Russian oligarchs invest in US commercial real estate, bypass sanctions as federal government warns banks

Wealthy Russian oligarchs may be investing in U.S. commercial real estate to avoid sanctions imposed after last year’s invasion of Ukraine, according to a warning sent to banks by the Treasury Department’s Financial Crimes and Intelligence Division. high.

The Financial Crimes Enforcement Network (FinCEN) has warned banks against questionable commercial real estate ( CRE) instructed you to be careful with the transaction.

FinCEN’s alert assesses that officials “have likely assessed that sanctioned Russian elites and their proxies are likely seeking to exploit several vulnerabilities in the CRE market to evade sanctions.” said.

“Thanks to international pressure and the economic restrictions imposed on Russia by more than 30 countries for its brutal war on Ukraine, the sanctioned Russian elites have no choice but to move and hide their ill-gotten wealth. There are fewer and fewer options,” said Himauli Das, Deputy Executive Director of FinCEN. said in a statement.

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The Russian flag flutters above the headquarters of Bank Rossii, Russia’s central bank, in Moscow, February 28, 2022. (Andrey Rudakov/Bloomberg via Getty Images/Getty Images)

Commercial real estate “routinely involves highly complex financing methods and opaque ownership structures, making it relatively easy for bad actors to hide illicit funds in CRE investments,” hence the sanctions. It may present an attractive opportunity to avoid.

Private companies and investors involved in the CRE market regularly use trusts, shell companies, pooled investment vehicles, and other legal entities on both sides of transactions. These legal structures allow investors to limit their legal, tax, and financial liability.

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Also, since CRE deals typically involve multiple tiers of these legal entities and potentially many investors behind them, it is important for financial institutions to identify all beneficiaries of a particular venture. can be difficult.

The lack of earnings transparency and stability makes the deal particularly attractive to foreign investors and companies. Foreign investors tend to make up the majority of his CRE deals in the US. A 2021 study found that 8.4% of his transactions involved at least one of her foreign customers residing abroad, according to FinCEN Alert, a figure that in the years before the pandemic he had increased to 10%. had exceeded.

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Squatters have occupied a building believed to be owned by a Russian oligarch, holding banners and Ukrainian flags. (AP Photo / Alberto Pezzali / AP Newsroom)

FinCEN has identified four ways sanctioned Russian oligarchs and elites are using the CRE market to try to circumvent sanctions.

• Pooled investment vehicles, including offshore funds, can be used to circumvent financial institutions’ customer due diligence (CDD) obligations and bank secrecy law reporting requirements. FinCEN says that even if banks lower their CDD threshold from 25% to 10% of funds (which is common for high-risk clients), investors trying to evade sanctions will still face detection. The fund may be lowered just below that threshold to avoid .
• Shell corporations and trusts based in the United States or abroad may be used by licensed Russian elites to conceal ownership of CRE properties, especially high-value properties with multiple legal entities and trusts . Legitimate property developers and asset management companies can take advantage of these structures to unwittingly be drawn into sanctions evasion schemes.
• Third parties, including relatives, friends and business associates, may be used by authorized Russian elites or their agents to create legal entities to be used in illegal CRE transactions.
• Discreet CRE investments that offer stable returns are less likely to be noticed by the general public or attract unwanted attention, making them attractive to the sanctioned Russian elite and their agents. FinCEN notes that these can be “very different in kind” and are likely to be tried in small and medium-sized cities as well as in big cities.

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FinCEN is an agency within the Department of the Treasury’s Terrorism and Financial Intelligence Division that collects financial information and seeks to combat money laundering, financing of terrorist groups, and other financial crimes. When banks submit suspicious activity reports to the Treasury Department regarding transactions suspected to be inherently illegal, FinCEN is a sub-agency that analyzes them and makes them available to law enforcement officers for investigation.