Originally published on the ACSblog.
The ultra-high-end real estate business, where Donald Trump made a lot of his money, is the easiest place for oligarchs and others to launder large amounts of illicit cash.
And because several of the lawyers on special counsel Robert Mueller’s team investigating Russian connections with the Trump presidential campaign are specialists in money-laundering and other financial crimes, some observers are speculating that he may be looking into Trump’s past business dealings to see if any of those connections are relevant to the matter at hand.
The fact that money-launderers flock to luxury real estate is nothing new, and isn’t much of a mystery either. It’s the direct result of a major loophole in U.S. government rules that require banks to report cash deposits over $10,000 — but allow property owners to accept $10 million in cash for a condo without divulging who gave it to them.
When it comes to the real estate business, the anti-money-laundering rules only apply to banks and other financial institutions. So when buyers take out a mortgage from a lender, they are extensively scrutinized and unusual amounts of cash are reported to the government.
But by paying all cash – behavior that would reasonably raise the most suspicion – real estate buyers actually avoid setting off any alarm bells. The real estate agents and owners pocketing huge sums are under no legal obligation to report that to anyone.
For fraudsters, drug cartels, oligarchs and corrupt foreign government officials looking for a way to launder huge sums of illicit cash — and park it somewhere safe — high-end real estate is the investment of choice. “You can put a lot of money in one place at one time, without raising any eyebrows,” says Heather Lowe, legal counsel for the dirty-money watchdog group Global Financial Integrity.
The Treasury Department explains it this way: “The real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which it appreciates in value, ‘cleans’ large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations.”
A New York Times series in 2015 found that more than half of the $8 billion spent each year on New York residences that cost more than $5 million comes from shell corporations that mask the real owners’ identities, one possible sign of money-laundering.
Under pressure after the New York Times series, Treasury Department officials in early 2016decided to try an experiment in Miami-Dade County and Manhattan, ordering title insurance companies there to identify the individuals who owned the shell companies making all-cash purchases — and requiring them to send copies of the buyers’ IDs to the Treasury’s Financial Crimes Enforcement Network (FINCEN).
There were still some laughably large loopholes, chief among them the exemption of sales made with wire transfers, which are arguably the most common method of moving cash these days, especially from foreign sources.
But it helped: FINCEN reported on August 22 that a whopping 30 percent of the all-cash high-end real estate deals reported under the new program involved people who were already under government scrutiny due to potential money laundering — including a little rogue’s gallery of bribe-takers and drug smugglers.
And in a shock to Trump cynics, FINCEN officials simultaneously announced that they are not just re-upping the experiment, but expanding it to Honolulu – and including those ever-important wire transfers.
Yet even so, the new rules remain almost laughably easy to avoid: Just don’t get title insurance. That’s not an option for those of us who get a mortgage, because lenders require title insurance for their own protection. But otherwise, it’s totally optional and arguably a waste of money for the all-cash buyer.
The Russians Are Buying
Stories about money laundering in real estate – particularly by Russians and others in the former Soviet bloc – are legion.
One article in the Times series focused on apartments in the super-luxury Time Warner Center as an archetype, and “found a growing proportion of wealthy foreigners, at least 16 of whom have been the subject of government inquiries around the world, either personally or as heads of companies.” That “included government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico.
Another Times article concluded that “the flight of wealth accrued in the chaotic capitalism of post-Soviet Russia has been a powerful force behind the luxury condominium boom reordering New York City’s skyline.”
Jennifer Shasky Calvery, then the direct of FINCEN, said last year that in her previous job — prosecuting Russian organized crime — she often found members “based outside of the United States were laundering their funds through the U.S. financial system. Often, this involved the suspected purchase of personal residences with criminal proceeds.”
The Miami Herald reported last year that “Trump helped local developers sell condos to buyers from Latin America and Russia, including people allegedly involved in corruption and wrongdoing, as well as to dozens of anonymous offshore companies.” Buyers included “members of a Russian-American organized crime group, a Venezuelan oilman convicted in a bribery scheme and a Mexican banker accused of robbing investors of their life savings.”
McClatchy reported in May about “fugitive oligarchs and their kin accused of laundering Kazakh money in posh U.S. real estate — including Trump Organization properties.”
The U.S. Attorney’s office in Manhattan abruptly and controversially settled a major money-laundering prosecution in May that had targeted Russian businessman Denis Katsyv, the owner of Prevezon Holdings. He was accused of laundering some of the $230 million he obtained through Russian tax fraud in luxury New York apartments.
None of those apartments were in Trump buildings – but there was a connection to the Trump campaign: One of Kastyv’s lawyers was Natalia Veselnitskaya, the Russian attorney who held a secret meeting in June 2016 with Trump’s son, son-in-law and then-campaign manager, offering them Russian government information on Hillary Clinton.
And once the laundered money is invested in real estate, the people who control the shell company are truly home free. It’s just that simple.
They can use the property as collateral for a loan. They can charge rent and put the money in a domestic bank account. Ownership of shell companies can be shifted at any time, with no indication in property records. And the owner of the shell company can simply turn around and sell the property — walking away with clean money. Depositing rental income or the proceeds of a real estate sale into U.S. financial institution sets off no automatic alarm bells.
“There’s really no impediment” to accessing the money after it’s been put into U.S. real estate, said Peter D. Hardy, a partner at the Ballard Spahr law firm and contributor to the Money Laundering Watch blog.
There may be some tax issues related to income or capital gains. But, Hardy said, “lots of money-laundering schemes don’t really involve tax fraud per se, in terms of hiding the income. It’s really more about being able to use it.”
Lowe said if Treasury wanted to seriously crack down on money laundering through real estate, it would require real estate agents to adopt the same kind of due-diligence, know-your-customer standards as financial institutions.
No Regrets From Trump
Neither his campaign nor his presidency have led Trump to shy away from selling real estate to shell companies – one of the possible indicators of money-laundering. In fact, a USA Today investigation published in June found that since Trump won the Republican nomination, “the majority of his companies’ real estate sales are to secretive shell companies that obscure the buyers’ identities.”
That’s a much larger proportion than the two prior years, USA Today found, but to be fair, the main concern is not so much money-laundering anymore as “that the secretive sales create an extraordinary and unprecedented potential for people, corporations or foreign interests to try to influence a President.”
Meanwhile, Trump is welcoming a major figure in luxury U.S. real estate money-laundering to the White House on September 12: Malaysian Prime Minister Najib Razak.
The Justice Department last year began the process of seizing more than $1 billion in assets of the 1Malaysia Development Berhad, the government-owned investment fund founded by Najib. Then-Attorney General Loretta E. Lynch called it “the largest single action ever brought under the Kleptocracy Asset Recovery Initiative.”
Those assets include a $30.6 million penthouse at the Time Warner Center in Manhattan and a $39 million mansion in the Los Angeles hills, both bought by shell corporations.
Najeeb might even bring this up in conversation with Trump: The assets are currently frozen, but they haven’t actually been seized yet.