US Treasury Department officials are warning banks and real estate professionals to be on high alert if there are signs Russian oligarchs are using commercial real estate investments to circumvent economic sanctions imposed on Russia for its invasion of Ukraine.
In addition to superyachts and layers of untraceable shell companies, these billionaires close to Russian President Vladimir Putin could use secret commercial real estate investments via bank loans to conceal their assets and avoid confiscation of funds under anti-money laundering laws, according to the Ministry of Finance.
Banks are able to spot red flags because of their heavy exposure to the US commercial real estate market and their anti-money laundering statutory mandate. Credit is provided by banks, but commercial real estate professionals apply for and arrange bank financing for commercial developments and identify buyers and sellers of real estate.
The Financial Crimes Enforcement Network, a division of the Treasury Department better known as FinCEN, has initiated a rulemaking process imposing requirements to prevent money laundering in the commercial real estate industry, said Dan Stipano, banking regulatory attorney at Davis Polk & Wardwell. But the process isn’t far enough along to know who within commercial real estate would be subject to the rules.
Despite their direct connection to commercial real estate lending, commercial real estate agents and executives may feel like they have nothing to worry about, said Ross Delston, an independent lawyer specializing in money laundering compliance with more than 20 years of experience. You’re wrong, said Delston, who lives in Washington, DC and was a former attorney with the Federal Deposit Insurance Corp.
“Real estate people don’t know that they have statutory insurance,” Delston told CoStar News. But the Office of Foreign Assets Control’s rules “apply to everyone.” He added: “No question [commercial real estate executives] will be examined more closely.”
The Treasury Department did not say whether it is aware of cases in which Russian oligarchs, social elites, family members or corporations have illegally participated in US commercial real estate loans. But current conditions make it ripe for it to happen, the agency said.
US-led economic sanctions against Russia have targeted oligarchs for their close ties to Putin and immense wealth. The nonprofit National Bureau of Economic Research estimated that Russian oligarchs held about $800 billion in offshore accounts in 2015.
Roman Abramovich, the oligarch who was forced to sell Chelsea FCa Premier League football franchise, had an estimated net worth of $6.9 billion last year due to sanctions, according to Forbes.
docking superyachts a common means of avoiding sanctions in pro-Russian countries, but the United States has seized ships believed to be owned by oligarchs. Now they are turning to other methods, Stipano said.
“Commercial real estate projects often involve multiple legal entities and complex structures, which can make them opaque,” Stipano told CoStar News. “Commercial properties tend to be stable, too, which makes them an attractive place to park money.”
FinCEN last week warned banks to be on the lookout for potential home loans from wealthy, well-connected Russians subject to US sanctions.
“Sanctioned Russian elites and their proxies … may try to avoid detection by investing in [commercial real estate] Projects that are less likely to be noticed by the general public or potentially attract unwanted attention,” FinCEN said in the report.
“They don’t have to be high-end or luxury properties and could include [commercial real estate] in the apartment building, retail, office, industrial or hotel sector,” according to the agency.
Banks are well positioned to spot warning signs, officials say. According to a 2020, banks hold about 40% of outstanding commercial real estate in the United States, a larger share than life insurance companies or mortgage-backed securities report from the Congressional Research Service.
The federal law on banking secrecy requires banks to identify and report suspicious activity to the Treasury Department. Banks should improve compliance or face potential regulatory violations, wrote Alex Brackett, attorney at McGuireWoods in Richmond, Virginia, in a recent report to customers.
Federal regulators routinely fine banks for failing to report red flags. The USAA Federal Savings Bank in San Antonio was fined $140 million last year for failing to report thousands of suspicious transactions. The bank, which issues commercial real estate loans, agreed to the fine and said it plans to step up its scrutiny and its review compliance programs.
Banks are regulated by a number of state and federal agencies, including the Federal Deposit Insurance Corp. But it’s unclear which agency will enforce compliance at commercial real estate companies, Delston said.
It could have come from a combination of law enforcement agencies, including the FBI, the Internal Revenue Services Criminal Investigations Division, and the Department of Homeland Security.
Federal officials aren’t the only ones trying to wipe out Russian real estate investments in the United States. A proposed bill in the Texas Senate would do so Prohibit all future real estate purchases in the state of citizens, organizations and governments from Russia, North Korea, Iran and China. Texas Gov. Greg Abbott has said he supports the bill.