On January 25, 2023, FinCEN issued an alert regarding potential investments in the U.S. commercial real estate (CRE) sector by sanctioned Russian elites and their proxies. FinCEN includes in its reference to CRE the following types of property: investment or income-generating property such as office buildings, retail stores, hotels, and multifamily housing.
What Is FinCEN?
The U.S. Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury. FinCEN’s goal is to safeguard the financial system from illicit use and combat money laundering and promote national security.
Russian Commercial Real Estate (CRE)
FinCEN highlighted the difficulty the financial industry faces in identifying sanctioned individuals because some ultimate beneficial owners (BOs) may be purposely hidden through:
Multiple layers of entities.
Decreased percentage of ownership in an investment below the threshold set by a financial institution’s (FI’s) Customer Due Diligence ( CDD) protocols.
Use of pooled investment vehicles, shell companies, trusts in CRE.
Use of third parties to hide the BO’s identity.
Maintaining a low investment profile by making inconspicuous investments with stable returns.
FinCEN Financial Red Flags Involving CRE
In its eleven-page alert, FinCEN listed the following nine red flags that FIs should watch for:
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.
Agency Verification
FinCEN reminded FIs they are required to provide Suspicious Activity Reports (SAR) and supporting documentation upon request to FinCEN or an appropriate law enforcement or supervisory agency. However, FinCEN emphasized FIs must verify the source of the request.
The FI must confirm that a requestor of information is actually a FinCEN representative or an appropriate law enforcement or supervisory agency. Additionally, the verification should not be a one-off exercise. The FI should add verification procedures into its Bank Secrecy Act (BSA) compliance or anti-money laundering (AML) program.
FinCEN suggested two methods an FI can complete the verification:
Independent employment verification with the requestor’s field office; or
Face-to-face review of the requestor’s credentials.
To read the complete 11-page document, click here: FIN-2023-Alert002.
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.