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The US Treasury’s Financial Crimes Enforcement Network (FinCEN) has warned financial institutions that sanctioned Russian oligarchs may use the US commercial real-estate sector to hide their wealth.
In an alert published on January 25, the agency states that sanctioned Russian elites “are likely attempting” to exploit gaps in the American commercial real-estate market in order to evade sanctions. To help banks mitigate that risk, FinCEN lists potential red flags and patterns and warns financial institutions that they must report suspicious transactions.
“Thanks to international pressure and the economic restrictions that more than 30 countries have imposed on Russia for its brutal war against Ukraine, sanctioned Russian elites are increasingly left with fewer options for moving and hiding their ill-gotten wealth,” said FinCEN acting director Himamauli Das.
“FinCEN is committed to exposing the channels that Russian elites, oligarchs, and their proxies may use to move or hide funds. Today we are identifying red flags and typologies in commercial real estate transactions that financial institutions can use to remain vigilant in monitoring, detecting, and reporting suspicious activity that may be indicative of sanctions evasion by sanctioned Russia elites, oligarchs and their proxies.”
Specifically, FinCEN noted that real-estate buys often involve highly complex financing methods and opaque ownership structures that make it difficult to know who is buying or selling a property.
For example, a property with a value ranging from a couple of millions of dollars to billions typically involves private companies or institutional investors as the buyer or the seller.
“As such, trusts, shell companies, pooled investment vehicles, or other legal entities are regularly used on both sides of [commercial real-estate] transactions,” the alert says.
Additionally, the buyer or the seller is often composed of several layers of legal entities, some of which may be incorporated in an offshore jurisdiction. There may also be a large number of investors behind the entities and banks may struggle to identify all of the beneficial owners.
Meanwhile, due to the high value of these properties, the elite could store large amounts of wealth in real estate or even generate income from them.
“The lack of transparency in the [commercial real estate] market and the stability of returns in this market may have attracted a significant number of illicit actors among those foreign investors in recent years, including sanctioned Russian elites and their proxies,” FinCEN notes.
The agency advises banks to be vigilant when they see the use of pooled investment vehicles, shell companies and trusts in property purchases that hide the beneficial owners.
It also warned that sanctioned Russians may use relatives, friends, or business associates to set up the legal entities to invest in property projects.
These properties may vary in kind from multi-family housing, retail, office, industrial, or hotel sectors.
In many cases, sanctions evaders may seek out “inconspicuous” investments so long as they provide stable returns.
The alert emphasises that there are no central geographic hubs where sanctioned Russians tend to invest and financial institutions should be on the lookout for suspicious transactions throughout the whole country.
The US has issued numerous packages of sanctions since the invasion of Ukraine started 11 months ago. On Thursday (January 26), the Treasury also sanctioned private military group PMC Wagner in parallel with the Department of State’s sanctions targeting infrastructure used to support battlefield activities.
Earlier in December, the Treasury sanctioned Russian banks, as well as Vladimir Potanin, Russia’s richest man and chairman of conglomerate Interros.
Financial institutions, including money services businesses, are required to comply with the sanctions and report suspected sanctions evasion attempts to FinCEN.
