FinCEN Issues Alert on Sanctioned Russian Investors in CRE
January 30, 2023
On January 25, Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert on “Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies”. The alert is directed at financial institutions to highlight vulnerabilities FinCEN perceives in U.S. CRE.
Why it matters: While sanctions related to the Russian invasion of Ukraine are a top priority, FinCEN has been undertaking additional scrutiny of CRE markets for anti-money laundering and sanctions evasion.
The alert claims complex financing methods and opaque ownership in CRE investments, plus the cash flow and relative stability of U.S. CRE, make the market attractive for hiding money.
FinCEN outlines other potential methods in CRE markets to evade sanctions:
- Pooled Investment Vehicles: CRE investors seeking to evade sanctions may use pooled investment vehicles, including offshore funds, to avoid beneficial ownership protocols established by financial institutions, thereby allowing them to evade detection. Investors may reduce their ownership percentage to avoid triggering beneficial ownership reporting requirements (typically 10% or 25% of ownership).
- Shell Companies and Trust: Similar to the technique above, a sanctioned individual may use complex legal entities across international jurisdictions to to make it difficult for a financial institution to find the beneficial owner.
- Third Parties and Trusts: Sanctioned individuals may use relatives or friends to avoid detection. Trusts can also be used to obscure the sanctioned party, and FinCEN recommends trustees taking care to ensure sanctioned persons do not have present, future, or contingent property interests in the trust.
- Inconspicuous CRE Investments: FinCEN warns that investments need not be high-end or luxury. All CRE asset classes in all geographies are as likely targets as those in urban cores.
The bottom line: FinCEN, Treasury, and other regulators will continue to scrutinize vulnerabilities in CRE for money laundering and sanction evasion. CREFC is working with policymakers to educate them on the CRE finance markets, including how the industry works to prevent, detect, and report illicit activity.
Contact David McCarthy (dmccarthy@crefc.org) with questions.