It’s a well-known fact that drug traffickers, money launderers, corrupt officials, terrorists, and other criminals often use residential or commercial real estate transactions to launder money, conceal their identities and hide their money.
In 2017, the Financial Crimes Enforcement Network — or FinCEN — issued an advisory to financial institutions. Escrow agents, real estate brokers, title insurers and other real estate professionals were warned to be on the lookout for this kind of criminal behavior. Here’s what you need to know.
Why and How Criminals Exploit Real Estate Transactions
Real estate transactions are attractive vehicles for criminals to launder or hide their money since they involve large sums of money, can be performed by opaque entities and are accomplished by means of complex processes. Additionally, through a real estate transaction, a criminal can “clean” a large amount of cash in one deal, allow the property to appreciate in value and protect the money from exchange-rate fluctuations and market instability.
To shield their identities, criminals often use shell companies such as otherwise legitimate limited liability companies, non-publicly traded corporations and trusts that conduct little to no business and generate no value. This is due to the fact that it’s possible to designate an outward-facing manager or other representative while keeping the identity of the beneficial owner — i.e. the actual owner — of the entity shielded. As a result, shell companies can conduct financial transactions without the real name of the actual owner being disclosed.
In addition, criminals can exploit real estate transactions by making all-cash purchases for properties — even high-value ones. This enables them to avoid the scrutiny that’s routinely involved with financing. Almost 25 percent of residential real estate transactions are all-cash transactions, with some areas experiencing a higher concentration than others.
An example of this is the case of California real estate agent Anthony Keslinke, who utilized straw buyers — front people acting as buyers in order for the actual buyer to circumvent legal restrictions — to purchase properties in all-cash transactions. He also altered documents and records, after which he sold the properties at a significant profit. Fortunately, he was caught, and in 2016, he was ordered to pay $1,427, 916 to his victims and forfeit $3,808,831. On top of that, he was also sentenced to four years in prison.
To combat the exploitation of the real estate industry by criminals, FinCEN issued geographic targeting orders — or GTOs — for several geographic areas, including the California counties of Los Angeles, San Diego, Santa Clara, San Francisco, and San Mateo. These GTOs require title insurance companies and any agents or subsidiaries to file a suspicious activity report — or SAR — for any transaction in which residential real estate is purchased by a legal entity for $300,000 or more without any financing and using in part or entirely cash; a certified, cashier’s, traveler’s, business or personal check; any form of money order; virtual currency or a funds transfer.
A reporting company will have safe harbor from liability — but failure to comply with the GTO can expose the organization to civil or criminal penalties.
More Resources from Your Escrow Company in Los Angeles
For more information on reporting requirements, please contact Escrow Hub today. We take pride in being your go-to escrow company in Los Angeles for any resources you may require for success.