Last week, the UK Parliament passed long-promised reform to provide a window into the opaque British real estate market. This reform – desperately needed following countless exposés about financial abuses in the UK real estate sector, including recent revelations in light of Russia’s invasion of Ukraine – will have critical implications for deterring and investigating economic crime and sanctions evasion. The recent attention on illicit Russian oligarch funds only highlights the long-standing vulnerability of opaque Western real estate markets. As the U.S. works with other countries to pursue multilateral sanctions against Russia, it must follow the UK and expeditiously advance its own rules to improve transparency in the U.S. real estate sector.
There are many wealthy individuals and companies from Russia and around the world that invest legitimately in the U.K. and U.S. financial and property markets. However, the anti-corruption organization Transparency International UK’s new report reveals that up to £1.5bn of UK property is owned by Russians accused of financial crime or with links to the Kremlin. Take the example of the son of sanctioned oligarch, Mikhael Gutseriev, who was recently revealed to own a £40 million office block in London. The true figure for illicit wealth invested in the UK alone is said to be far higher, with almost 90,000 properties across the country owned by opaque companies which has made it difficult for the British Government, UK law enforcement and the public to know who truly owns them.
The UK legislation finalized last week will be a critical structural reform to provide law enforcement and the public the tools to root out illicit cash and increase the transparency of the UK real estate market. The legislation will create a public register of the owners of overseas companies that own or buy property in the UK, retrospectively applied to property purchases in England and Wales over the past 20 years, and since December 2014 in Scotland. It also makes reforms to the Unexplained Wealth Orders (UWOs) to ensure those who own property in a trust are brought within scope of these orders and to expand the definition of an asset’s ‘holder’. The register will be accessible to the public, making it the biggest reform to UK anti-money laundering policy since the creation of its beneficial ownership registry in 2016 and a standard setter for global real estate transparency.
The U.S. has its own transparency issues in real estate. In December, U.S. Treasury Secretary Janet Yellen stated, “…right now, the best place to hide and launder ill-gotten gains is actually the United States.” The August 2021 report by Global Financial Integrity (GFI) offered some insight into this problem by demonstrating that at least $2.3 billion has been laundered through U.S. real estate in the past five years. This includes three properties in NYC, worth $92 million, owned by Roman Abramovich who transferred his ownership to his ex-wife Zhukova just before a round of U.S. sanctions was announced in 2018. There is also the $88 million in NYC property Dmitry Rybolovlev bought for his daughter, held via trust, plus the Palm Beach mansion $95 million he bought from Trump in 2008.
In 2001, Congress identified the real estate sector as an industry that would be required to stand up anti-money laundering programs, but then the Treasury Department granted the sector a “temporary” exemption from meeting those obligations. Twenty years later, that exemption is still in place. FinCEN is now reassessing the exemption in light of ongoing and consistent abuse of the real estate sector.
Previously, FinCEN has taken important but inherently limited steps to stem money laundering in real estate–principally for information gathering purposes. Since 2016, a renewable Treasury pilot program – known as the real estate Geographic Targeting Orders (GTOs) – has required title agents to report to FinCEN the true, “beneficial” owner behind an entity making an all-cash purchase of real estate in up to 22 counties in the United States. These reports are only filed for all-cash residential transactions that exceed $300,000 in value. Additionally, the temporary nature of these orders demands that they be renewed every six months, introducing uncertainty for industry and increasing burden on the federal agency.
The Biden Administration announced, as part of the inaugural Strategy on Countering Corruption, that it would advance a permanent, nationwide rulemaking to address money laundering through real estate. FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) in December 2021 seeking public input on measures to tackle real estate money laundering.
In its comment to FinCen, GFI discusses how to transition from the information gathering GTOs into an effective comprehensive anti-money laundering regime. As recommended by the FACT Coalition and GFI, the U.S. must clean its own house by advancing a Treasury Department rulemaking which adopts a permanent and nationwide regime with no monetary reporting threshold for transactions.
A U.S. nationwide regime must also include a “cascading” reporting obligation for multiple real estate professionals, including title and escrow companies and agents, real estate agents and brokers, and real estate attorneys, applying to both transactions by legal entities and natural persons. The requirement to submit beneficial ownership information of both the buyer and the seller, as well as information on source of funds should be mandatory and should apply to both residential and commercial real estate.
All these factors need to be addressed as the U.S. moves to finally clamp down on pervasive real estate-based money laundering. Whether in the U.K. or U.S., commensurate laws and regulations, spurred in part by the hunt for Russian oligarch assets, must be matched by resources that fund government agencies to use information, investigate, and enforce the law. That’s why the FACT Coalition is calling on Congress to approve robust Fiscal Year 2023 funding for FinCEN to juggle the many jobs it’s been tasked with, including writing a rulemaking on real estate and tracking down Russian oligarch funds.