On January 25, 2023, FinCEN issued an alert to financial institutions on potential investments in the U.S. commercial real estate sector by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act. The alert lists potential red flags and typologies involving attempted sanctions evasion in the commercial real estate sector, and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations.
According to FinCEN’s press release, sanctioned Russian elites and their proxies are likely attempting to evade sanctions by exploiting vulnerabilities in the U.S. CRE market as it routinely involves highly complex financing methods and ownership structures that reduce transparency that may allow bad actors to hide illicit funds in commercial real estate investments. In addition, the relative stability of the CRE market and the high value of commercial real estate properties can provide a steady income for illicit actors.
FinCEN has identified methods of potential sanctions evasion in the CRE market that sanctioned Russian elites and their proxies may be exploiting, including:
The use of pooled investment vehicles in CRE;
The use shell companies and trusts, whether based in the U.S. or in other jurisdictions, to conceal their ownership stake in a CRE property;
The use of third parties to invest in CRE on behalf of a criminal or corrupt actor; and
Inconspicuous CRE investments that provide stable returns.
FinCEN has also provided the following financial red flag indicators to recognize a potential illicit or suspicious activity:
The use of a private investment vehicle that is based offshore to purchase CRE and that includes PEPs or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors.
When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information.
Multiple limited liability companies, corporations, partnerships, or trusts are involved in a transaction with ties to sanctioned Russian elites and their proxies, and the entities have slight name variations.
The use of legal entities or arrangements, such as trusts, to purchase CRE that involves friends, associates, family members, or others with a close connection to sanctioned Russian elites and their proxies.
Ownership of CRE through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose.
Transfers of assets from a PEP or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation.
Implementation of legal instruments (e.g., deeds of exclusion) that are intended to transfer an interest in CRE from a PEP or Russian elite to a family member, business associate, or associated trust following a legal event such as an arrest or an OFAC designation of that person.
Private investment funds or other companies that submit revised ownership disclosures to financial institutions showing sanctioned individuals or PEPs that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.
There is limited discernable business value in the CRE investment or the investment is outside of the client’s normal business operations.
FinCEN’s news release can be found here.
The full alert can be found here.