WE HAVE SEEN THE MONEY LAUNDERERS AND THEY ARE US

Trivia: What country is the world’s leading money laundering destination? Is it the British Virgin Islands (BVI) with 366,000 odd companies registered on a 59 square mile island with a population of 31,000? Maybe on a per capita basis, but not in absolute terms. Switzerland, with its vaunted banking secrecy? An honorable mention, at best. Surely, the UK then, with the City of London synonymous with laissez-faire finance and a real estate market with a reputation as a dumping ground for the ill-gotten gains of sheikhs and oligarchs? Well, no. If you’re an American, it’s us by many measures. It’s not a new claim, of course, but there’s data to back it up. The Tax Justice Network has named the US the “most secretive financial jurisdiction in the world”. Amid the final promulgation of long awaited new rules from the US Department of Treasury that finally require all-cash buyers to disclose their true identities to the Feds, it’s time to begin tackling the mothership of money laundering, the (by some measures) US$50 trillion US real estate market. The broader disclosure of company beneficial owners is critical to this, while civil society should be given access to the data, as is sustained commitment by politicians who, in some cases, owe their wealth to selling condos to foreign officials offering cash.

Bringing transparency to this market is the first step to tackling a wider set of problems that make the US, the world’s largest economy, also the most attractive destination for domestic and international money launderers. Earlier this year, The Financial Accountability and Corporate Transparency (FACT) Coalition made this task the first of four steps aimed at reversing our course of becoming a hub for what British journalist Oliver Bullough has dubbed “Moneyland”, “the secret country of the lawless, stateless superrich”. Other steps? First, force American banks to share customer data with enforcement agencies in the same way we force foreign banks to do. Second, compel the US$11 trillion private fund industry to introduce real anti-money-laundering and countering the financing of terrorism (AML-CFT) and due diligence measures. Finally, require key enablers in the financial and legal system to undergo rigorous oversight.

Beginning with real estate, we should highlight a late August announcement by Treasury’s enforcement arm, FinCEN, that heralds a step in the right direction. Just what did FinCEN change after decades of exempting non-financed (i.e. all-cash) buyers from the same oversight as bank customers? It establishes what it calls the new “final rule”, namely that “certain persons involved in real estate closings and settlements to report information to FinCEN about specified transfers of residential real estate that are a high risk for illicit finance”. For the first time, “reporting persons” in the home buying process will need to report certain details of the buyers and the property to FinCEN, akin to the AML procedures and Suspicious Activity Report requirements imposed on banks. Importantly, these rules are only for residential properties and transactions involving legal entities, not individuals. Still, with all-cash transactions accounting for nearly a third of all US home purchases in January 2024, there will still be a lot of reports to file.

Semi-transparency

One difference between the final rule provisions and previous enforcement efforts is scope – the new rules are nationwide and there is no pricing floor. Previously, in 2016, FinCEN launched Geographic Targeting Orders (GTOs), renewed every six months, that target certain problematic jurisdictions, including New York and Los Angeles, with a threshold property price of US$300,000 in most areas (US$50,000 in Baltimore, because Baltimore). These put the onus on title insurance firms to file reports for deals within a GTO remit. As The Real Deal reported, this move “sent shockwaves” through certain cities, especially Miami. Yet “massive loopholes” still allowed launderers to seek quieter jurisdictions not under scrutiny or manipulate prices to get under the limit. The GTOs will remain the key mechanism, however, until the new final rule comes into effect on December 1, 2025.

Importantly, the new rules expand the definition of reporting person beyond title company insurers to other players in the purchasing process, in what FinCEN dubs a “cascade” system that assigns responsibility to certain gatekeepers, including real estate lawyers, although your local real estate agent appears exempt. The bigger exemption, of course, is the commercial real estate sector, which, as Transparency International (TI) US noted in a statement, accounts for 30% of all real estate money laundering cases. TI noted that FinCEN is working on rules for this segment and praised the Biden Administration for “once-in-a-generation effort to modernize U.S. defenses against the serious and evolving money laundering threats to our financial system”.

Linked to this is the threat to social stability as anonymous buyers drive up prices in big cities. Research published by Reinventing Albany, a watchdog group, last year, found that 37% of Manhattan property owners are LLCs, compared to the New York state figure of 6%. This led the state legislature to pass the LLC Transparency Act, requiring companies formed or doing business in the state (not just in real estate) to disclose their ownership to the NY Department of State – notably, it mirrors many provisions of the federal Corporate Transparency Act (CTA) requiring the disclosure of company beneficial owners that came into law this year. For civil society, a key and deeply frustrating drawback of both is that the registers are not open to public scrutiny.

Project 2025

This lack of public transparency makes the emerging system of tracking the real buyers of US real estate utterly dependent on enforcement. This, in turn, is hostage to tactical budget fights and more strategic attempts to gut the current AML system that will be dictated by which party controls the White House and Congress in January 2025. The administration sought around US$229 million for FinCEN in fiscal year 2024, but Congress only approved US$190 million, nearly flat year-on-year, despite the increased scope of its work, not least implementing the CTA. On a strategic level, the right-wing Heritage Foundation’s Project 2025’s chapter about overhauling the Treasury Department is sharply critical of FinCEN and its role as financial regulator, while not taking on the issue of real estate transactions.

The analysis raises the inarguable point that FinCEN lacks transparency. But the document, which (despite Trump’s disavowals that he has never read the nearly-900-page “policy book”)  is the closest thing to a policy blueprint for a second Trump administration if he is elected and the GOP take one or both chambers, also calls for the simple repeal of the CTA (Trump vetoed the National Defense Authorization Act that contained it in 2020 for multiple stated reasons) and suggests a far-reaching review of all AML-CFT rules, while blaming them for the decline of domestic broker dealers and community banks. Whatever the merits of ideology behind all this, the practical impact of these steps would likely be to make it impossible for FinCEN to enforce its final rule, which in turn could be gutted by executive order (like sanctions).

Where the Republicans stand on the present AML-CFT regime writ large is clear. That their candidate enriched himself selling real estate, including to allegedly corrupt Russian and other foreign officials, is inarguable – the story of Igor Zorin, who bought three units at the Trump Sunny Isles tower in South Florida worth US$5.4 million in 2017, is just one small illustration of a project tellingly dubbed, according to the Miami Herald, “Little Moscow”. That was just one of dozens of such projects for Trump and his family. But this is a bipartisan issue. The famously secrecy-friendly corporate laws of solid blue Delaware have enabled a boom of anonymous purchases of swathes of blue cities by the superrich, including Russian oligarchs and officials. The sheer scope is not really known, but a hint is provided by the  International Consortium of Investigative Journalists’ analysis of leaked data from Cyprus enablers who bought buildings for Russian oligarchs and officials. Then there’s the fall of Democratic LA City Council Member Jose Huizar, who stood at the center of a major real-estate corruption scandal revolving around the influx of vast sums of investment in California from Chinese billionaires. And on and on. The bottom line is that, If we care about the integrity of the US economy and our housing market, both candidates should be grilled about what they plan to do about corruption and if they will preserve progress made – flaws and delays and loopholes aside – on tackling AML-CFT while also providing true transparency. In the current political environment, where much of the donor class, many of the candidates and the owners of our media are also the citizens of Moneyland, it is almost certain this won’t be asked or answered.