By Belinda Li
Miami’s tropical weather, white sand beaches, and vibrant communities are almost enough to distract from the city’s darker reputation as a safe haven for criminals. But even though the days of the Cocaine Cowboys and Miami Vice are now in the past, the government’s crackdown on drugs has not staunched the flow of dirty money entirely. Any void left by the drug lords is easily filled by another group of criminals—foreign kleptocrats who have stolen vast sums from the public budgets of their home countries.
When the Panama Papers were released in 2016, they opened up a small window into how corrupt officials and businessmen are able to hide their assets overseas. The Panamanian law firm whose documents were leaked, Mossack Fonseca, helped many of these kleptocrats and their relatives register companies in jurisdictions with lax beneficial ownership disclosure laws. These anonymously-owned companies were then used to funnel money around the world which often ended up in luxury Western real estate.
While it is difficult to ascertain the legitimacy of money transferred through anonymous companies, it is clear that the secrecy surrounding these legal entities offers a veil of impunity for real estate purchases that would otherwise arouse suspicion. The Miami Herald, for example, reported that Paulo Octávio Alves Pereira, a Brazilian politician, was able to use an anonymous company to buy a $2.95 million condo at the St. Regis in Miami in 2011, even after being indicted for corruption in his home country.
Recently, U.S. law enforcement has begun investigating the use of anonymous companies to purchase luxury real estate. In January 2016, the Financial Crimes Enforcement Network (FinCEN), one of the Treasury Department’s primary agencies overseeing anti-money laundering policies, issued Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in certain metropolitan areas.
Unsurprisingly, Miami-Dade County was chosen as one of the first areas covered by the GTOs, due to its popularity among luxury buyers and higher than average percentage of all-cash purchases. Last month, I spoke with Nicholas Nehamas from the Miami Herald and Kenneth Rijock, a compliance consultant, to gain a better picture of what has been happening in Miami and elsewhere in the United States. Here’s what I learned.
Anonymous Companies and Real Estate: A Deadly Duo
Once illicit funds enter the financial system, money launderers must make tracing their origin as difficult as possible. This stage, known by compliance specialists as “layering,” is greatly facilitated by the existence of anonymous companies. In the United States, states are responsible for setting their own incorporation rules and procedures. The absence of a federal, nationwide beneficial ownership law has arguably led to the U.S. becoming the leading incorporator of anonymous companies, dwarfing traditional secrecy jurisdictions such as Switzerland, the Cayman Islands, or the Isle of Man.
By using anonymous companies, criminals can effectively legitimize their illicit funds and make purchases and investments without arousing suspicion. Real estate is one of the most popular investment options, not only because it provides a possible second home and source of income, but also because it is able to be purchased with complete anonymity. Kenneth Rijock notes that “the use of anonymous shell companies is the rule rather than the exception when it comes to purchases of high end real estate in the U.S.”
While some high profile individuals desire anonymity for security reasons, it is difficult to distinguish between legitimate and questionable real estate transactions. In any case, real estate professionals have few incentives to do so. After the passage of the USA Patriot Act, financial institutions—including “persons involved in real estate closings and settlements”—were required to implement anti-money laundering programs, but the real estate industry was granted a temporary exemption by the Treasury in 2002. The exemption also meant that real estate professionals would not be required to submit Suspicious Activity Reports, which are used by banks and other financial institutions to flag questionable transactions.
Although the FinCEN GTOs gather data on otherwise completely anonymous real estate transactions, Nicholas Nehamas points out that real estate is still “one of the easiest ways to launder money,” due to a number of limitations. For example, the GTOs do not cover wire transfers or purchases of multiple homes below each jurisdiction’s specified price points, which are seen as easy methods to bypass FinCEN’s scrutiny.
Still, Nehamas notes that the GTOs provided a “wake-up call” for real estate professionals in Miami, affirming the government’s commitment to combatting money laundering. And they have already yielded valuable information about the use of shell companies in luxury real estate transactions—for instance, FinCEN found that 30 percent of transactions covered by the GTOs involve a beneficial owner or purchaser representative who had previously triggered a Suspicious Activity Report.
How Dirty Money in U.S. Real Estate Affects Us
The risks of allowing anonymous ownership of real estate in the U.S. are increasingly well-known. In addition to FinCEN, the Financial Action Task Force, U.S. Government Accountability Office, Senate Committee on Homeland Security, and various NGOs such as Transparency International have also issued reports linking the lack of beneficial ownership information in real estate to major national security and money laundering concerns.
Yet there has been little movement towards legislative change, even as some U.S. states engage in a “race to the bottom” on beneficial ownership secrecy. A bill that would eliminate anonymous companies, for example, has been stalled in Congress for the past nine years, and real estate professionals are still exempt from any type of anti-money laundering compliance.
The continued ease and opaqueness of purchasing real estate in the U.S. reveals our complicity in globalized corruption, allowing kleptocrats and other criminals to take advantage of our financial system and rule of law. Furthermore, it is clear that our complacency benefits both criminal organizations and hostile regimes.
In 2008, it was discovered that a large skyscraper in Manhattan was partially owned by a front company for an Iranian bank that has ties to terrorism. In the city of Sunny Isles located in Miami County, there has been a large influx of Russian investors, some of whom have suspicious ties to the government and organized crime. Vladimir Pekhtin, an outspoken Putin supporter and the former chair of the ethics committee in Russia’s legislature, owned $2 million worth of undisclosed property in south Florida, despite having an official government salary of $72,000 a year. Anatoly Golubchik and Michael Sall, members of a Russian-American organized crime group, owned two units worth $2.3 million in Sunny Isles. The properties are now subject to forfeiture as “proceeds obtained.… from racketeering activity” after Golubchik and Sall were convicted in the U.S. for their role in an illegal high-stakes sports betting ring.
Allowing criminals to operate with impunity in our country not only creates a national security concern, but also affects local communities. Foreign investment in real estate has driven up housing prices around the world—leading cities like Vancouver to implement drastic measures such as a 15 percent tax on all foreign real estate purchases. In metropolitan areas like Miami, where foreign buyers represent 39 percent of all real estate sales, housing affordability is starting to become a more prominent issue. Although Nehamas notes that rising housing prices affect “mostly people who are poorer and have less voting power,” it is also contributing to a brain drain in the region, as younger generations are forced to look for housing elsewhere.
Some say that imposing additional regulations will hurt the already struggling real estate market. However, it is clear that a new balance must be struck between profits and privacy on the one hand, and long-term stability and security on the other. Cracking down on dirty money will not only stop U.S. real estate from being used as a money laundering vehicle by our enemies, but also help to address distortions in the housing market. As law enforcement continues to uncover more cases of illicit money in U.S. real estate, the impact that criminals and kleptocracies have on our communities is hitting closer and closer to home. That is—if you can afford one.
Belinda Li is a Research Associate at Hudson Institute’s Kleptocracy Initiative.