Search and seizure: oligarch edition
Biden vowed to go after real estate tied to the Kremlin elite. It won’t be easy.
Well over a month into Vladimir Putin’s invasion of Ukraine, the West’s response has left Russia in a financial mess.
Well-heeled Russians seen as enablers of the Kremlin were hit with sanctions in an effort to deprive Putin and his inner circle of their overseas wealth and apply pressure to end the war. President Joe Biden, in his State of the Union address, said the United States will “identify, hunt down and freeze the assets” and “ill-begotten gains” of Putin’s cronies.
Yet it will be a long time and a long haul before this effort bears fruit, experts said.
Luxury real estate in the U.S. has long been a safe haven for foreigners to stash their lucre — filthy or otherwise — because of its lax ownership disclosure laws and overall openness to foreign buyers. Russian oligarchs are no exception, known for splurging on private jets and yachts as well as mansions and condos in South Florida, Los Angeles and New York City.
Not only are disclosure requirements riddled with loopholes, but oligarchs likely prepared for the sanctions by further obscuring their assets. The Russia-Ukraine conflict is not new, with the 2014 annexation of Crimea prompting sanctions against some wealthy Kremlinites and likely putting others on blast, said Harsh Arora, a Fort Lauderdale-based attorney with Kelley Kronenberg who works on international real estate disputes.
The process of tying a property to an individual or company on the Treasury Department’s Specially Designated Nationals list is merely a starting point: A forfeiture fight has to go through the courts.
“To permanently deprive someone of property would really have to go through some kind of legal process and not some summary proceeding where the government says, ‘We have sanctions. You own an apartment. Now it’s ours.’ That’s how I think the public sees it,” said Aleksey Shtivelman, a Miami-based attorney at Shutts & Bowen who specializes in international disputes. “That’s just not how it works. The American way is to provide people with their day in court — including Russian oligarchs.”
Once a property is identified, it can be immediately frozen, blocking any transactions such as sales or loans. Sanctioned Russians would then face criminal or civil forfeiture, setting the stage for the government to take over the asset for good.
To succeed, the government would need to show that the funds tied to the real estate, whether in the purchase, mortgaging or other costs associated with the property, were derived illegally.
Take as an example Alexei Kuzmichev, the billionaire co-founder of Russia’s largest private bank, Alfa-Bank. Shortly after the invasion, Kuzmichev listed his quadruplex on New York’s Upper East Side for $41 million. The U.S. has not sanctioned Kuzmichev, who divested his stake in Alfa-Bank after the invasion, but it has sanctioned the bank.
“The question is going to be, are those personal assets or are those assets obtained from bank assets?” said Shtivelman.”It really depends which funds those assets were purchased with and how those purchases happened.”
A civil forfeiture would be triggered if the government alleges the properties were bought with money obtained illicitly from the Russian government, Shtivelman said, while claims in a criminal process would deal with theft or money laundering.
In these cases, civil forfeitures could be more likely, according to experts on white-collar crime and sanctions law.
Oligarchs would be hesitant to enter criminal court, exposing them to the risk of having their criminal undertakings laid out publicly, attorneys Franklin Monsour and Kristina Arianina said in a Bloomberg Law piece in March.
“They worked too hard to shield their dealings and ownership interests to fight over a mansion or a yacht,” Monsour and Arianina, both of Orrick, Herrington & Sutcliffe, wrote.
In the successful U.S. civil forfeiture of more than $1.2 billion in assets misappropriated from 1Malaysia Development Berhad, a government investment fund, the pushback was weak. Low Taek Jho, alleged mastermind of the $4.5 billion scheme and now a fugitive, walked away from more than $700 million worth of assets.
A criminal case against a former legal counsel to the Venezuelan Oil Ministry, Carmelo Urdaneta Aqui — one of eight people charged in 2018 over a $1.2 billion money laundering and embezzlement scheme involving state-owned oil company Petróleos de Venezuela — also led to the seizure of real estate.
He pleaded guilty to conspiracy to commit money laundering and agreed to turn over a unit at the tower as well as six in South Beach, according to a plea agreement.
Sanctioned oligarchs and those who fear they might be next on the list are likely trying to sell their properties, to the extent they can do it under the radar.
The Foreign Accounting Tax Compliance Act could be one way to trace these deals, as it requires foreign banks to disclose financial information about U.S. residents. Essentially, it’s a mandate to disclose the flow of money in and out of the U.S. to the Treasury Department, said Harold Patricoff Jr., an international dispute attorney.
“But if the individual’s name does not appear anywhere on the documents, you are going to have to do more work to find out who the beneficial owners are,” Patricoff said. “Very few of the ultra-high-net-worth individuals from Russia do things in their own name.”
And that’s where the issue of finding oligarchs’ real estate comes in. Usually, foreign ownership is held through a shell of limited liability companies, which in many states, including Florida, do not have to publicly disclose the name of the true beneficiary. The LLC listed on property records can be managed by a web of foreign-registered companies, with some Caribbean islands allowing for further secrecy.
“If someone wants to obscure an ownership, they can layer the ownership: A British Virgin Islands company owned by a Netherlands company, layered by a Swiss company,” Patricoff said. “If they want to utilize a trust to further obscure ownership, they can. Trusts are the most obscure instruments that can be used.”
The only way to pierce trusts is through the courts, he said.
Another workaround: The Treasury’s Office of Foreign Asset Control, which issued the sanctions, mandates the freezing of entities that are 50 percent or more owned by those sanctioned.
“So say it’s 40 percent owned by someone who is a blocked party and 60 percent by a nonblocked party,” said Arora. “It technically passes muster and you can transact without getting in trouble.”
Although attorneys, accountants and other third parties working on a deal have a responsibility for due diligence and reporting to authorities if they suspect what is represented in records is false, existing legislation does not provide them with clear guidance or require them to “become complete investigators,” he said.
“You are not going to bother law enforcement just because you feel there could be some suspicious activity going on,” he said. “That could lead to discriminatory activities.”
There is another form of real estate activity likely already happening that has Arora worried, something he calls “pre-transactions.” Ownership entities could be structured in ways that allow those sanctioned to sell their interest to the nonsanctioned property investors through internal buyout agreements.
“Some of these ownership structures are by sophisticated firms that had offices in Russia and represented high-net-worth oligarchs and had the strategy built in to do these pre-transactions in light of any event like we are facing now,” Arora said. “Basically, they had early buyouts built in within themselves.”
Following the trail
Project Property, spearheaded by the Russian America for Democracy in Russia, a U.S.-based community organization, started last year to track the flow of Kremlinites’ money into real estate. So far it has identified 40 condos, villas and mansions worth $450 million across the U.S., according to Dmitry Valuev, community coordinator for Russian America for Democracy in Russia.
Oligarchs turned to U.S. real estate for a simple reason: It is a stable market to stash their wealth in case “they run into issues with Putin,” Valuev said.
“What not all of them expected is that Putin would go this far and break the ties with the West, and the Western government would be looking for seizure or forfeiture of those properties,” he added.
Project Property uses public databases, media reports and an asset list required by Russian law compelling government officials to report their assets, Valuev said. Still, the list is incomplete, as this requirement has often been bypassed, he said.
Patricoff said another way is “good old-fashioned word of mouth,” as owners and renters of high-end properties likely know one another. And luxury residential enclaves such as Fisher Island, off Miami Beach, and Tahiti Beach, within Coral Gables’ Cocoplum neighborhood, have security cameras that could help investigators.
And then there’s new legislation, such as the Corporate Transparency Act, as well as an advance notice of proposed rulemaking put forth by the Treasury’s Financial Crimes Enforcement Network.
The latter is a proposal that the real estate sector, including agents, be subject to the same “know your customer” and anti-money laundering rules that banks have to abide by, according to Ross Delston, an anti-money laundering expert.
“But that’s very much in the discussion stage, and it doesn’t remedy the underlying beneficial ownership gaps in U.S. law and regulation,” he added.
Under the Corporate Transparency Act, for which regulations are still in the process of being finalized, a beneficial owner who owns at least 25 percent of a company has to be disclosed to FinCEN, but not to the public. It’s expected to be enforced starting later this year and will likely be retroactive, and to require disclosures from foreign entities registered in the U.S. and certain types of trusts.
Whether the act would help nail down oligarchs’ holdings is unclear. If banks want to obtain identifying information about the beneficial owner, they have to get that person’s consent. The company seeking a loan can just go to another lender, Delston argued.
But Shtivelman said the law might still help.
Once it goes into effect, a year will be afforded to meet disclosure requirements, plus time to allow oligarchs to lawyer up and fight forfeitures, he said. But if sanctioned Russians are quietly trying to sell their real estate now as a way to wiggle out of losing their asset in forfeiture, investigators could come after them.
“It might take some time, but they will investigate. Absolutely,” he said. “They could create a whole new department and hire attorneys and proceed. It could take them one, two, five or 10 years — it does not mean they are going to stop.”
Arora said there are other factors to consider, including shifting political winds in the U.S. relationship with Russia.
“I cannot predict that it would come to some level of prosecution even if you were to find out some of the transactions were prohibited and still occurred,” Arora added. “Are we going to spend millions of dollars for a transaction that was not even worth $10 million?”
One more likely outcome would be a softening of the real estate industry’s usual pushback against disclosure requirements, in light of the widespread condemnation of Russia’s actions.
“The Russian invasion of Ukraine has changed the calculus dramatically for both the beneficial ownership rules and the real estate sector rules,” Delston said. “As a result, I think it’s going to be a lot more difficult for opponents to argue that more rigorous requirements are not needed.”