The anti-money laundering stalemate

Political infighting in Washington has choked efforts to reveal kleptocrats and terrorists using U.S. real estate and bank accounts to wash dirty money at a growing rate

From left: Respresentative Carolyn Maloney, Senator Chuck Grassley, Treasury Secretary Steven Mnuchin, Hezbollah’s Hassan Nasrallah, Equatorial Guinea’s Teodoro Nguema Obiang Mangue and Denis Katsyv of Prevezon Holdings
From left: Respresentative Carolyn Maloney, Senator Chuck Grassley, Treasury Secretary Steven Mnuchin, Hezbollah’s Hassan Nasrallah, Equatorial Guinea’s Teodoro Nguema Obiang Mangue and Denis Katsyv of Prevezon Holdings

Malibu mansion and Gulfstream jet were seized from the playboy son of the president of Equatorial Guinea, who pilfered hundreds of millions of dollars from his starving country. Authorities retrieved $100 million from a bank used by Hezbollah to wash money from drug trafficking. And a foreign not-for-profit is facing charges that it helped Iran evade sanctions by secretly investing in a Manhattan skyscraper.

In each case, American shell companies masked the true identities behind owners of properties, companies and bank accounts used to launder the proceeds of terrorism, fraud and other criminal acts. It is an issue that has taken on added urgency: A growing number of countries are tightening transparency regulations, driving more bad actors to the U.S.

“Money has flooded into the United States as the United Kingdom and other European countries have been smart enough to enact laws and regulations to improve beneficial ownership transparency,” the Senate Judiciary Committee’s Republican Chairman Chuck Grassley, of Iowa, said at a recent hearing on money laundering.

The U.S. is now the world’s second largest tax haven behind Switzerland — surpassing the Cayman Islands in recent years — and accounts for 22 percent of global offshore services, according to a report by the Tax Justice Network, a U.K.-based advocacy group of international researchers and activists.

States such as Delaware — where close to a million limited liability companies are registered — do not require individuals to disclose their identity when creating a legal entity. That provides a veil of anonymity used by terrorist organizations, kleptocrats and other corrupt officials to hide their identities in real estate purchases and other transactions.

“There should be no possibility of forming an LLC without disclosing the beneficial owner,” said Stef Cassella, a former U.S. Department of Justice prosecutor. “Then you could find out that it’s not just a post office box, but an individual, who you can put in front of a grand jury and seize their assets,” he said.

Although a string of bills proposed in the House and Senate in recent years signals Washington, D.C.’s growing alarm over money laundering, efforts to root out the core problem have stalled, as members of Congress and federal agencies remain divided on the issue.

 Other nations have confronted money laundering with greater force. Following the release of the Panama Papers, which spotlighted the flow of illicit money across the globe, England brought in an aggressive wave of reform that includes a plan for a public register of ownership in foreign companies with assets in the U.K. The European Commission has taken even more strident steps and last year required member states to establish registers for legal entities that can be accessed by law enforcement.

In an interview with The Real Deal, Grassley said he’s been trying to pass legislation that would close the loophole, and his efforts are among several bipartisan bills seeking to stifle money laundering through the U.S.

But a number of special interests have aligned against the push for transparency. They include lobbyists for the real estate industry and the state of Delaware, which collects fees from incorporating companies; secretaries of state who don’t want the responsibility of tracking corporate owners; and financial services firms.  

“All I can say is I’ve been working on this for four years — it’s a difficult issue,” Grassley said. “I need more Republicans.”

Rinse and repeat

In 2009, a Russian firm called Prevezon Holdings bought two luxury condominiums at 20 Pine Street in Lower Manhattan and then transferred ownership to two separate LLCs. Federal prosecutors later alleged that the LLCs were used to hide money stolen through a $230 million Russian tax scam, and Prevezon’s owner, Denis Katsyv, paid $5.9 million as part of a settlement agreement last year.

“We will not allow the U.S. financial system to be used to launder the proceeds of crimes committed anywhere — here in the U.S., in Russia, or anywhere else,” then-acting U.S. Attorney for the Southern District of New York Joon Kim said in May 2017.

To aid these law enforcement efforts, the U.S. Treasury Department has taken steps in recent years to spotlight beneficial ownership in real estate and require banks to report the owners of accounts used for potentially illicit transactions.

In January 2016, the Treasury’s Financial Crime Enforcement Network (FinCEN) launched its Geographic Targeting Order (GTO) program, which requires title insurance firms to identify the beneficial owners of shell companies seeking to purchase residential real estate with cash. Those rules initially applied to transactions of more than $3 million in Manhattan and over $1 million in Miami.

The initial results were telling: More than 30 percent of beneficial owners identified in the program were previously cited in suspicious activity reports filed by financial institutions, which suspected money laundering or fraud, per a February 2017 report. A FinCEN spokesperson told TRD last year that the reporting order helped track a person suspected of more than $140 million in illicit transactions since 2009 and unearthed details of another individual accused of public corruption in Asia and South America.

The program has since expanded to more than a dozen counties across the country, including parts of California, Texas and, most recently, Hawaii. A report published by economists at the Federal Reserve Bank of New York and the University of Miami in June found that since the GTO program was introduced, the number of companies using all cash to buy homes plummeted. In Miami, for instance, it reportedly fell by 95 percent.

But title insurance firms remain in limbo without clear guidance on whether the program, which is set to expire next month, will be enforced with a rule. “That’s the first issue: Should we be moving from GTO to a rule?” said Chip Poncy, a former director of the Treasury’s strategic policy office.

FinCEN has also turned its attention to banks and other financial firms. It introduced a rule in 2016 that requires those entities to identify the beneficial owners of accounts set up under LLCs, closing a loophole the agency said “enables criminals, kleptocrats, and others looking to hide ill-gotten proceeds to access the financial system anonymously.”  

Banks and financial lobby groups complained about the added responsibility, which the agency estimated would cost the industry up to $280 million a year. But FinCEN has argued that the rule is cost beneficial because this figure makes up less than 1 percent of illicit money believed to be generated in the U.S. annually.

Under the Trump administration, however, the banking requirement may be up for negotiation. Testifying before the House Financial Services Committee in July, Treasury Secretary Steven Mnuchin said he’s willing to look at reform but told lawmakers that the requirement for banks to file suspicious activity reports is onerous and needs streamlining.

“I believe this issue needs to be solved, whether it’s solved as part of BSA [the Bank Secrecy Act] or whether it’s solved separately,” Mnuchin said, while acknowledging the need for law enforcement to access beneficial ownership information to combat terrorist financing.

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Despite pressure on financial institutions by the Treasury Department to conduct due diligence in recent years, Congressional efforts that aim to address the central issue — to require ownership disclosure when LLCs are formed — have stagnated in both the Senate and House.

Sen. Grassley introduced two bipartisan bills last year with Democratic Sen. Dianne Feinstein, of California, that would tighten anti-money laundering laws. The first bill would require companies to disclose information about the individuals who own or control them and the second bill would criminalize concealment of beneficial owners by banks.

But the push for transparency has faced intense lobbying that has doubled in the past year. Forty-four federal lobbying disclosures were filed on anti-money laundering reporting issues in the first quarter of 2018, up from 21 during the same time last year, according to Bloomberg Government. Business associations and financial firms, meanwhile, have spent more than $100 million lobbying the federal government in 2018 alone, an analysis of lobbying data from the Center for Responsive Politics shows.

The U.S. Chamber of Commerce, arguably the country’s most influential lobbying group, has labeled the requirement for LLC owner disclosure a “paperwork nightmare” for business owners and claimed it would “undermine the privacy rights of millions of American citizens.” The conservative and libertarian advocacy group FreedomWorks, founded by the Koch brothers, went further and called efforts to disclose beneficial ownership “garbage.”

“[They] say that it’s going to be a workload that they can’t handle, which I think is a bunch of propaganda,” Sen. Grassley told TRD of those fighting against the bill. “I don’t accept that argument.” The Judiciary Committee chairman added that he’s faced especially strong pushback from secretaries of state and Delaware lobbyists who profit from company incorporations.

Other industry groups, including the National Association of Realtors, have expressed support for LLC disclosure but say the onus should be on business entities and the states they are registered with.

“Regulations that would require real estate agents and brokers to adopt anti-money laundering programs would prove burdensome and unnecessary,” said Christie DeSanctis, a lobbyist for NAR. She stopped short of endorsing a public registry, citing “legitimate privacy concerns” — a view that’s been echoed in New York’s real estate industry.

“As long as [the ownership information] is not made public, it wouldn’t have a big impact at all,” said Pierre Debbas, a real estate attorney with the New York law firm Romer Debbas. “I think a lot of domestic investors don’t know that the government doesn’t already have access to it.”

The industry lobbying seems to have paid off, helping to derail anti-money laundering efforts in the House. In June, Republican representatives Steven Pearce, of New Mexico, and Blaine Luetkemeyer, of Missouri, gutted a key clause from a bill that would require LLCs to report their beneficial owners when they are formed.

The bill, first introduced in November, was also revised to increase the threshold for financial firms required to file suspicious activity reports, from $10,000 to $30,000 — meaning fewer transactions would be scrutinized for fraud or money laundering.

The changes prompted outcry from Democrats, including New York Rep. Carolyn Maloney, who said that ignoring the need for the ownership disclosure clause does a “disservice” to law enforcement.

“Due to anonymous shell companies, the New York real estate market can be used to buy property with dirty money, which is then ‘washed’ when that property is then sold,” Maloney told TRD in an emailed statement.

Maloney’s own bill, the Corporate Transparency Act — which she introduced to the House Financial Services Committee in June 2017 with bipartisan support — seeks to enforce beneficial ownership of LLCs at the time of incorporation. A similar bipartisan Senate bill was introduced soon after by Democratic Sen. Ron Wyden, of Oregon, and Republican Sen. Marco Rubio, of Florida.

Both of the proposed laws have gained little traction so far. But if either bill passes, Maloney said law enforcement will be provided with beneficial ownership information that would bring the U.S. in line with “every other advanced country in the world.”

Ripple effects

Last year, the European Commission issued a directive to member states requiring each of them to set up a registry of legal entity ownership.

Though it has been enforced with varying degrees of consistency in each country, the Fourth Anti-Money Laundering Directive is still in its infancy to determine if there has been a shift in money laundering patterns through Europe and its real estate industry.

An amendment to the directive is already being considered, with the European Commission, European Parliament and Council of the European Union all agreeing that the registries should be public.

Similar steps have been taken across the world over the past two years, in Singapore, Brazil and even the Cayman Islands, where recordkeeping has been expanded to include ultimate ownership disclosure. Most recently, Hong Kong established a non-public registry that contains ownership information on incorporated companies.

And while the U.S. lags behind, anti-money laundering reform has started to receive backing from influential Senate Republicans who see the lack of transparency as a threat to national security.

Senate Majority Whip John Cornyn, of Texas, has bolstered his support for Sen. Grassley’s bills and said that closing the disclosure loopholes would stifle the flow of money laundered by Mexican and Central American drug cartels through the U.S.

But some Democrats remain skeptical that enough political will exists to pass legislation. Sen. Richard Blumenthal, a Democrat from Connecticut who sits on the Judiciary Committee, said the anti-regulatory bent of the Trump administration has made it harder to do so.

“Very bluntly, I think the current administration is so hostile to anything transparent and truthful and so welcoming to dark money that I think the prospects for passage are pretty cloudy,” Blumenthal told TRD.

A spokesperson for the White House did not return multiple requests for comment.

— This story is part of a series on money laundering and real estate. David Jeans and Adam Piore reported from Washington and Will Parker reported from New York.