FinCEN issues alert on Russian sanctions evasion in real estate market

According to FinCEN, foreign investment in CRE surged to $72.6 billion in 2021, nearly doubling the previous year’s figure. Foreign investment as a share of total U.S. sales volume averaged nearly 14 percent between 2014 and 2018. Despite high inflation and growing concerns about a recession, much of the world still sees the U.S. as a safe haven for investment.

When working to finance CRE projects, banks have CDD obligations to verify the beneficial owners of legal entity customers. The latest alert reminds banks that they are frequently well-positioned to identify and report suspicious activities — including those among CRE customers that might involve politically exposed persons — as part of their sanctions compliance program. Sanctioned individuals may try to use pooled investment vehicles or offshore funds to avoid due diligence processes since banks aren’t typically required to verify the identities of individuals who own less than 25 percent of a fund. Banks should beware of market participants who keep lowering their stakes to avoid detection while still maintaining control of the fund.

FinCEN encouraged financial institutions to consider the following red flags for real estate sanctions evasion:

• The use of an offshore private investment vehicle to purchase CRE involving PEPs or other foreign nationals (mainly family members or close associates of sanctioned Russian elites and their proxies) as investors.
• Any customer declining to answer questions about the ultimate beneficial owners or controllers of a legal entity or arrangement.
• Multiple limited liability companies, corporations, partnerships, or trusts with slight name variations involved in a transaction with ties to sanctioned Russian elites and their proxies.
• Purchases of CRE through trusts or other legal entities and arrangements that involve friends, associates, or family members of 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 could be 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.
• Ownership disclosure notices from private investment funds or other companies that indicate sanctioned individuals or PEPs who previously owned more than 50 percent of a fund have changed their ownership to less than 50 percent.
• Information indicating there is limited discernable business value in the CRE investment or that the investment is outside of the client’s regular business operations.

No single financial red flag indicator confirms illicit or suspicious activity, so financial institutions should consider each transaction's relevant facts and circumstances in keeping with their risk-based approach to compliance.