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Suspected Commercial Real Estate Companies With Russian Ties Scrutinized

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Banks were warned by Treasury Department against property loans as a way to avoid sanctions.
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Table of Contents

U.S. On The Heels Of Foreign Dealing Domestic Real Estate Entities

U.S. Treasury officials are advising banks and real estate companies to be watchful for signs that Russian oligarchs are using commercial real estate investments as a method of evading economic sanctions that have been placed on Russia for its invasion of Ukraine.

In addition to super yachts and layers of untraceable shell companies, these millionaires close to Russian President Vladimir Putin could be using secret investments in commercial real estate via bank loans as a way to disguise their revenue and guard against banks seizing their assets to avoid exposure to money laundering laws.

Real Estate Regulations In Question

The real estate law mandates banks to detect suspicious activity, forcing them to profit from their intensive exposure to the United States commercial real estate market. It is real estate developers who apply for and arrange banks’ financing for commercial real estate projects.

FinCEN (The Financial Crimes Enforcement Network), the resources division of the Treasury Department, started an information-disclosure procedure in July 2018 with the objective to forestall money laundering in the commercial real estate industry. However, the procedures do not yet include any information about who within the commercial real estate field will be held liable.

Comfortable Cash Flow Concerns

Ross Delston, a D.C.-based attorney specializing in anti-money-laundering compliance for over two decades, believes commercial real estate brokers and executives may be erroneously at ease due to their direct involvement with business property loans. A former Federal Deposit Insurance Corp (FDIC) lawyer himself, he states otherwise.

The Treasury Department has not made public any knowledge regarding illegal involvement of Russian oligarchs, family members, societal elites or corporate entities in U.S. commercial real estate loans. However, they have stated that current conditions make it likely to occur.

Transaction Penalties On The Rise

The United States has launched economic penalties against Russia due to what the Russian government, its associates, and their assets stand for. A 2015 research study by the nonprofit National Bureau of Economic Research estimated that as of 2015, Russian oligarchs controlled approximately $800 billion in offshore accounts. 

Roman Abramovich, the oligarch who was compelled to sell their club Chelsea F.C., a Premier League soccer franchise, last year because of sanctions, had an estimated net worth of $6.9 billion last year, as per Forbes.

A traditional way to evade sanctions was to offshore super yachts to friendly locations, but the United States has seized vessels suspected of belonging to oligarchs’ interests. Now they’re onto other methods.

FinCEN instructed American banks to keep an eye out for real estate loan payments to rich, well-connected Russian nationals deemed subject to sanctions.

There are many indications that banks are superior at detecting threats. About 40 percent of high-quality commercial real estate in the United States is held by banks, compared to just about one-third for life insurance companies and about 10 percent for mortgage-backed securities, according to a 2020 study by the Congressional Research Service.

Knowing Procedural Failure

The Federal Bank Secrecy Act requires that banks report suspicious activity to the Treasury Department. Banks must step up compliance or risk regulatory violations, as Alex Brackett, an attorney at McGuireWoods in Baltimore, Maryland, wrote about in a recent report to clients.

The United States Attorney’s Office of the District of Minnesota fined USAA Federal Savings Bank $140 million for neglecting duty to report red flags. The institution, which originates commercial real estate loans, consented to the takeaway and said it intended to raise scrutiny and compliance efforts.

Changing The Laws

As proposed by Texans in the Texas Senate, Senate Bill 317 would ban all future real estate purchases in the United States by citizens, entities, and governments of entities from Russia, North Korea, Iran and China.

 

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