Now is the Time for the Biden Administration to Crack Down on Money Laundering Tools that Reward Kleptocrats and Encourage Environmental Damage

(Note: This is the fourth in a series of FACT blogs directly connecting our tax justice and anti-corruption work to the climate crisis.)

With the global climate summit COP26 just concluded and the Summit for Democracy – with its emphasis on combating corruption – right around the corner, now is the perfect time for activists to bring together the fights against corruption and climate change. FACT has recently highlighted the central role that anonymous shell companies play in enabling environmental destruction through financial secrecy. Banning them is a key first step, but kleptocrats and environmental criminals still have other tools for storing and abusing their ill-gotten natural resource wealth. As the Pandora Papers have reaffirmed, the United States plays a singular role in attracting, legitimizing, and protecting illicit financial gains. Recognized regulatory weaknesses with respect to U.S. real estate markets and private investment vehicles, in particular, allow environment-plundering kleptocrats to launder the profits of their crimes through otherwise secure and stable U.S. markets, incentivizing them to continue their unsustainable and illegal business to the detriment of the global climate, the developing world, and America’s working families.

Palaces of Plundered Wealth

A critical first step in keeping bad actors out of the U.S. financial system is simply to have the regulatory rules necessary to identify them. Throughout most of the U.S., however, kleptocrats and criminals can purchase real estate anonymously through all-cash purchases, giving them the cover to spend dirty money with no oversight by anti-money laundering authorities. 

As a result, kleptocrats have flocked to the U.S. with cash in hand to buy up glitzy U.S. properties. This comes as no surprise; for those with lots of tainted dollars to spend from environmental crimes, laundering it through U.S. real estate is an attractive store of wealth, an investment, and a display of power and prestige all in one. 

This has led to a string of high-profile cases connected to environmental crime with investigators finding well-known kleptocrats buying up multi-million dollar residences around Miami, and New York using bribes and embezzled funds connected to mining and petroleum extraction in developing countries. In allowing dirty money to flood real estate, the U.S. rewards criminals for the environmental and financial crimes that they commit by giving them the means to enjoy the profits of their crimes and to enjoy the rule of law so often missing in their home countries. Still worse, the damage that produced these profits often follows it to the U.S. communities in which kleptocrats choose to store their wealth. The exorbitant prices they are willing to pay can push up land prices and turn main streets into ghost towns

The massive scale of this operation has recently garnered the attention of anti-corruption advocates like FACT and our members such as Global Financial Integrity. In their bombshell report released this year, “Acres of Money Laundering,” they reveal that bad actors had laundered $2.3 billion in U.S. real estate in the last five years alone.

Private Investments Pose New Problems

Real estate is not the only regulatory gap we need to address to stem illicit finances flowing through the U.S. economy.  Unregistered investment companies and investment advisors operating in the U.S. currently have no anti-money laundering obligations under the Bank Secrecy Act. As of now, investment advisors have no requirement to even ask clients about the source of their money. This has opened a prime opportunity to launder money through hedge funds and private equity markets, and bad actors are taking note. According to a leaked 2020 report, the FBI had “high confidence” that criminals have now turned to the more than $10 trillion U.S. private investment market as an increasingly attractive venue for money laundering. 

As organized crime gangs and sanctions evaders have picked up the practice, it is all too likely that environmental criminals and kleptocrats have also begun to launder and benefit from their plunder through U.S. private investment. Already, we have seen evidence of U.S. private investment firms advising illegal and unsustainable businesses how to build a “creative and mutually beneficial [corporate] structure to enable” continued expansion and destruction. Not only does the lack of transparency enable this form of laundering and unsustainable investment, it also makes it difficult to track, leaving the real scope of the crisis out of view of both legal authorities and anti-corruption and environmental activists. 

The Biden Administration has the Means to Defend U.S. Financial Markets and Strike at Environmental Crime

The abuse of U.S. real estate and private equity underscore a fundamental problem of secrecy. It comes as no surprise that criminals and kleptocrats will succeed in laundering profits when authorities and activists can’t follow the money. This is how they have built a $281 billion industry out of environmental devastation. Now is the time for the Biden administration to shine a light on these practices. Treasury Secretary Yellen can take action without any new mandate from Congress. 

Currently, the Geographic Targeting Orders (GTOs) issued by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) require beneficial ownership information of buyers in all-cash residential real estate purchases in select U.S. jurisdictions. If the administration moved to make these disclosures under the GTOs nationwide, permanent, without cash thresholds, and inclusive of commercial real estate purchases, it would be a major step towards closing off U.S. real estate from illicit funds. 

Likewise in the case of private investments, the Biden administration already has the tools it needs to make a major move against illicit finance. The administration could build on and expand the work of a 2015 proposed rule by subjecting registered investment advisors to anti-money laundering obligations. By reviving the draft rule and including other actors in the private investment sector — including unregistered investment companies and advisers to all private funds, such as hedge funds, private equity, family offices and rural business investment companies — FinCEN could shore up the integrity of the US private investment sector and require that these entities understand with whom they are doing business. 

A Rare Moment to Advance Anti-Corruption, Environmental Protection, and the Fight Against Climate Change

The United States has centered the fight against corruption and illicit wealth in its national security policies, and has even called out the real estate industry by name for its weakness to money laundering. These actions, paired with growing concern at FinCEN over an “upward trend in environmental crimes and associated illicit financial activity,” point to a rare opportunity to bring together the climate and corruption fights. With fighting corruption one of three themes of the Summit for Democracy,  now is the perfect time for the Biden administration to both follow up on its commitments and advance immediate measures to create transparency in the U.S. real estate and private investments markets.