Wealthy Russian oligarchs are likely investing in U.S. commercial real estate and trying to sidestep sanctions imposed after the invasion of Ukraine last year, according to a warning sent to banks by the Treasury Department's financial crimes and intelligence unit.
The Financial Crimes Enforcement Network (FinCEN) told banks to be on the lookout for suspicious commercial real estate (CRE) transactions that may be carried out by sanctioned Russian elites, oligarchs, their family members and entities they use to move their wealth.
FinCEN's alert noted that the agency "assesses that sanctioned Russian elites and their proxies are likely attempting to exploit several vulnerabilities in the CRE market in order to evade sanctions."
"Thanks to international pressure and the economic restrictions that more than 30 countries have imposed on Russia for its brutal war against Ukraine, sanctioned Russian elites are increasingly left with fewer options for moving and hiding their ill-gotten wealth," FinCEN Acting Director Himamauli Das said in a statement.
Commercial real estate presents an attractive opportunity to potentially avoid sanctions because they "routinely involve highly complex financing methods and opaque ownership structures that can make it relatively easy for bad actors to hide illicit funds in CRE investments" the alert said.
Private companies and investors involved in the CRE market regularly use trusts, shell companies, pooled investment vehicles and other legal entities on both sides of transactions. Those legal structures allow investors to limit their legal, tax and financial liability.
CRE transactions also typically involve multiple layers of those legal entities and may have numerous investors behind them, which can make it challenging for financial institutions to identify all the beneficial owners of a particular venture.
That lack of transparency and stability of returns has made the transactions particularly attractive to foreign investors and entities. Foreign investors tend to make up a significant portion U.S. CRE transactions – the FinCEN alert notes that 8.4% of transactions in a 2021 survey involved at least one foreign client living abroad, and the figure was above 10% for several years before the pandemic.
FinCEN identified four methods by which sanctioned Russian oligarchs and elites may attempt to use the CRE market to evade sanctions:
- Pooled investment vehicles, including offshore funds, can be used to skirt financial institutions' customer due diligence (CDD) obligations and Bank Secrecy Act reporting requirements. FinCEN notes that even if banks lower their CDD threshold from a 25% stake in the fund to 10% – which is typical for high-risk customers – investors looking to evade sanctions may simply lower their fund just below that threshold to avoid detection.
- Shell companies and trusts based in the U.S. or abroad may be used by sanctioned Russian elites to conceal their ownership in a CRE property, particularly in high-value properties with multiple layers of legal entities and trusts. Legitimate real estate development businesses and asset management companies may unwittingly be drawn into sanctions evasion schemes through the use of these structures.
- Third parties – including relatives, friends or business associates – may be utilized by sanctioned Russian elites or their proxies to set up the legal entities used in illegal CRE transactions.
- Inconspicuous CRE investments that provide stable returns can be attractive for sanctioned Russian elites and their proxies because they're less likely to be noticed by the general public or draw unwanted attention. FinCEN notes these may "vary tremendously in kind" and are just as likely to be attempted in small- to mid-sized urban areas as in the largest cities.
FinCEN is an agency within the Treasury's Office of Terrorism and Financial Intelligence that gathers financial intelligence and seeks to combat money laundering, financing of terror groups, and other financial crimes. When banks file suspicious activity reports about transactions suspected to be illegal in nature to the Treasury Department, FinCEN is the subagency that analyzes them and makes them available to law enforcement officials for their investigations.
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