Author Archives: Ella Hawkins

How the U.S. Should Tackle Money Laundering in the Real Estate Sector

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It is no secret that foreign kleptocrats and other crooks like to stash their illicit cash in U.S. real estate (see here, here, here and here).  A recent report from Global Financial Integrity (GFI) found that more than US$2.3 billion were laundered through U.S. real estate in the last five years, and half of the reported cases of real estate money laundering (REML) involved so-called politically exposed persons (mainly current or former government officials or their close relatives and associates). The large majority of these cases used a trust, shell company, or other legal entity to attempt to mask the true owner of the property.

Shockingly, the U.S. remains the only G7 country that does not impose anti-money laundering (AML) laws and regulations on real estate professionals. But there are encouraging signs that the U.S. is finally poised to make progress on this issue. With the backing of the Biden Administration, the U.S. Treasury Department’s Financial Criminal Enforcement Network (FinCEN) has published an advance notice of proposed rulemaking (ANPRM) that proposes a number of measures and floats different options for tightening AML controls in the real estate sector. The U.S. is thus approaching a critical juncture: the question no longer seems to be whether Treasury will take more aggressive and comprehensive action to address REML; the question is how it will do so. And on that crucial question, I offer three recommendations for what Treasury should—and should not—do when it finalizes its new REML rules:

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Corruption and Trade Misinvoicing: A Closer Look at Colombia

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Trade misinvoicing—the misrepresentation of the price, quantity, origin, or quality of traded goods—is a serious problem. Misinvoicing deprives the government of revenue by enabling importers and exporters to evade taxes and duties, or to claim undeserved tax incentives. Consider the case of Colombia: According to estimates, in 2016 the country lost approximately US$2.8 billion in revenue due to trade misinvoicing (equivalent to roughly 5.2% of total Colombian tax revenues collected that year)—revenues that could have paid for Colombia’s 2018-2022 National Development Plan more than eight times over. Trade misinvoicing also plays a key role in so-called trade-based money laundering (TBML), as the under- or over-statement of value of traded goods is one way to move value across borders and disguise the origin of illicit wealth. This form of money laundering is especially attractive to criminals, in part because roughly 80% of global trade transactions do not involve bank financing and as a result are not subject to the anti-money laundering (AML) controls that apply to the financial sector. Myriad TBML cases can be found in countries where corruption is systemic and impunity reigns (see here, here, and here).

Corruption of customs officials is the lubricant that makes trade misinvoicing possible. As one illustrative example of the extent and impact of such corruption, consider the case of Humberto Angulo Montero, the former head of the Cartagena Office of Colombia’s National Directorate of Taxes and Customs (Dirección de Impuestos y Aduanas Nacionales, or DIAN). In 2015, following a nine-year investigation, Angulo was arrested for taking kickbacks from smuggling networks importing alcohol, cigarettes, textiles, and shoes. The investigation revealed that Angulo facilitated the under-reporting of goods by up to 50%, allowing the importers to make colossal profits. In return, the importers gave Angulo a share of those profits—a hefty enough share that his personal wealth increased an astounding 580% between 2003 and 2009. Angulo’s case may be extreme, but it is hardly unique.

Governments in countries like Colombia can and should do more to prevent this sort of corruption. While Colombia took an important step forward in 2015 by passing its Customs Law No. 1762, there is still much room for improvement. Here are four recommendations for making progress on this issue, which are tailored to Colombia but that may apply more broadly:

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Public Procurement in Peru: Three Urgent Reforms to Curb Corruption

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Peru is in the midst of yet another major corruption scandal, this one involving a cartel of companies called the Construction Club. The Club allegedly operated as a bid-rigging cartel for major public construction works, in which the members of the Club would decide which one of them would win any given public contract and at what price, and the other Club members would deliberately submit higher bids to create the illusion of a competitive process. What started as an antitrust scandal has turned into a corruption scandal, as the Club is also accused of bribing public officials (including former President Vizcarra) to “guarantee the functioning of the cartel”.

The alleged bribery and bid-rigging are shocking but not surprising. This sort of corruption is all too common in the public procurement process in Peru and elsewhere (see here, here, and here). The vulnerability to corruption stems largely from the lack of accountability and transparency in the public procurement process, as well as the lack of professionalism in the public service. Can anything be done to address these longstanding problems? While there is no simple or overnight solution, there are in fact a number of measures that Peru can and should adopt to address the corruption vulnerabilities in its public procurement process and reduce the likelihood of another incident like the Club scandal recurring in the future.

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Learning from the Collapse of CICIG, MACCIH, and CICIES: What Lessons for the Future?

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Six years ago, the world was celebrating one of the most innovative and promising investigative commissions to curb grand corruption: Guatemala’s International Commission Against Impunity in Guatemala (Comisión Internacional Contra la Impunidad en Guatemala, or CICIG). CICIG was a domestic-international hybrid organization that exposed sixty criminal networks, charged nearly 700 people, and took down high-level officials, including Guatemala’s sitting president, vice president, and head of the public prosecutor’s office  (see here, here, here, and here). CICIG was so successful that it inspired two of Guatemala’s neighbors, El Salvador and Honduras, to create commissions on a similar model: MACCIH in Honduras (created in 2016) and CICIES in El Salvador (created in 2019). The key element setting these commissions apart from traditional anticorruption agencies was their hybrid domestic-international setup. In all three cases, the commissioners were supported by an international body (the UN for CICIG and Office of American States (OAS) for MACCIH and CICIES), and the commissions were led by foreigners. The commissions had ambitious mandates, but also limited powers: They could not prosecute on their own, but rather had to work with the national prosecutor’s office. Initially, MACCIH and CICIES scored a few remarkable victories, taking down a handful of government officials. This fueled optimism that these institutions, together with CICIG, would prove to be a powerful and sustainable anticorruption innovation.

Now, several years later, the bloom is off the rose. None of these commissions are still operating. And the story of their demise is remarkably similar: In each country, the commission’s investigations got too close to the incumbent administration, ultimately leading the president to either terminate the commission’s mandate or let it expire (see here, here, and here). This all-too-familiar story highlights a difficult challenge in fighting corruption effectively, one that is not limited to these special hybrid commissions: The main point of creating independent anticorruption bodies is to make possible the investigation and prosecution of the politically powerful—those who might benefit from de facto impunity if investigations were left to the ordinary institutions of justice—but at the same time, these independent commissions are sustainable only as long as the politically powerful would not find it more expedient to shut them down.

It’s difficult to thread this needle, and I’m reluctant to second-guess the leaders of CICIG, MACCIH, and CICIES regarding their strategic choices. Still, the fates of these commissions suggest a few valuable lessons that might be applicable to other anticorruption agencies that find themselves facing a comparable dilemma:

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