NYPost article on Russian Oligarchs and their NYC Properties

David Goldsmith

All Powerful Moderator
Staff member

David Goldsmith

All Powerful Moderator
Staff member

Lawmakers seek to unmask property owners behind LLCs​


New bill would require public disclosure of beneficial owners​


As officials call for action against Russian oligarchs who own real estate in New York City, state lawmakers are seeking to make it easier to find.
Their measure, though, would not only apply to oligarchs.

A new bill would change disclosure rules for limited liability companies, requiring them to disclose “beneficial owners,” defined as those who have a membership interest in the LLC.
The legislation would require that this information be disclosed on an LLC’s annual tax returns, and that the Department of State assign each beneficial owner an identification number that would appear in a database along with the LLCs tied to that person.
That information would then be available through public records requests. Foreign limited liability companies doing business in New York would also be required to provide such identification information.

If approved, the measure could shed light on an opaque system that has allowed high-net-worth individuals to anonymously park cash in the city, at times to conceal illegal activity. The bill could help curb money laundering, tax evasion and code violations that go unaddressed by anonymous landlords, according to the bill’s sponsors.
“We are often in the dark about who is the beneficial owner of a company,” said state Sen. Brad Hoylman, a Manhattan Democrat. “It would appear that you are required to provide less information to form an LLC than you are to apply for a library card in New York.”
The measure had been in the works long before the increased focus on real estate owned by wealthy Russian individuals tied to Vladimir Putin.

In a memo about the bill, the lawmakers noted that some tenants were unable to receive aid from the state’s Emergency Rental Assistance Program because they could not track down their landlords to fill out the paperwork.
Assembly member Emily Gallagher, who is sponsoring the bill with Hoylman, said the measure was inspired, in part, by her experience working with tenants, and would not have unintended consequences.
“It’s really just going to be a problem for people abusing the system,” she said. “This is already done in other places in the world.”

Under federal rules, title companies are already required to disclose beneficial ownership information for residential transactions of $300,000 or more in New York City, when such deals are done without outside financing. That information is reported to the U.S. Treasury.
The state approved a measure in 2019 that required LLCs involved in certain real estate transactions to disclose the identities of all owners and managers in tax filings. The law, however, only applies to properties with one to four units. The bill proposed Tuesday eliminates that threshold and applies the rule to all residential deals.
Last week, Manhattan Borough President Mark Levine said properties in his borough owned by Russian oligarchs should be seized given the country’s invasion of Ukraine, though he does not have the authority to put such a measure in place — and it’s not clear other agencies do either.
 

David Goldsmith

All Powerful Moderator
Staff member

Russian Oligarchs Hide Money in Plain Sight in Luxury New York City Condos​

Throughout the late 2000s and early 2010s, the growing presence of fabulously wealthy Russian oligarchs in high-end housing markets such as Manhattan, Miami and Los Angeles was the real estate industry's worst kept secret. Although many eschewed publicity, they weren't hard to spot. They often arrived by private jet and pulled up to luxury buildings around town in cars that cost more than most two-family homes, along with entourages of bodyguards, assistants and traveling maids. They inked purchases so eye-popping that some of them inevitably made the newspapers.

Those headlines may soon come back to haunt them. During his State of the Union address earlier this month, President Joe Biden announced his intention to "go after the crimes of Russian oligarchs," and to "find and seize their yachts, their luxury apartments, their private jets."
"Tonight, I say to the Russian oligarchs and corrupt leaders who built billions of dollars off this violent regime, no more," Biden said. "We're coming for your ill-gotten gains."
Soon after, the U.S. Justice Department announced the creation of a Task Force KleptoCapture, a new unit that promised to "use every tool to freeze and seize" the assets of any Russian the Biden Administration places on a sanctions list.
It's a good bet they will begin by trying to find the owners of what some have called the "world's most expensive safe deposit boxes"—scores of high-end condos in luxury towers that have sprung up in big U.S. cities in recent years and constitute some of the juiciest forfeiture targets. But identifying those assets won't be easy. Anti-corruption and law enforcement experts have been warning for decades that American money-laundering and financial-disclosure laws—particularly in real estate—have failed to keep pace with those of many European nations, increasingly making the U.S. a mecca for those looking to hide their money in plain sight.

The properties in question, which are often worth tens of millions of dollars, are especially appealing to those who reside in unstable countries or have reason to fear their assets may someday be confiscated elsewhere. Due to the relative stability of the U.S. political system and the U.S. dollar, these foreign property buyers can be reasonably assured these assets will retain their value. The U.S. legal system can usually be counted on to protect the rights of property owners. And the origin of the money used to buy the assets can be easily obscured by funneling the money through a labyrinth of trusts and LLCs. Thanks to aggressive lobbying by the real estate industry and other special interests, in many U.S. states it's often easier to obscure one's identity by setting up an anonymous shell company than to get a driver's license.

"There's a bunch of this money in condos," says Gary Kalman, U.S. director of Transparency International, a nonprofit that monitors corruption. "But much of it they're never going to be able to figure out. And that should be a scary wakeup call to Congress to close these gaps as soon as they can. It's a problem."
Nowhere is the influence and presence of this Russian money more evident—and more maddeningly difficult to pin down—than in Manhattan. (That's the subject of my new book, The New Kings of New York, Renegades, Moguls, Gamblers and the Remaking of the World's Most Famous Skyline.) Over the last decade, the city's developers have put up a series of supertall, jagged, toothpick towers at the bottom of Central Park, designed and marketed to the world's .01 percent, a tiny group in which Russian oligarchs are disproportionately represented.

These condos, which can fetch upwards of $200 million each and cast shadows over the park's beloved Great Lawn, have helped drive Manhattan land prices into the stratosphere and contributed to a populist anti-development backlash that in 2019 derailed the city's long sought efforts to lure Amazon to build a second headquarters.
Is it fair to blame the Russians? Jonathan Miller, one of the city's leading real estate appraisers, makes a compelling case. He attributes the frenzy of building at the foot of the park to a single transaction: the 2011 sale of former Citigroup chairman Sandy Weill's 7,000-square-foot park-facing penthouse at 15 Central Park West to the Russian fertilizer king Dmitry Rybolovlev, who agreed to pay $88 million—double the amount Weill had paid just a few years before. Rybolovlev, who owns the professional soccer club AS Monaco FC and in 2008 purchased Donald Trump's Palm Beach mansion for $95 million, put the condo in the name of his college-age daughter. He was soon sued by his estranged wife, Elena, who accused him of shielding his assets from her by spending freely using trusts linked to their children.

Whatever his motivations, the Rybolovlev transaction changed the city's real estate landscape.
"That number was so shocking," Miller told me. "It looked like he just picked a number out of the air. That sale triggered a new thinking in New York—it was the catalyst that lit the fuse."
The price came to $12,571 per square foot for real estate that, just seven years earlier, many had been skeptical could fetch even $2,000 a square foot. It sent the amount developers were willing to pay for real estate around the park, and other desirable areas of Manhattan, sky high. To make back the money required to win bidding for coveted Central Park-facing real estate, developers created more products designed to appeal to the world's ultrarich.

In the years following that sale, ultra-luxury real estate, costing $10 million and up, would account for roughly 50 percent of all new construction, according to Miller. Fertilized by Rybolovlev's free-spending ways, eight needle-thin towers sprouted like gleaming, metallic weeds along a stretch of West 57th street south of Central Park, an area that would come to be known as Billionaires' Row.
These apartments offered all the luxury money could buy, with towering Cathedral ceilings, herringbone floors, corridors sheathed in silk wall coverings, marble bathroom fixtures, steam showers, handcrafted kitchen cabinetry, built in wine cells, and floor to ceiling glass walls with king of the World views of the Park and Manhattan South.

The greatest amenity these opulent dwellings offered to Russian oligarchs, and others looking for a safe place to park their cash, was anonymity.
Unlike the tony Upper East Side co-ops that have traditionally housed Manhattan's financial elite, these towering monstrosities lacked the nosy, societal gatekeepers of traditional co-op boards—who had famously turned their noses up at a wide array of celebrities from Richard Nixon to Barbra Streisand. Every new building on Billionaires' Row was a condominium. And there was only a single requirement for admission and membership in these towers—money, heaps of it.
"Temporary" exemptions
The nation's gaping real estate disclosure loopholes are well known to policymakers in Washington. In the wake of the 9-11 World Trade Center attacks, the Senate Permanent Subcommittee on Investigations held hearings aimed at choking off the flow of illicit funds to terrorists by closing money laundering loopholes. The panel found that as much as half of the estimated $1 trillion in criminal proceeds laundered worldwide each year went through American financial institutions, much of it through private banks where "a corporate culture of secrecy and lax controls" were guiding principles. They highlighted figures ranging from the brother of former Mexican president Carlos Salinas, Raul, accused of links to narcotics cartels, Gabon's president Omar Bongo, and Asif Ali Zardari, the widower of former Pakistani Prime Minister Benazir Bhutto, and helped shape the most sweeping anti-money laundering legislation passed in a generation, pushed through as part of the USA Patriot Act.

The legislation required a long list of industries to conduct some level of due diligence on their clients, including buyers of jewelry, hedge funds -- and real estate. It stipulated that those involved in selling such assets be required to analyze risk, know their clients and take steps to avoid handling dirty money. But the U.S. Treasury Department was overwhelmed by all the rules that had to be issued, recalls Elise Bean, who was the committee's chief counsel at the time.
"Everybody was covered," Bean recalls. "But then the regulators said 'we have to cover so many people, we can't do them all at once!"

In the end, the regulators decided to place their initial emphasis on increasing effort to monitor the flow of money through banks and securities firms and agreed to grant a temporary exemption to realtors (along with investment advisors and those selling yachts and aircraft).
"Here it is, 20 years later," Bean said recently. "And they've still got that 'temporary' exemption."
These exemptions coincided with a significant spike in the number of Russian buyers interested in U.S. real estate. Though Russians first began eyeing Manhattan real estate shortly after the breakup of the Soviet Union in the 1990s, it wasn't until 2000 or 2001 that the group began buying in great numbers—numbers that rose significantly in the late 2000s and early 2010s, according to Edward Mermelstein, a Ukrainian-born former real estate attorney who, when I first spoke with him back in 2012, told me he had handled more than 500 deals for Russians.

"The Russians that are coming to New York — especially in the last couple of years — are typically high-profile individuals," said Mermelstein at the time. (He now serves as head of the New York City Mayor's Office for International Affairs.) "The types of properties they are looking at reflect that. They jump from one building to the next just because it's the flavor of the year."
Though most preferred anonymity, the ones that made it in the media were memorable characters. Andrey Vavilov, a former deputy finance minister and hedge-fund magnate, survived a car bombing in a Kremlin parking lot. In the late 1990s, Russian federal prosecutors investigated whether he embezzled $230 million during the sale of MiG fighter jets to India (he denied the accusations and the case was eventually closed when the statute of limitations expired). In 2008, he sued Plaza Hotel developer Elad Properties, complaining that two penthouses in the famous Manhattan property he'd committed to buy for a cool $53.5 million had been ruined by narrow windows that "make the space more closely resemble an attic than a luxury penthouse living room." (He later acquired a condo at Time Warner Center more to his liking: a $37.5 million, 8,275 square feet penthouse with his-and-her master bathrooms and 360-degree city views).

Vavilov's former neighbor at the Plaza, Russian entertainment mogul Igor Krutoy, gained prominence when he set the record for most expensive condo (before Rybolobeleva smashed it), ponying up more than $48 million for a 6,000-square foot apartment in the building. He later shelled out another $23.9 million for a mansion on Southampton's tony Gin Lane, telling his brokers he planned to demolish it and build a new one.
Perhaps the most prominent oligarch known to have purchased real estate in the city was Roman Abramovich, a close Putin associate, who built a fortune by gaining control of natural resources, like oil and aluminum, after the collapse of the Soviet Union, owns the high-profile Premier League soccer team Chelsea, a $600 million yacht and is reportedly worth at least $12 billion. He acquired six Upper East Side properties, including a block of townhouses being combined into a mega mansion, worth an estimated $92.3 million.

Catering to these mercurial buyers, say those who do so for a living, requires a unique skillset, an emphasis on discretion, and the willingness to adhere to a different set of rules.
"Normally with buyers in New York, you need to know up front what's in their bank, in terms of liquid cash, but I would never dream of asking that question," Dominique Punnett, a half-Russian broker at Stribling & Associates, told me of one Russian client who was looking for an ultra-high-end apartment at the height of the boom. The buyer had made it clear to Punnett, without explicitly saying so, that "price is not an issue."
"They come from a very different culture, and you have to understand that," explains Victoria Shtainer, a Russian-born broker with Douglas Elliman, who began meeting Russian clients through family and friends back in 2004 and by 2008 had sold them properties at many of the city's most expensive addresses, including 15 Central Park West and the Time Warner Center, the two New York City developments that foreshadowed the arrival nearby of Billionaires' Row.

Russia, she pointed out, is "not the land of opportunity — it's cutthroat."
Those who made it to the top and come here to spend the spoils, she added, expect VIP service, don't suffer fools and "are always on the defensive."
"They don't talk about who and what they are," Shtainer said. "You have to win their trust. You find that information out later rather than sooner."
If you find out at all. Many Russian buyers hid behind lawyers, underlings or the private bankers who managed their wealth. At the very least, these advisors played a key role in many of these transactions, serving as the gatekeepers for real estate agents looking to meet them—which many did, particularly during down markets.

Nikki Field, who headed a Sotheby's brokerage team dealing with the city's toniest product, was in Moscow within three weeks of the Lehman Brothers collapse in 2008. At the time, she recalled, the phone in her office was ringing off the hook with calls from wealthy clients suddenly out of a job or in financial distress, and eager to offload second homes or, if they worked at recently shuttered Lehman or Bear Stearns, sell their Manhattan properties. Field, a trim, charismatic former Pam Am flight attendant and marketing executive, quickly realized she had a problem. With credit frozen and billionaires hoarding bars of gold in preparation for the possible collapse of the western banking system, no one in the city was buying.

"Now we had to take these properties that they were leaving and sell them quickly," she said.

By the first week of October, a little more than two weeks after Lehman, Field was on the road. As she did in the other cities she would subsequently visit—she continued onto Hong Kong, Beijing, Shanghai, Wenzhou, Singapore and Taiwan—Fields relied on her New York office to ready the ground with phone calls or emails to local contacts at Sotheby affiliates (Sotheby's had just opened a Moscow branch). She also relied on her own local banking connections to secure meetings with private wealth advisors, who could take real estate opportunities to their, often secretive, clientele.

"They're moving a lot of money to the U.S.," she told me. "They get the comfort level of being able to say to their client, 'I know you're going to buy in Miami or New York, or Washington. We're introducing you to a Sotheby's agent that will give you all the information and help you. They have our confidence and endorsement."
Ironically, the biggest challenge interested Russian buyers faced, and the ones most likely to cause headaches for those financial advisors, was not U.S. regulatory requirements, which were relatively few, but the ones they faced from their home country.
"In order to move money out of Russia, you need to prove that taxes have been paid on those funds. And it's not a country where people like to pay taxes," Mermelstein said, adding that he only dealt with clients who actually paid their taxes.

"Problems occur when you have made a lot of money in Russia and now you are interested in investing out of Russia because you have to disclose you have made the money and paid taxes on it," he explained. "It's a question of whether they want to do that because you are exposing yourself to prying eyes."
By contrast in the U.S., under current laws, notes Transparency International's Kalman, real estate agents "are under no obligation to ask the right questions and could basically file paperwork and buy and sell property without asking those questions."
True owners
In 2015, The New York Times splashed the first story in a multipart investigation entitled "Towers of Secrecy," across the front-page of its Sunday newspaper. The series cast a spotlight on the gaping holes in disclosure requirements and their potential to facilitate money laundering by linking sales in New York City's tony Time Warner Center to a number of shady foreign buyers hiding behind LLCs. These included a gregarious Malaysian socialite and Hollywood producer named Jho Low. He would later be accused of looting the national treasury and laundering money on behalf the Prime Minister's son (some of which Low used to finance the movie "the Wolf of Wall Street" and to party with Paris Hilton in Las Vegas and St. Tropez). Others singled out included a Colombian politician subsequently jailed for corruption, and a Russian oligarch named Vitaly Malkin, who had been involved in a 1996 deal to restructure the government of Angola's $5 billion debt to Russia in an arrangement. That deal, the Times noted, "has become a symbol of official plundering in Africa among anti-corruption advocates."

A few months later, the Treasury's Financial Crime Enforcement Network (FinCEN), instituted what it called a "Geographic Targeting Order," a temporary measure focused on new anonymous, all-cash transactions exceeding $3 million in Manhattan and $1 million in Miami. The new rules sounded promising on paper. They required title insurance companies to identify the true owners of American shell companies involved in the transactions. In one analysis subsequently conducted by FinCEN, the agency revealed that more than 30 percent of the newly identified true owners had previously been flagged in "suspicious-activity reports" filed by banks and other financial service providers for transactions they suspected might be related to money laundering or other illicit activities. FinCEN has since expanded the GTOs to multiple parts of the U.S. and have extended them each time they expire.

In practice, however, most money laundering experts say that the GTOs are littered with loopholes. For one, anyone who wishes to avoid the requirements can simply forgo title insurance. Transparency International's Kalman says the GTOs are largely viewed by many in law enforcement as having been useful for "information gathering purposes—to see what they could get back and learn how they might be improved" in the future.
The opportunity to apply those lessons may now be at hand. In 2021, after decades of inaction, Congress finally passed new legislation aimed at strengthening American money laundering laws. Among other things, the new laws will require all entities formed in the U.S. to disclose their beneficial owners and they instruct FinCEN to create a non-public registry for regulators, law enforcement and some financial institutions.
Soon after taking office, Biden announced his intention to make fighting money laundering a priority and unveiled a comprehensive anti-corruption strategy for the federal government. In the document, he explicitly mentioned real estate, indicating he was considering provisions that would extend the bank secrecy act to those involved in real estate closings, which would require them to have an anti-money laundering program. Earlier this year, his administration put out a document soliciting comment from the public and interested industry figures. It is expected to issue new rules aimed at addressing the problems in the months ahead. Bean, the former Senate investigator, is hopeful.

"For the first time we would set up a system to find out who's behind all of these entities that we're creating and unleashing on the rest of the world, when we have no idea who's behind them," she says. "There are loopholes in the new legislation, there's no doubt about that. But it would still cover an awful lot of entities. And once you get it into place, you can start working on all the exemptions and whittle them down."
None of this, however, is likely to be of much help to Biden's Task Force KleptoCapture, which will have a limited toolset with which to root out assets owned by sanctioned oligarchs.

Transparency International's Kalman notes that their best hope lies in targeting the small minority oligarchs who bought property long before Russia invaded Crimea and the U.S. first raised the specter of sanctions and "were not all that interested in hiding their identity."
"A number of them—not many—gave money to charitable organizations and were trying to build their reputations in the United States," he says.
If that fails? "You hate to rely on this, but not every criminal is a genius and sometimes people just file things," he says. "So you can hope that somebody did something sloppy. But I think there's a bunch of this money and a bunch of these condos that they're never going be able to figure out. I think finding these assets is going be very difficult."

One obvious target is Roman Abramovich, who was sanctioned late last week by British authorities. He appeared at the top of a list of sanction targets proposed last year by imprisoned anti-corruption activist Alexei Navalny, who labeled the oligarch "one of the key enablers and beneficiaries of Russian kleptocracy." Others have called him "Putin's banker." By some accounts, Abramovic, who was also close to former President Boris Yeltsin, was the first to recommend the leader appoint Putin to succeed him.

But even going after his assets won't be so easy. He signed over the deeds to most if not all of his Manhattan properties to his former wife, Dasha Zhukova, in 2018 – an action which some suggest Biden's investigators are likely to discover is unusually common among those whose assets are at risk.
"The UK action will pressure the US to follow suit," Ross Delston, an independent anti-money laundering expert and former banking regulator, says, but notes: "You're allowed to give gifts. Our laws protect private property."
So, if the U.S. attempts to go after the New York properties, "then the question would be is it derived from a criminal offense? And was (Zhukova) a knowing beneficiary? Was she involved in the underlying crime if there was one?

"Establishing that's all very hard to do," he said. "And I guarantee you she's going to have the best lawyers money can buy."
 

David Goldsmith

All Powerful Moderator
Staff member

Wash, rinse, repeat: How money launderers exploit real estate​


Property investment is a common way to clean dirty cash, but watchdogs aren’t giving up​

In early March, Lakshmi Kumar got a chance to tell Sens. Chuck Grassley and Sheldon Whitehouse that crooks across the globe were taking the U.S. to the cleaners. She didn’t miss it.
Kumar, the policy director at watchdog group Global Financial Integrity, told the powerful lawmakers that Congress had failed to close the loopholes routinely used by international criminals to convert ill-gotten gains into American real estate.

Testifying before the Senate Caucus on International Narcotics Control, she laid out in striking detail how American property has become a thoroughfare for traffickers, terrorists and kleptocrats to rinse tainted money through the U.S. financial system.
Grassley and Whitehouse have for years led an earnest but sputtering crusade against money laundering. Yet regulators still lack the information and the authority to cut through the webs of shell companies and trusts that hide illicitly obtained assets, Kumar explained.
“Right now, it’s like you’re blindfolded in a dark room trying to find a grain of rice,” Kumar told The Real Deal.
In the wake of calls to punish Russian oligarchs, a spotlight has been thrust on the difficulty of identifying property purchased with illicit funds. But those ghost apartments are just the tip of the iceberg.
No one knows that better than Kumar, whose report “Acres of Money Laundering” details how real estate serves as a conduit for dirty money. One of the bigger, and least scrutinized, vulnerabilities in the system is private investment.
It’s hard to overstate the recent growth of private equity, hedge funds, alternative lenders and other private capital in real estate. They have exploded in popularity since the Great Recession, writing bigger checks and raising massive funds overseas with minimal government oversight. They are buying up homes across the country and have raised so much cash so fast that one bought a New York City skydeck — not the building, just the deck — for half a billion dollars.
While institutional banks need to undergo standard anti-money laundering procedures, these private lenders face essentially none of those requirements. That has allowed cartels and oligarchs to clean their money by investing in everything from humble multifamily projects in the Southeast to high-rises in Cleveland. The true scope of their real estate purchases is likely vastly larger than what has been identified.
The Financial Action Task Force, an intergovernmental organization of G7 nations, has called the free pass for investment advisers one of the “most significant” gaps in America’s efforts to stop money laundering.
The government once came tantalizingly close to addressing the problem. In 2015, the Financial Crimes Enforcement Network proposed a new rule that would have forced investment advisers to comply with anti-money laundering programs and report suspicious transactions. As the division of the Treasury Department tasked with combating money laundering, FinCEN called for suggestions on how to implement such sweeping new requirements.
“Investment advisers are on the front lines of a multi-trillion-dollar sector of our financial system,” said FinCEN Director Jennifer Shasky Calvery in the announcement. “If a client is trying to move or stash dirty money, we need investment advisers to be vigilant in protecting the integrity of their sector.”
Not surprisingly, the industry was not keen on ratting out its clients. In the face of pushback and insufficient data to support the proposal, it soon disappeared into the bureaucratic ether. But even before Russia’s invasion of Ukraine put oligarchs under the microscope, winds blowing in Washington indicated the proposal was still alive.
Lakshmi-Kumar-quote.jpg

In December, President Joe Biden released the White House’s “Strategy on Countering Corruption.” It called on the Treasury to re-examine the 2015 rule and consider adding “minimum reporting standards” for investment advisers and equity funds.
Stopping money laundering, particularly in real estate, is the rare issue that bridges the partisan divide. In October, three Democrats and three Republicans in the House of Representatives introduced a bill to require investment advisers like those at private equity and hedge funds to report suspicious activity to FinCEN and establish anti-money laundering compliance programs. Whitehouse plans to introduce a Senate version.
Even if the government acts, there are still major questions about how implementation would work, and whether the world can ever regulate money laundering out of real estate.
Investing in one of these funds is not the quickest or simplest way to get money into the American financial system, but it’s one of the hardest to stop, according to Kumar.
“If I’m a kleptocrat buying a house somewhere in the D.C. area, it’s just me buying the house,” she said. “When you’re investing in private equity and large portfolios, you can own 2 percent of the property through the structure, and you’d still make millions.”

Pesos in Georgia​

Eagle’s Brooke is a nondescript, mid-rise multifamily development just outside Atlanta. The 248 modest, blue-shingled apartments are the kind of rentals that alternative investors have targeted as young families relocate to Sun Belt it-cities but are not ready or able to buy. In 2018, Florida-based real estate investor Sefira Capital and Coastal Ridge Real Estate bought Eagle’s Brooke for $34 million.
One problem: The feds were watching. They didn’t like what they saw.
Throughout 2018 and into early 2019, Sefira received millions of dollars from investors who were actually laundering drug money through the Black Market Peso Exchange.
The exchange has helped criminals pass huge sums of money between Latin America and the United States, but consider the following example: a Mexican cartel that sells drugs for U.S. dollars wants to convert them into pesos for use at home. Meanwhile, a corrupt Mexican official wants to turn his bribes, paid in pesos, into dollars. Both groups want to keep their financial alchemy under the radar of regulators. Enter money-laundering brokers.
A broker buys the drug dollars with the government official’s pesos and deposits the greenbacks into shell bank accounts controlled by the official. Voila: Clean cash for everyone, in their preferred currencies.
From there, the money could go in a number of directions. Private real estate investors provide a relatively opaque, easy-to-enter repository. As prosecutors laid out in their case against Sefira, a laundering broker directed drug money into several investments in multifamily apartments.
“In at least four cases, high-ranking Mexican officials accused of corruption, embezzlement and unexplained wealth acquired real estate worth millions of dollars in the U.S.,” Kumar’s report noted.
In 2018, as part of an investigation into international money laundering, the Drug Enforcement Administration infiltrated the Eagle’s Brooke transaction and transferred millions of dollars at the direction of exchange brokers into Sefira multifamily funds. That money blended in with the $100 million Sefira raised between 2016 and 2019 and helped the firm purchase real estate, including Eagle’s Brooke, across the Southeast.
As a private real estate investor, Sefira had no obligation to ask where the DEA-injected funds came from. But any real property involved in a money-laundering transaction is subject to civil forfeiture, and Sefira found itself in a bind. It ended up paying $6.5 million in a settlement with the Department of Justice and promising to conduct due diligence on future investors.
The Corporate Transparency Act aims to mandate such disclosure. It would require small LLCs, like the special-purpose investment vehicles Sefira created for each building it invested in, to report the names and personal information of all their “beneficial owners” to the Treasury Department.
But under the act, companies would only need to report information about people who own or control at least 25 percent of the LLC. Given the size of commercial transactions, shady characters could pour millions of dollars into major commercial deals without reaching that threshold.
Commercial real estate poses a particular problem for officials trying to catch launderers. Identifying beneficial ownership is relatively easy in residential transactions but “tends to break down in the commercial realm, because you have all sorts of sources of funding flying around,” said Peter Hardy, an anti-money laundering expert and attorney at Ballard Spahr.
While many of the biggest financing deals in commercial real estate still involve institutional banks, private lenders’ footprint has grown. Last year, real estate debt funds alone raised $32.5 billion, up from $13.7 billion a decade before, according to research firm Preqin.

Real estate’s burden​

Industry experts agree that money laundering is a problem in real estate, but argue that implementing anti-money-laundering, or AML, requirements for investment advisers, real estate agents and lawyers would create a lot of burden with scant benefit.
“Our view is that very little if anything would be added by imposing AML requirements on investment advisers,” said Gail Bernstein of the Investment Adviser Association. “It sounds very easy: Why don’t you just add this one thing? But each thing that gets added takes up a lot of staff time and monitoring time.”
Processes like suspicious activity reporting, beneficial ownership research and identity verification can be a huge time suck and resources drain for a company. The Government Accountability Office found that up to 2 percent of banks’ operating expenses come from AML compliance. Verifying customers’ identities and reporting suspicious activity made up more than half of that.
In another survey, the American Land Trust Association asked its members about geographic targeting orders, which require title insurance companies to complete AML checks in all-cash deals in counties deemed laundering hotspots. Insurers estimated that compliance runs $45 per transaction.
The amount of money laundered through real estate is unknown, but Kumar’s report estimates at least $2.3 billion in the past five years.
“In a vacuum, that’s a qualitatively large number,” said Hardy, “but the industry as a whole handles multiple trillions of dollars a year.”
Some say the problem isn’t big enough to warrant the kind of sweeping regulations making their way through Washington and state capitals.
“The question is whether the benefit outweighs the burden it would impose on the industry,” said Neil Simon, who leads lobbying for the Investment Adviser Association.
The answer is no, according to the association, which also notes that investment advisers make decisions about money but don’t actually hold it. Instead, the actual custodians, the depository institutions, are the ones who should face regulation, advisers argue.
“Thinking that there is material risk at the adviser level for AML really misunderstands how advisers work,” said Bernstein.
Money launderers don’t need a team of crooks to help push their funds through the system’s checks and balances. With such a loosely regulated industry, as recent reports about Russian oligarchs investments in the United States show, they just need enough people willing to look the other way.
Even unintentionally, a real estate fund can become a vehicle for illegally obtained money, especially if it is large, draws investors from around the world and uses “feeder funds” that namelessly compile cash, including from tax havens such as the Cayman Islands.
The Treasury Department’s ultimate definition of a financial institution could mean millions of dollars in compliance costs and untold hours of paperwork. It also figures to send launderers back to the drawing board in their endless quest to evade lawmakers trying to regulate them out of existence.
“As we innovate policy, criminals innovate their operations,” said Kumar.
After the first GTO was issued in 2017, all-cash purchases by shell companies fell by 70 percent, a University of Miami and Federal Reserve Bank of New York study found. But geographic targeting orders initially exempted wire transfers, so some operators began using them instead.
Kumar acknowledged that even with the new measures, regulators would still be searching for grains of rice among billions of dollars in real estate deals. “The hope now,” she said, “is at least you have the lights turned on.”
 

David Goldsmith

All Powerful Moderator
Staff member

American Real Estate Was a Money Launderer’s Dream. That’s Changing.​

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CLEVELAND — When a young man from Florida barely old enough to enter a bar began buying up office buildings in downtown Cleveland, many in the real estate industry here were eager to do business with him. Even though Chaim Schochet wasn’t forthcoming about who his financial backers were or the particulars of his employer, Optima, he had deep pockets, and his company apparently was able to pay in cash.
It was 2008, and the city had fallen over the edge of a massive foreclosure crisis. Cleveland was hurting, and Optima (which has used different versions of its name) eventually became its largest holder of commercial real estate. And Cleveland was not alone. In communities from West Virginia to Kentucky, a desperate need for investors led elected officials in struggling cities and towns to roll out the red carpet for Optima, which bought up steel plants, factories and commercial real estate.
But things that seem too good to be true often are. In 2019, a Ukrainian bank filed a lawsuit in Delaware alleging that Optima was a front for two Ukrainian oligarchs who used it to launder hundreds of millions of dollars of stolen money. The Federal Bureau of Investigation raided Optima’s offices the following year. In 2021, the State Department issued sanctions against one of the oligarchs, Ihor Kolomoisky.

Cleveland has now become a poster child for the need for more transparency in the U.S. real estate industry. A raft of new anti-money laundering laws and regulations is aimed at the industry, which has attracted more than $2 billion in illicit funds over a recent five-year period, according to one report. Chipping away at the culture of anonymous ownership is a good thing, and is long overdue. But the new rules won’t address the elephant in the room: Many cities and small towns, especially in the American Midwest, badly need investment, and sometimes shadowy foreign money is the only kind that comes calling.

“Over and over again, Kolomoisky and his network allegedly turned to Middle America — overlooked towns, forgotten areas, regions that needed an economic lifeline, whatever the source — for their massive laundering needs,” Casey Michel, the author of “American Kleptocracy: How the U.S. Created the World’s Greatest Money Laundering Scheme in History,” wrote recently in Foreign Policy magazine. “Those on the receiving end had no incentive to look this foreign gift horse in the mouth, even when the signs of money laundering were clear.”
Mr. Schochet, Mr. Kolomoisky and their associates have denied the allegations against them and have repeatedly appealed rulings against them in court that aim to strip them of their assets. One by one, Optima’s properties are being sold off to new owners.
Cleveland is still struggling to recover from the 2008 foreclosure crisis, which made it particularly vulnerable to secretive strangers with deep pockets. Local officials and an economic development fund saw a ray of hope in Optima and lent the company at least $42 million in 2011 to fix up a hotel that anchored a block near City Hall. But after the construction wrapped up, it was clear that the company wasn’t holding up its end of the bargain. It defaulted on loans and failed to pay taxes. In the end, it didn’t even bother to change the light bulbs in the hotel parking garage when they went out, according to a former hotel employee.

The Pittsburgh Post-Gazette published an investigative series last year with a story about how elected leaders in Ohio and West Virginia helped Optima keep some of the factories it had purchased open, despite environmental and safety violations. As Ukrainian officials began investigating Mr. Kolomoisky for stealing billions of dollars, Optima stopped paying bills in the United States. Municipalities were left with shuttered factories, neglected properties, injured workers and unpaid tax bills. Making good on these investments was, apparently, less important than being able to park whatever money they could in the U.S. Money-launderers are like false lovers. They promise the moon, but then they leave you high and dry.

The ordeal has sparked soul-searching in Cleveland and beyond about what went wrong and how to fix it. Scott Greytak, director of advocacy for Transparency International U.S. and a Cleveland native, told me that one of the biggest problems is that many American professionals aren’t required to do due diligence into their foreign clients. “Ihor Kolomoisky could not have raided Cleveland without the help of American enablers,” he said. “The middlemen who incorporate companies and who close on properties should have to ask basic questions about their clients before taking their money.”

He has been pushing for the ENABLERS Act, which the House passed in July. It would empower the Treasury Department to require so-called “gatekeepers” to the U.S. financial system — including certain lawyers, accountants and registered agents — to look into their clients and report suspicious activity, just as banks are required to do. It’s not clear whether the Senate will pass it, but the principle behind it is an important one: Americans who make a business model out of money laundering shouldn’t be allowed to get away with it.
Another big problem that the saga of Optima reveals is the secrecy of the U.S. real estate industry itself, which encourages the use of limited liability companies, shell companies and land trusts that often end up protecting the privacy and the holdings of the wealthy. Jay Westbrook, a retired city councilman in Cleveland, told me that Ukrainian oligarchs aren’t the only ones who hide their identities. Mr. Westbrook, who now works with land banks to clean up abandoned and neglected properties, said it is not uncommon for out-of-town investors to buy property under the names of various L.L.C.s and then walk away from their responsibilities at the first sign of trouble, leaving unpaid taxes and messes behind. In many jurisdictions that have not been deemed at “high risk” for money laundering, cash buyers can essentially purchase property anonymously, without anyone involved in the transaction recording and verifying their true identities.

His solution? To hold the wealthy to the same disclosure standards that working stiffs have to go through to get a mortgage.
Congress took a small but important step in this direction when it passed the Corporate Transparency Act in the waning days of the Trump administration, overriding a presidential veto. The new law directs the financial crimes bureau of the Treasury Department, known as FinCEN, to collect information from companies about their true ownership and keep it in a massive, confidential database that can be used by law enforcement for money laundering investigations. Eventually, this law could touch millions of businesses, forcing them to file an additional form. As long as the filing process isn’t onerous, the benefits of greater transparency should outweigh the hassle.
But this database won’t be available to the public, and it’s unclear exactly how accessible it will be for people in cities like Cleveland who may want to use it to figure out if a potential investor is a deadbeat or a kleptocrat. It’s also far from clear that FinCEN has the capacity to build and manage the massive database it has been ordered to create. A Government Accountability Office report found that the agency can take years to make use of other ownership information that it collects and inform law enforcement agencies about the information’s existence. Unless this data is used effectively, there’s no point in collecting it.
To be clear, these steps to combat money laundering are important. The United States has been ranked the most secretive financial jurisdiction in the world. A 2016 report by the Financial Action Task Force, an intergovernmental group that combats money laundering, gave the United States some embarrassingly low rankings, although some improvements have been made since then. To have strong credibility on the world stage in the fight against international corruption, the United States must continue these efforts. This is especially crucial now that the Biden administration has called corruption a core national security interest.

But it’s not clear that any of these new rules — as necessary as they might be — would stop another Optima.

Stephen Strnisha, the chief executive of the Cleveland International Fund, which pairs foreign investors with local business opportunities, lent the lion’s share of the package that Optima received to revamp the hotel. He has spent nearly two years in court trying to get that money back through a sale to a new owner. Greater transparency “would be a good thing,” he told me. But it might not have prevented Optima from buying up so much of Cleveland.
Even if he had known that Optima was owned by an oligarch, no allegations had been made public against Mr. Kolomoisky at the time, so the loan might have gone through anyway.

Mr. Strnisha assured me that neither the saga of Optima — nor the new rules that are being adopted to combat similar situations — will stop Cleveland’s comeback. “Cleveland doesn’t need dirty money,” he said, and the city will survive this. But smaller communities that have been more reliant on Optima’s investments have been hit far harder, he added. The cautionary tale of what shadowy money can do to struggling communities could prove to be the most effective anti-money laundering tool yet.
 
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