American real estate money-laundering gap

This summer, the TV documentary From Russia with Cash frayed political nerves, exposing London real estate agents keen to accept cash from “Boris,” an undercover journalist masquerading as a corrupt Russian health minister.

It should surprise no one that the real estate market is a favorite money laundering vehicle for criminals and corrupt foreign officials. Stashing wealth overseas via the offshore financial system offers anonymity and access to the legal protections of rule of law states, safekeeping ill-gotten gains.

But what if Boris skipped London for New York, Miami, or Los Angeles? As a result of a regulatory gap, he might have even less trouble laundering money stateside.

Unlike UK estate agents, real estate agents in the United States are not required to submit suspicious activity reports to regulators when they suspect criminal activity. With a temporary exemption from FinCEN, repeatedly renewed since 2002, real estate agents may facilitate transactions with as much -- or as little -- due diligence as seems necessary.

In a 2011 letter to FinCEN, the National Association of Realtors defended the exemption for agents saying:

We note that, in nearly all real estate purchase transactions in which real estate agents participate, funds are transferred using services of several different regulated entities, from payment of earnest money when the sales contract is executed through closing or settlement.

To paraphrase, mandatory anti-money laundering controls imposed on other regulated entities make up for the absence of regulations covering real estate agents.

But this argument overlooks the vital role that real estate agents can play in preventing – or enabling – money laundering through U.S. real estate.

Especially where the nominal buyer or seller is an obscure shell company or offshore trust, financial institutions conducting due diligence checks would be hard-pressed to uncover the kind of valuable intelligence available to real estate professionals, such as:

  • Is the price of a property inconsistent with an individual’s occupation or income?
  • Is the property titled in the name of a legal entity or third party without a legitimate business explanation?
  • Is one party a foreign political official or a suspected criminal?

Positioned on the front lines of real estate sales, agents interact extensively with potential buyers and should have a unique advantage in identifying these red flags. Perhaps it is time to transition their option to file a suspicious activity report into an onus to cooperate in keeping corrupt and criminal cash from our shores.

To be sure, mandating anti-money laundering programs for real estate agents would not be free of costs. But in an industry where firms aggressively compete for lucrative commissions, it should seem foolhardy to rely solely on the self-regulation of those who stand to profit.

As the United States increasingly targets corruption abroad, we should also consider what we might do at home. We could start by toughening our stance on illicit real estate transactions, thus denying sanctuary and legitimacy to the ill-gotten wealth of criminals and kleptocrats.

_____

Thomas Weldy is a Program Associate with the Kleptocracy Initiative, which was founded in 2014 by the Hudson Institute to address and promote public recognition of the threats posed by corrupt authoritarian regimes to Western democracy and U.S. national security.

A longer version of this post appears here.

Reader Comments (1)

I would argue that if we can create an environment in which people from corrupt countries can invest successfully in the U.S., we might actually help anti-corruption efforts abroad. Assuming that the purchaser of the real estate is a private individual as opposed to a foreign official, then the private individual (who previously did not have jurisdictional ties to the USA) would become subject to the FCPA through his investment in American real estate. As a result, any continued FCPA violation in the investor's homeland could ostensibly elicit prosecution. In other words, by giving them something to lose if they continue bribing, we might stand a chance of changing their behavior.

Granted, ill-gotten gains by foreign officials are not necessarily FCPA violations, which is why I agree with you about the necessity of determining whether purchasers are foreign officials.
October 6, 2015 | Unregistered CommenterIlya Zlatkin
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