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

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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Guest Post: The Ukraine Crisis Demonstrates (Again) that the U.S. Must Crack Down on Illicit Finance

GAB is pleased to welcome back Shruti Shah, the President of the Coalition for Integrity, to contribute today’s guest post:

Like so many of us, I am shocked and horrified by Russia’s invasion of Ukraine and unforgivable attacks on civilian targets. At the same time, I have been encouraged by the resistance to Russia’s unprovoked aggression—most obviously and importantly by the brave Ukrainians defending their homeland, but also by the response of the international community. The United States, the European Union, Canada, the United Kingdom, and other nations have announced coordinated sanctions against Russia, including cutting off major Russian banks from the SWIFT system and preventing Russia’s central bank from drawing on foreign currency reserves held abroad. In addition to sanctions targeted at Russia’s financial system, Western nations have also sought to use targeted sanctions aimed at oligarchs close to President Putin. The Biden Administration also announced a transatlantic task force to ensure the effective implementation of financial sanctions by identifying and freezing the assets of sanctioned individuals and companies and an interagency law enforcement group called KleptoCapture.

This renewed focus on the corruption of the Russian political and economic elite is welcome. Russia’s deep-rooted corruption is one of the reasons that Putin has been free to engage in such outrageous acts. He relies on the security services and corrupt oligarchs to protect him. Oligarchs also serve as his personal wallet. Yet for far too long, these corrupt oligarchs have lived lives of luxury off of ill-gotten wealth, which they have used to purchase luxury property in places like New York and London. Yet while some oligarchs and Russian political figures were already the subject of targeted sanctions prior to the recent attack on Ukraine. Overall the West had been far too complacent. The Ukraine tragedy seems to have prompted Western governments to pay more attention to this problem. Indeed, the new sanctions are significant in both scope and size, and they welcomed by the Coalition for Integrity and most other anticorruption activists around the world.

But there’s more work to be done. It’s time for Western governments to ask some hard questions about how these corrupt elites were able to use their ill-gotten gains to buy luxury property and assets and enjoy their wealth in places like New York and in London for so long, and about the role of Western “enablers” in hiding the sources of their wealth and shielding questionable transactions from scrutiny. And, to turn to more specific priorities for policy reform in the United States, there are three specific things that the U.S. government should do to crack down further on illicit finance and thereby advance the agenda laid out in the White House’s Strategy On Countering Corruption: Continue reading

Why the U.S. Corporate Transparency Act Should Cover Trusts

In late 2020, anticorruption and transparency advocates scored a major victory: the passage of the U.S. Corporate Transparency Act (CTA), which requires U.S. corporations, limited liability companies, and “other similar entities” to disclose the identities of their true beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). FinCEN is currently in the process of drafting regulations to implement the CTA. One of the key questions FinCEN is considering concerns the scope of the CTA’s coverage—in particular whether trusts should be considered “similar entities” to which the CTA’s disclosure obligations apply.

The answer ought to be a resounding yes. As the recent revelations from the International Consortium of Investigative Journalists (ICIJ) stories on the so-called Pandora Papers has made all too clear, trusts are prime vehicles for kleptocrats, organized crime groups, and others who want to hide their illicit assets. To be sure, trusts have legitimate uses, such as estate planning, charitable giving, and certain (lawful) strategic business purposes. But the potential for abuse means that it is essential to increase transparency and oversight of trusts.

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A Few Thoughts on the Passage of the U.S. Corporate Transparency Act

[Note: I drafted the post below earlier this week, before yesterday’s shocking events in the U.S. Capitol. I mention this only because it might otherwise seem odd, and perhaps a bit tone-deaf, to publish a commentary on new corporate transparency rules when we just saw an attempted insurrection incited by the siting U.S. President. I don’t really have anything to say about the latter events (at least nothing that others haven’t already said), so I decided to go ahead and publish the post I planned to publish today anyway.]

Last week, as I suspect many readers of this blog are well aware, the United States Congress enacted one of the most significant anticorruption/anti-money laundering (AML) reforms in a generation. The Corporate Transparency Act (CTA), which was incorporated as part of the annual National Defense Authorization Act (NDAA), will require—for the first time in the United States—that corporations, limited liability companies, and similar entities will have to provide the U.S. government (specifically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)) with the identities of the ultimate beneficial owners of those entities. That beneficial ownership information, though not made publicly available, will be provided to law enforcement agencies, as well as to financial institutions conducting due diligence (with customer consent). This reform will make it substantially harder for kleptocrats and their cronies—as well as other criminals, including human traffickers and terrorists—to conceal and launder their assets in the United States through anonymous shell companies, and will make it substantially easier for law enforcement to “follow the money” when investigating possible criminal activity.

This important reform has already gotten a ton of coverage in the anticorruption/AML community (see here, here, here, and here), as well as the mainstream media (see here, here, here, and here), though mainstream coverage has understandably been overshadowed by both the coronavirus pandemic and President Trump’s attempts to subvert the recent election. And we’ve had quite a bit of discussion of the issue on GAB prior to the passage of the NDAA (see, for example, here, here, here, here, and here). So, I’m not sure I really have that much to add to what others have already said. Nevertheless, it felt strange to allow this landmark event to go entirely undiscussed on GAB, so at the risk of self-indulgence, I’d like to throw out a few additional thoughts and observations related to the CTA. Continue reading

It’s Time for the United States to Mandate Enhanced Scrutiny of Domestic Politically Exposed Persons

In February, former Baltimore mayor Catherine Pugh became the latest in the long line of Maryland politicians sentenced to prison for corruption-related crimes. According to the Department of Justice, Pugh sold copies of a self-published children’s book series to a variety of local organizations that already had or were attempting to win contracts with the city and state governments. Over eight years, Pugh and her longtime aide failed to deliver, re-sold, and double-counted the orders, squirrelling away nearly $800,000 into bank accounts belonging to two shell corporations registered to Pugh’s home address. Pugh, who did not maintain a personal bank account, used the funds to purchase and renovate a private home as well as fund her re-election campaign, among other activities.

These facts are classic red flags in the anti-money laundering (AML) world. Pugh would have had more difficulty executing this corrupt scheme, and might have been brought to justice much earlier, if the banks handling her illicit revenues had conducted the sort of enhanced customer due diligence and monitoring that financial institutions are required to perform on so-called “politically exposed persons” (PEPs), as well as their immediate family and close associates. While there is no uniform definition, PEPs are typically understood to be someone who holds a powerful government position, one that provides greater opportunities for engaging in embezzlement, bribe-taking, and other illicit activity. (Defining a PEP’s “close associates” is more challenging, but the category is generally thought to include someone like Pugh’s aide, who has the requisite status and access to carry out transactions on behalf of the PEP.) But U.S. financial institutions were not required to subject Pugh or her aide to enhanced scrutiny, because under the U.S. AML framework, such scrutiny is only obligatory for foreign PEPs, not domestic PEPs.

For many years, that was the standard approach internationally. But a new consensus is emerging that financial institutions should subject all PEPs, both domestic and foreign, to enhanced scrutiny. This position has been embraced by the Financial Action Task Force (FATF), the international body which sets standards for combating corruption in the international financial system, by the Wolfsberg Group, an association of the world’s largest banks, and by the European Union’s Fourth AML Directive. But far from joining the growing tide of domestic PEP screening, the United States seems to be swimming against it. The United States is one of the few OECD countries that does not require domestic PEP screening, and this past August, the Financial Crimes Enforcement Network (FinCEN), the primary U.S. agency tasked with investigating financial crimes, reiterated that it “do[es] not interpret the term ‘politically exposed persons’ to include U.S. public officials[.]”

This is a mistake. It’s time that the United States joined the international consensus by formally requiring enhanced scrutiny of domestic PEPs as well as foreign PEPs. Continue reading

Reforming the US AML System: Some Proposals Inspired by the FinCEN Files

Last week, I did a post with some preliminary (and under-baked) reflections on the so-called “FinCEN Files” reports by BuzzFeed News and the Independent Consortium of Investigative Journalists (ICIJ). These stories relied in substantial part on a couple thousand Suspicious Activity Reports (SARs) that had been filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and leaked to a BuzzFeed journalist in 2018. The documents, and the reporting based on them, highlight the extent to which major Western banks assist suspected kleptocrats, terrorists, and other criminal actors move (and launder) staggering amounts of money all over the world, and highlight the deficiencies of the existing anti-money laundering (AML) system.

What can we do to rectify this depressing state of affairs? Much of the commentary I’ve seen so far (both in the FinCEN Files stories themselves, and commentary on the reporting from other sources) emphasizes the need for more individual criminal liability—putting bankers in jail, not just fining banks. Even when banks are threatened or hit with penalties, the argument goes, this doesn’t really have much of a deterrent effect, partly because even what seem like very large monetary sanctions are dwarfed by the profits banks stand to make from assisting shady clients with shady transactions, and partly because the costs of monetary sanctions are mostly passed on to the bank’s shareholders, and don’t really hurt the individuals responsible (or the managers who tolerate, or turn a blind eye to, misconduct).

I’m quite sympathetic to both of these arguments, though with a couple of important caveats. Caveat number one: The absence of individual prosecutions of bankers is sometimes attributed to the fecklessness—or, worse, the “soft” corruption—of federal prosecutors, but as I noted in my last post, I tend to think that the more significant obstacle is the fact that it is very difficult in most cases to prove beyond a reasonable doubt that the that bankers or other intermediaries had the requisite level of knowledge to support a criminal money laundering conviction. Caveat number two: I don’t think we should be too quick to dismiss the idea that levying significant monetary penalties on banks can affect their behavior. After all, these institutions are motivated overwhelmingly by money, so hitting them in the pocketbook is hitting them where it hurts. The problem may be less that monetary sanctions are inherently ineffectual in this context, but rather that they are too low and too uncertain to have a sufficient impact on incentives and behavior.

In that vein, I want to suggest a few legal reforms that might make the U.S. AML system function more effectively. I acknowledge that these are “inside the box” ideas, insofar as they seek to make the existing framework more effective rather than to drastically transform that system. That may make these proposals feel unsatisfying to some, though I suspect the proposals will seem radical, even outlandish, to others. I should also acknowledge that I am not at all an AML expert, so it’s quite possible that the discussion below will contain errors or misunderstandings of the law or the system. But, in the spirit of trying to stimulate further discussion by those who really understand this field, let me throw out a few ideas. Continue reading

New Podcast Episode, Featuring Frederik Obermaier

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, my collaborators Nils Köbis and Christopher Starke welcome back to the podcast Pulitzer Prize-winning investigative journalist Frederik Obermaier of the German publication Süddeutsche Zeitung, who is also affiliated with the International Consortium of Investigative Journalists. A year and a half ago, I had the opportunity to interview Mr. Obermaier on the podcast about his work breaking the Panama Papers story, which shed unusual light on how corrupt officials and other criminals use anonymous companies to launder the proceeds of their illegal activity. In the new episode, Mr. Obermaier discusses the so-called FinCEN Files (which I blogged about last week): the leak of over two thousand suspicious activity reports (SARs) filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). Mr. Obermaier explains why and how the FinCEN Files reveal how badly broken the international anti-money laundering (AML) system is, the likely reasons for the ineffectiveness of the system, how the ICIJ and its journalistic collaborators handled such a sensitive story, and the possible political implications of the stories based on the FinCEN Files reporting.

You can find this episode here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

FinCEN Is Seeking Public Input on Proposed Amendments to Its AML Regulations. AML Advocates Should Comment!

In my last post, I discussed the so-called “FinCEN Files” (leaked Suspicious Activity Reports (SARs) filed by banks with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)), and the reports from BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) based on those leaked documents. This reporting highlighted serious weaknesses in the current anti-money laundering (AML) system, both in the United States and globally. Perhaps coincidentally (but perhaps not), just a couple of days before the FinCEN Files stories went public, FinCEN issued an Advanced Notice of Proposed Rulemaking (ANPRM), seeking public comment on various proposed changes to its current regulations implementing the AML provisions of the Bank Secrecy Act (BSA). The comment period will remain open until November 16th, 2020. Of course, it’s never clear how seriously federal agencies will take public comments, but in at least some circumstances sophisticated comments, supported by evidence and analysis, can move the needle, at least somewhat, on agency policy. So, I very much encourage those of you out there in ReaderLand, especially those of you who work at organizations that have expertise in this area and might be well-positioned to submit the sort of detailed, substantive comments that stand a chance of making some practical difference, to submit your comments before that deadline. (Comments can be submitted through the federal government’s e-rulemaking portal, referencing the identification number RIN 1506-AB44, and the docket number FINCEN-2020-0011, in the submission. The link above goes directly to the comment section for this rule, though, so you don’t need to enter that info again if you follow the link.)

The full ANPRM is not that long, but let me provide a very quick summary, highlighting the main proposal under consideration and the specific questions on which FinCEN is seeking public input. Continue reading

The FinCEN Files: Some Scattered Preliminary Thoughts

As most readers of this blog are likely well aware, last week BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) released a bombshell story about international money laundering through major financial institutions. The collection of stories—more of which are likely in the works—is based on an analysis of a large trove of leaked documents from the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which the journalists reporting on the case have dubbed the “FinCEN Files.” These files consist of so-called Suspicious Activity Reports (SARs), which are documents that, pursuant to a U.S. statute called the Bank Secrecy Act (BSA), banks and certain other institutions are legally required to file with FinCEN whenever the bank has reason to suspect that a transaction it’s handling involves money laundering or some other criminal activity, or simply lacks an apparent lawful purpose. The bank does not inform its customer that it’s filing a SAR—indeed, the BSA prohibits banks from doing so. FinCEN can use SARs to detect and investigate financial crime, and may share SARs with other law enforcement agencies in the context of an investigation, but otherwise SARs are supposed to remain strictly confidential. However, in October 2018 a FinCen employee leaked over 2,100 SARs to a BuzzFeed reporter. (While BuzzFeed and ICIJ do not identify their source, it is almost certain that this former employee, who pled guilty last January to illegally leaking the documents, is the source.) Journalists with BuzzFeed and the ICIJ analyzed these documents and have published multiple stories (see, for example, here and here) about what these documents reveal regarding the global anti-money laundering (AML) regime, together with a subset of the actual SARs. (The journalists released only those SARs that support reporting in specific stories, principally SARs that pertain to known criminal figures. They are not publishing a database of all the SARs in their possession due to concerns about privacy of the individuals involved, many of whom are not currently accused of any wrongdoing.)

The picture that these stories paint of the global AML regime is not a pretty one. While the stories are lengthy and detailed, and discuss many different aspects of the overall issue, if I had to try to distill all this reporting into a simple punchline, it would go something like this: The leaked SARs reveal that the major banks repeatedly handled huge and highly suspicious transactions for corrupt kleptocrats, organized crime groups, terrorists, fraudsters, sanctions evaders, and others, and relatively little was done, by the government or the banks, to stop it. As the ICIJ puts it, “The FinCEN Files show trillions in tainted dollars flow freely through major banks, swamping a broken enforcement system.” Or as BuzzFeed puts it, the FinCEN files reveal “how the giants of Western banking move trillions of dollars in suspicious transactions,” while “the US government, despite its vast powers, fails to stop it.”

I’m still working my way through all the FinCEN Files stories, and I’m certainly no expert on money laundering or banking regulation. (I come to this issue sideways, from an interest in anticorruption, rather than any professional expertise in AML as such.) But, in the interest of getting some ideas down in writing and perhaps stimulating some further conversation on what we can learn from the FinCEN Files reporting, let me share a few scattered, somewhat disconnected preliminary observations. Continue reading

Are Legislative Changes to US AML Rules Finally on the Way? Some Thoughts on Tomorrow’s Subcommittee Hearing

Although the United States has been a leader in the fight against global corruption in some respects—particularly in its vigorous enforcement of the Foreign Corrupt Practices Act and, at least until recently, its diplomatic efforts—there is widespread agreement in the anticorruption community that the United States has not done nearly enough to address the flow of dirty money, much of it stolen by kleptocrats and their cronies, to and through the United States. Effectively addressing this problem requires updating the US legislative framework, a task made difficult by the checks and balances built into the federal legislative process, coupled with high levels of political polarization. Yet there are reasons for cautious optimism: Thanks in part to skillful lobbying efforts by several advocacy groups, and aided in part by the Democrats taking control of the House of Representatives in the most recent mid-term elections, it looks as if there’s a real chance that the current Congress may enact at least some significant reforms.

Three of the reform bills under consideration are the subject of a hearing to be held tomorrow (Wednesday, March 13, 2019) before the House Financial Services Committee’s Subcommittee on National Security, International Development, and Monetary Policy. That hearing will consider three draft bills: (1) a draft version of the “Corporate Transparency Act” (CTA); (2) the “Kleptocracy Asset Recovery Rewards Act” (KARRA); and (3) a draft bill that currently bears the unwieldy title “To make reforms of the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (which I’ll refer to as the Bank Secrecy Act (BSA) Amendments). The subcommittee’s memo explaining the three proposals is here, and for those who are interested, you can watch a live stream of the subcommittee hearing tomorrow at 2 pm (US East Coast time) here.

For what it’s worth, a few scattered thoughts on each of these proposals: Continue reading