Tag Archives: Geographic Targeting Orders

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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Why Didn’t the Disclosure of the Beneficial Owners of Real Estate Make a Difference?

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Anticorruption advocates have long thought that real estate and money laundering go together like a horse and carriage. At least in the United States. With a little help from a friendly lawyer, a corrupt official or other big time criminal has until recently been able to use an anonymous shell company to hide their money by buying a luxury mansion or pricey condominium. Because the real estate registry listed the company, not the crook, as the owner, the real owner’s identify was hidden. From law enforcement, the media, and civil society.

In 2016 the U.S. government made a start on ending this abuse. It began to require the disclosure of the beneficial owner of any corporation which paid cash for properties in cities where real estate purchases were likely used to hide stolen money.  Initially, and as expected, the new rule seemed to have the desired effect: all cash purchases of real estate appeared to drop significantly — indicating a gaping loophole in the antimoney laundering laws had been plugged.

But the first paper published by the Anticorruption Data Collective finds to the contrary.  Authors Matt Collin of the World Bank and Brookings Institution, Florian M. Hollenbach of the Copenhagen Business School, and David Szakonyi of George Washington University report the rule had no impact “on the number of, the total price volume, or the share of corporate all-cash purchases in targeted counties.”  Indeed, they could find “little difference in the patterns of corporate all-cash purchases versus a ‘placebo’ outcome that should not be affected by the policy.”

Beneficial ownership disclosure is a favorite reform of anticorruption advocates. One that would seem to have an obvious, immediate salutary effect. Why didn’t it here?

The authors offer two reasons, and suggest there could be others. Their paper demands careful attention. One because of the implications for beneficial ownership disclosure rules, and second, and more importantly, because it shows how important it is to carefully assay anticorruption reforms. Their paper is here and comments are welcomed.  And GAB looks forward to more work by the Anticorruption Data Collective.

Little Trust on the Prairie

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Offshore finance has always been glamorous. The world’s tax dodgers and kleptocrats seem to favor the same jurisdictions as James Bond, places with soring vistas, crystalline waters, and plenty of five-star resorts. Yet as the recent release of the Pandora Papers makes clear, the geography of offshore finance has shifted in recent years. For those seeking to obscure the origins of their wealth, South Dakota now eclipses Grand Cayman. Customer assets in South Dakota trusts have more than quadrupled over the past decade to $360 billion. And while there are of course legitimate reasons to set up a trust, trusts offer an ideal mechanism—even better than shell companies—for concealing ownership and preserving anonymity.

South Dakota is an especially attractive jurisdiction for setting up such trusts because it offers not only low costs and flexibility, but also a combination of privacy and control that those seeking to hide their wealth find attractive. Notably, South Dakota automatically seals trust records, preventing outsiders from identifying settlors and beneficiaries, and does not require publicly filing trust documents. (Although South Dakota’s privacy laws do not shield settlors and beneficiaries from federal law enforcement, they do conceal the trust from journalists and the private parties, making it less likely that those involved in the trust come to the attention of government authorities.) South Dakota also allows the creation of “dynasty trusts,” which exist in perpetuity, as well as “directed trusts,” which give families and their advisors maximum control in managing the trust’s affairs. Unusually, South Dakota also allows trusts whose settlor and beneficiary are the same person.

These rules make South Dakota trusts particularly appealing to business and political elites whose assets may be the target of civil as well as criminal litigation. Indeed, the Pandora Papers identified, among those who used South Dakota trusts to conceal their assets, a Colombian textile baron who had sought to launder international drug proceeds, a Brazilian orange juice mogul who allegedly underpaid local farmers, and the former president of a Dominican sugar producer who was accused of exploiting workers. With banks and even real estate agents wary of taking large sums from officials in corrupt regions, a U.S. domiciled trust offers a veneer of legitimacy.

Allowing states like South Dakota to join the archipelago of secrecy jurisdictions where bankers and trustees ask few questions undermines the United States’ fight against global corruption. Indeed, attacking those who abet foreign corruption while welcoming dirty money as an investment strategy is not just hypocritical but self-defeating. The rise of anonymous domestic trusts in the United States demands and an aggressive response from federal regulators. That response can and should include the following measures:

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Ownership Transparency Works: Geographic Targeting Orders in the US Real Estate Market

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The anticorruption community, along with those concerned about tax evasion, fraud, and other forms of illicit activity, has made anonymous company reform a high priority on the reform agenda. It’s not hard to see why: Kleptocrats and their cronies, as well as other organized criminal groups, need to find ways to hide and launder their assets, and to do so in ways that are difficult for law enforcement authorities to trace. Moreover, those whose legitimate sources of income would be insufficient to obtain luxury assets would like to conceal their ownership of such assets, as the ownership itself could arouse suspicion, and might make the assets more vulnerable to forfeiture.

So-called “know-your-customer” (KYC) laws in the financial sector have made it much more difficult—though, alas, far from impossible—for account owners to conceal their identities from the banks and government overseers, at least in the US and most other OECD countries. But it is still far too easy for criminals to purchase substantial assets in wealthy countries like the United States while keeping their identities hidden. All the bad actor needs to do is, first, form a company in a jurisdiction that does not require the true owner of the company to be disclosed and verified to the government authorities, and, second, have this anonymous shell company purchase assets in a transaction that is not covered by KYC laws. Step one is, alas, still far too easy. Though we often associate the formation of these sorts of anonymous shell companies with “offshore” jurisdictions like the British Virgin Islands, in fact one can easily form an anonymous shell company in the United States. Step two, having the anonymous company purchase substantial assets without having to disclose the company’s owner, is a bit trickier, because you’d need to avoid the banking system. But you can get around this problem by having your anonymous company purchase assets with cash (or cash equivalents, like money orders or wire transfers), so long as no party to the transaction is under obligations, similar to those imposed on banks, to verify the company’s true owner.

One of the sectors where we’ve long had good reason to suspect this sort of abuse is common is real estate, especially high-end real estate. Though money laundering experts had long been aware of the problem, the issue got a boost from some great investigative journalism by the New York Times back in 2015. The NYT reporters managed to trace (with great effort, ingenuity, and patience) the true owners of luxury condos in one Manhattan building (the Time Warner Center), and found that a number of units were owned by shady characters who had attempted to conceal their identities by having shell companies make the purchases.

The US still hasn’t managed to pass legislation requiring verification of a company’s true owners as a condition of incorporation, which would be the most comprehensive solution to the anonymous company problem. Nor has the US taken the logical step of extending KYC laws to real estate agents across the board. But starting back in 2016, the US Treasury Department’s Financial Crimes Enforcement Network (known as FinCEN) took an important step toward cracking down on anonymous purchases of luxury real estate by issuing so-called Geographic Targeting Orders (GTOs). And thanks to some excellent research by the economists C. Sean Hundtofte and Ville Rantala (still unpublished but available in working paper form), we have strong evidence that many purchasers in the luxury real estate market have a strong interest in concealing their true identities, and that requiring verification of a company’s ultimate beneficial owners has a stunningly large negative effect on the frequency and aggregate magnitude of anonymous cash purchases. Continue reading →

Guest Post: Encouraging Signs for a Possible U.S. Legislative Crackdown on Anonymous Companies

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Gary Kalman, the Executive Director of the FACT Coalition, contributes today’s guest post:

A little over a year ago, the International Consortium of Investigative Journalists (ICIJ) released the Panama Papers, a treasure trove of information and a window into the world of financial secrecy. In some ways, much of what the Panama Papers revealed was already well known. Previous estimates put the amount of money hidden in offshore secrecy havens somewhere between $8 trillion and $32 trillion. In 2015, The New York Times published an impressive five-part series on the use of anonymous shell companies to purchase prime real estate in New York City. Prior to that, the U.S. Justice Department filed a lawsuit (which they just won on June 29th) to force the forfeiture of New York property secretly owned by the government of Iran in direct violation of economic sanctions. And so on. Yet it is hard to deny the captivating intrigue of the specific stories in the Panama Papers involving Russian kleptocrats, world leaders, athletes, movie stars, and others.

The big question is: more than a year later, did anything change? As I recently observed, there are indeed encouraging signs around the world, particularly in Great Britain, several EU member-states, and some developing countries such as Ghana. What about the United States? After all, with U.S. transparency laws ranging from weak to non-existent, there is little need to go to Panama to launder one’s dirty money. While Delaware gets the most notoriety, no state collects information on the true (“beneficial” owners of corporations. In fact, in its recent assessment of the U.S., the Financial Action Task Force, an international anti-money laundering body, noted that for all the progress the U.S. has made, the lack of beneficial ownership transparency remains a glaring weakness. And in the past, when some U.S. legislators – most notably former U.S. Senator Carl Levin (D-MI) – pushed legislation to require states to collect beneficial ownership information, the proposed bills never received so much as a hearing.

That may be about to change, and anticorruption advocates should take note. Continue reading →