Financial institutions have reporting obligations under the Bank Secrecy Act, and Financial Crimes Enforcement Network (FinCEN) published an alert on January 25 warning financial institutions to be alert to potential investments in commercial real estate by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act. Commercial real estate lawyers should also be alert to these dangers.
You can read the Alert in its entirety here.
Use this link for a list of sanctioned Russian elites and their proxies.
Commercial real estate transactions are particularly vulnerable to exploitation by bad actors because of the complex financing methods and opaque ownership vehicles routinely employed. Because commercial properties are so high in value, buyers and sellers seek to use these methods and vehicles to limit their legal, tax and financial liability. In addition, foreign investors are common in commercial real estate.
The Alert points to the following types of transactions and vehicles that are so common that protection against invasion into them by bad actors would be difficult at best. The green, italicized words are mine:
- The use of pooled investment vehicles, including offshore funds, to avoid due diligence and beneficial ownership protocols established by financial institutions. In other words, a bad actor may attempt to reduce its ownership percentage in a property to avoid normal due diligence for owners with higher percentages.
- The use of shell companies and trusts to conceal ownership interests.
- Involvement of third parties to invest in behalf of a criminal or corrupt actor.
- Inconspicuous investments that provide stable returns. The properties may not be high end. They may be multi-family housing, retail, office, industrial or hotels in small and mid-size urban areas.
Thankfully, FinCEN’s Alert provides several red flags to assist in these difficult determinations.
- The use of a private investment vehicle that is based offshore to purchase commercial real estate and that includes politically exposed persons or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors. I had to Google the term “politically exposed person”. It means a person who has been entrusted with a prominent public function. These individuals generally represent a higher risk for potential involvement in bribery and corruption by virtue of their positions and influence.
- When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information. In my former life in which I represented developers, when I asked questions about the identity of the beneficial owners, I got answers. It is a red flag if you are unable to obtain those answers.
- 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 commercial real estate that involves friends, associates, family members, or others with close connection to sanctioned Russian elites and their proxies.
- Ownership of commercial real estate through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose. Again, if you can’t get good answers to your questions, this is a red flag.
- Transfers of assets from a politically exposed person 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 of that person. Remember that we check the OFAC (Office of Foreign Assets Control) list for individuals in our transactions using links provided by title companies. If you have questions about how to perform this function, call your friendly title insurance company underwriter. You can use this link.
- Implementation of legal instruments that are intended to transfer an interest in commercial real estate from a politically exposed person 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 politically exposed persons that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.
- There is a limited discernable business value in the investment, or the investment is outside of the client’s normal business operations.
This is the fourth FinCEN alert on potential Russian illicit activity since Russia’s invasion of Ukraine. The Federal government is serious about policing these activities. I recommend that you contact your favorite title insurance underwriter any time you determine that sanctioned persons or their proxies involved in your transactions. Be careful out there!