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Money Laundering Risks in Commercial Real Estate: An Analysis of 25 Case Studies

By , &

How and why do the criminal and corrupt stash ill-gotten proceeds in the commercial real estate sector?

To better understand the money laundering risks in this industry, the Anti-Corruption Data Collective (ACDC), the FACT Coalition, and Global Financial Integrity (GFI) scoured news articles, government indictments, and other publicly available information, constructing for the first time a systematic overview of how suspicious money may be entering U.S. commercial real estate.

This new report identifies 25 cases in which illegal, allegedly illicit, or suspicious funds were funneled into commercial property over the last 20 years, with a total value of property purchased exceeding $2.6 billion. To no surprise, California, Florida and New York are some of the most favored locations for these illegal investments, but criminals stashed money across some 20 different states.

This money originated from around the globe: U.S. commercial real estate attracted suspicious funds from 14 countries identified in the report, including Iran, North Korea, Kazakhstan, Russia and Mexico. As varied as the sources of funds were, so too were the types of properties involved. Hotels, shopping malls, supermarkets, a music studio and an equestrian facility were snapped up by highly suspicious actors, in addition to more pedestrian office high-rises.

This report summarizes these cases, identifies the need for reform, and makes recommendations for the U.S. Treasury to bring comprehensive anti-money laundering safeguards to the colossal U.S. commercial real estate industry.

To address the flow of dirty money through U.S. commercial real estate markets, the Treasury should move quickly to:

  1. Adopt a reporting obligation for multiple real estate professionals in a cascading order to ensure the requirement falls on at least one U.S.-based entity involved in any given transaction, from both the buyer and the seller. As attorneys are legally required to be part of the closing process in almost 20 states, attorneys should be included with specific reference to the function they perform in the transaction;
  2. Cover transfers of ownership that do not constitute a sale: Current rules only refer to purchases of real property by a legal entity. However, numerous cases of real estate money laundering simply involve the transfer of ownership or creation of equitable interest in the property without an actual sale. FinCEN should expand the types of transactions covered to include direct/indirect transfers of ownership or creation of equitable interest in the property; and
  3. Cover transactions by trusts: An increasing proportion of housing is now owned by legal entities and arrangements, including trusts. In Los Angeles, for example, 23% of rental units are owned by trusts. Both foreign and some domestic trusts are excluded from the purview of the Corporate Transparency Act. Transactions by all different classes of legal entities and legal arrangements be included in any prospective rule.