By Peter Podkopaev
Following a string of recent exposes–notably the “Towers of Secrecy” series in the New York Times–the threat posed by dirty money in U.S. real estate is under increasing scrutiny.
Late last year, I looked at recent developments in this area for KI; now, an outstanding article by Jennifer Shasky Calvery (former director of the U.S. Treasury’s Financial Crimes Enforcement Network) and Kevin Bell in the Harvard International Review confronts the links between kleptocracy, anonymous companies, and U.S. real estate. Read the whole thing here. As the authors point out:
“Drug traffickers and fraudsters do not simply want to hide their dirty cash. They also want to conceal the origins of their funds in a way that grows as an investment…In that sense, real property—especially residential property in desirable cities in a relatively stable market like the United States—is a natural choice”
What makes the market vulnerable is the relatively few defenses in place against such abuse: “about 22 percent of the US real estate has limited anti-money laundering protections.”
This leaves a huge swath of potential real estate purchases open to anyone enterprising enough to exploit them. Any criminal wishing to safeguard their loot can simply make an anonymous, all-cash purchase of a property, thereby circumventing the routine due diligence reports carried out by banks and lenders for most buyers who take out a mortgage:
“The ability to conceal the identity of the purchaser of real estate is especially important to illicit actors who would otherwise attract suspicion to their involvement in a transaction, such as corrupt senior officials of foreign governments.”
The preferred method of making an all-cash purchase is through anonymous or “shell” companies:
“The efficiency and ease of using the US banking system to obtain anonymous shell companies contributes to the high incidence of money laundering in the country.”
Seeking to discern the extent of the problem, FinCEN issued Geographic Targeting Orders (GTOs) for the cities of New York and Miami in January 2016 (this pilot scheme was later expanded to other key U.S. jurisdictions). The goal is to gather information and advance FinCEN’s ability to regulate the real estate market. However, the authors urge caution over GTOs’ scope and reach: “This action has been described as a ‘crackdown.’ It is not.”
In view of this, one wonders what further regulatory steps the Treasury will take based on the information it has gathered so far–and how this might impact the political discourse on the abuse of anonymous companies.
Peter Podkopaev is a Researcher at Hudson Institute’s Kleptocracy Initiative.