The Financial Crimes Enforcement Network (FinCEN) has recently issued an alert cautioning all financial institutions regarding potential investments in the U.S. commercial real estate (CRE) sector, by or on behalf of sanctioned Russian elites, oligarchs, their family members, and entities through which they act. This alert complements sustained efforts of the U.S. government, in response to Russia’s war against Ukraine, to isolate sanctioned Russian persons from the international financial system. It highlights specific vulnerabilities to sanctions evasion in the CRE sector, which may be exploited by Russian elites or their proxies, and is based on a recent review of Bank Secrecy Act (BSA) reporting. It also provides financial institutions with guidance on identifying potential red flags and typologies of sanctions-evasion activities.
FinCEN’s alert notes that the CRE market is particularly vulnerable to sanctions-evasion activity due to, among others, the following characteristics inherent to the CRE market:
- CRE transactions often involve highly complex financing methods and unique ownership structures, sometimes designed to conceal an investor’s identity;
- Several layers of legal entities are frequently involved as CRE buyers or sellers, and they may be domiciled in offshore jurisdictions; and
- The large number of investors behind the CRE legal entities can have the effect of obscuring beneficial ownership.
The relative stability of the CRE market, as well as the value and predictable income stream of its assets, make CRE an attractive investment for a variety of domestic and international investors. Indeed, according to a 2021 study on U.S. CRE transactions, 8.4% of those surveyed reported closing a sale with a foreign client residing abroad. These transactions, which may involve foreign institutions not subject to the same rigorous compliance requirements as the U.S., pose heightened risks for sanctioned entities to enter the financial system.
The FinCEN alert identifies methods of potential sanctions evasion in the CRE market open to exploitation by sanctioned Russian elites and their proxies, including:
- The use of pooled investment vehicles, including offshore funds, to avoid customer due diligence (CDD) and beneficial ownership protocols of financial institutions;
- The use of shell companies and trusts, either domestic or international, to conceal ownership stakes in CRE properties;
- The involvement of third parties, including relatives, friends, and business associates, to invest in CRE on behalf of a criminal or corrupt actor; and
- Investment in inconspicuous CRE, including multifamily housing, retail, office, industrial, or hotels, which provides stable returns and typically avoids public scrutiny.
FinCEN also provided financial institutions with a list of a number of red flag indicators for CRE, including:
- Use of offshore private investment vehicles to purchase CRE, that include politically exposed persons (PEPs) or other foreign nationals (particularly family members or close associates of sanctioned Russian elites or their proxies) as investors;
- Customers that decline to provide information about beneficial owners or controllers of legal entities;
- Multiple LLCs, corporations, partnerships or trusts with slight name variations involved in transactions with ties to sanctioned Russian elites or their proxies;
- The use of legal entities, such as trusts, to purchase CRE on behalf of its beneficiaries, that involves those with close connections to sanctioned Russian elites or their proxies;
- Ownership of CRE through legal entities in multiple jurisdictions (often involving an offshore trust) without a clearly stated business purpose;
- Transfers of assets from a PEP or Russian elite to a third party or associated trust in close temporal proximity to a legal event such as an arrest or an Office of Foreign Assets Control (OFAC) designation;
- Legal instruments intended to transfer interests in CRE from a PEP or Russian elite to a third party following a legal event such as an arrest or an OFAC designation;
- Submission of revised private company 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%; and
- CRE investments with limited discernable business value or such investments outside of a client’s normal business operations.
Financial institutions, notably banks and insurance companies, are subject to regulatory obligations under the BSA, including the need to establish a reasonable, risk-based approach to Know Your Customer (KYC) activity and a financial institution’s Customer Identification Program (CIP), and risk-based transaction monitoring to detect unusual transactions that may require research or additional diligence. In accordance with their existing approaches, these institutions should identify and report suspicious activities associated with sanctioned Russian elites and their proxies, including PEPs, among CRE-related customers. They should also seek to determine whether their CRE-related activities have exposure to sanctioned Russian elites and their proxies.
Recommended steps for financial institutions include:
- Ensure that transaction monitoring personnel and software are attuned to the red flag indicators provided in this alert;
- Review KYC/CIP and AML policies and procedures to ensure these red flag indicators are accounted for and risks appropriately mitigated;
- Alert and train relevant personnel (including counsel, as appropriate) regarding these red flag indicators to identify and escalate suspicious activity concerning CRE; and
- Inform personnel responsible for Suspicious Activity Reporting (SAR) obligations of instructions contained in this alert.
FinCEN requests that financial institutions indicate a connection between the suspicious activity being reported and the activities highlighted in this alert by including the key term “FIN-2023-RUSSIACRE” in SAR field 2 (Filing Institution Note to FinCEN) as well as in the narrative. FinCEN also encourages expedited reporting of the evasive activities outlined in the alert through the agency’s 24/7 hotline at (866) 556-3974. FinCEN urges financial institutions to voluntarily share information with one another regarding suspected money laundering and terrorist activity, and notes that Section 314(b) of the USA PATRIOT Act provides a safe harbor for financial institutions that do so.
Financial institutions should act accordingly to avoid adverse examination findings by functional regulators, as well as the possibility of enforcement actions for BSA-related violations. Please contact the authors if you have any questions or would like to discuss the implications of FinCEN’s alert for your financial institution.
- FinCEN Encourages “Increased Vigilance” and Highlights Red Flags for Evasion of Russian Sanctions including Use of Virtual Currency (March 16, 2022)
- New Revelations in Ukraine Lead to Tightening Global Sanctions (April 8, 2022)
- Western Companies Starting to Feel Impact of Russian Sanctions (March 24, 2022)