The Financial Crimes and Enforcement Network (FinCEN) last week published its newest alert on Russian attempts to access the US financial system through investments in commercial real estate (CRE). Although residential real estate remains popular for money laundering and sanctions evasion, commercial real estate (CRE) transactions tend to be more complicated and profitable, making them particularly attractive to illicit actors. These layered networks help politically exposed persons (PEPs), sanctioned individuals, and their associates and family members hide their true identities and enable them to evade sanctions while collecting profits.
Financial institutions are critical partners in the effort to flag suspicious transactions, and FinCEN notes that sanctioned Russian elites and their family members and associates are almost certainly reducing their involvement in the financial vehicles used to purchase CRE properties in an effort to fly under the radar and avoid reporting requirements, making identification of risky transactions more challenging.
Identification of suspicious transactions in the CRE market is also more difficult because many of the red flags used by financial institutions to highlight suspicious transactions are common in the sector. In addition, the sector is under less government oversight than residential real estate, foreign investment is common, and the high marketplace value allows for storing a large amount of money and collecting significant interest, as well as profits from rent.
Ongoing Reporting Requirements and Alerts
The message in the latest FinCEN alert is not new, and the United States has been implementing measures to stop money laundering and improve transparency in high value transactions such as real estate during the past several years. These efforts are increasingly important in the aftermath of the extraordinary sanctions that were imposed on Russia after its invasion of Ukraine in 2022, because Kremlin-linked elites and oligarchs have taken extra care to conceal their assets and access the US financial system in anticipation of severe sanctions against Russia.
In 2016, FinCEN implemented geographic targeting orders (GTOs) to stem the flow of illicit money into the United States via the residential real estate sector, requiring title companies to report to FinCEN residential, all-cash real estate purchases that exceed $300,000. These GTOs have been renewed every six months since their creation—most recently in October 2022 when they were expanded to include additional jurisdictions.
The Corporate Transparency Act (CTA) became law in January 2021 and requires FinCEN to build a national registry of beneficial ownership information to identify natural persons behind LLCs and other corporate vehicles and fight money laundering.
FinCEN’s newest alert—along with previous alerts and advisories such as “FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts” and “FinCEN Alert on Real Estate, Luxury Goods, and Other High Value Assets Involving Russian Elites, Oligarchs, and their Family Members”—is in line with the “United States Strategy on Countering Corruption,” published in December 2021, which aims to make hiding “the proceeds of ill-gotten wealth in opaque corporate structures” more challenging.
Research and Resources
To avoid transacting with corrupt, sanctioned, or criminally linked individuals and businesses, enhanced research capabilities are a must. List-based screening is not enough. Reviewing business activities, researching name variations, searching possible PEP connections, and examining supply chains are critical strategies to reduce regulatory and reputational risks and bolster compliance efforts.
FiveBy’s IntelSentry analytic services provide the resources and experience needed to mitigate vulnerabilities and offer insights into possible customers and business partners. IntelSentry provides these assessments on demand, with research conducted by certified risk analysts and compliance specialists. They can be customized to address specific questions and offer the ability to focus in-house resources on other critical work while FiveBy’s experts complete comprehensive research to supplement automation data and provide insights to inform policy decisions and mitigate risk.
US regulators are increasingly focused on enforcement of current sanctions and AML regulations. Current compliance operations must be agile, and compliance officers must stay informed and prepared to adjust their strategies in the current ever-changing environment. As Russia’s war in Ukraine approaches the year mark, the United States will continue imposing sanctions and other restrictions not only on entities and individuals who are involved in Russia’s invasion, but also those who facilitate sanctioned actors’ and companies’ access to the global financial system and help them evade restrictions.
FiveBy will continue monitoring developing FinCEN requirements for the real estate and other sectors and additional Treasury, Commerce, and other government agencies’ efforts to hinder Russia’s ability to wage war.
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