Laundering Illegal Money? There's Ultraluxury New York Real Estate For That

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For decades, if one wanted to launder a few million (or billion) without paying taxes and attracting undue government attention, the proper venue were bank accounts in Geneva, Zurich or Bern. However, following recent events when courtesy of Barack Obama's tax "transparency" (if nowhere else) initiative, Swiss bank secrecy no longer exists, the world's uber-wealthy were stuck with a quandary: "where do we park our trillions in illicit cash without attracting the attention of tax and government authorities?"

Two years ago we revealed the answer, when we wrote "This is why the NAR will never be prosecuted for facilitating money laundering":

... a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors - those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) - which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

 

As a reminder, here is where the NAR stands on the issue of its most generous clients possibly being some of the worst criminal known to man, courtesy of Elanus Capital:

Many of you reading this will undoubtedly have spent time in an international bank and been forced to sit through countless hours of “know your client” and AML training. Fascinating to note that the National Association of Realtors lobbied for and received a waiver from such regulation. That’s right, realtors actually went to the U.S. government and said: we want to be able to help foreign business oligarchs and other nefarious business people launder money through the real estate markets of the United States – and prevailed.

 

Here's their official position:

 

"NAR supports continued efforts to combat money laundering and the financing of terrorism through the regulation of entities using a risk-based analysis. Any risk-based assessment would likely find very little risk of money laundering involving real estate agents or brokers. Regulations that would require real estate agents and brokers to adopt anti-money laundering programs may prove to be burdensome and unnecessary given the existing ML/TF regulations that already apply to United States financial institutions."

 

Hat’s off to the NAR – that is some serious doublespeak. My translation: We’ll support you as long as we don’t have to support you.

If after skimming the above, readers are still confused what the reason is for the luxury segment of the US housing market continuing to rise in price even as all other segments of the quadruplicate US housing market as explained here languish, we suggest rereading it as many times as necessary.

Indeed, the scheme was all the more attractive to Obama because in one fell swoop, the US president crushed Switzerland as the venue to park hot capital, and instead gave a green light to "deposit" said illegal funds in US ultra-luxury real estate, in the process pushing up real estate prices, if only at the high end, much higher, and giving the population the false impression that the housing market has not only stabilized (it hasn't) but is improving. Case in point: the latest just released NAR pending home sales data, about which even the NAR's always cheerful Larry Yun had the following caveat:

“The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year’s pace.... Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable.”

Odd how the NAR had nothing to say about foreigners abusing the NAR's exemption from anti-money laundering provisions. Which, incidentally, is the only reason why there is still any bid in US housing, which as we have shown before, is entirely at the ultra high end.

 

Today, we can finally end any debate on the topic of just where the world's illegal money comes to roost. The answer: ultra-luxury real estate, primarily in New York, courtesy of a report in New York magazine that catches up with what we first said in the summer of 2012, and which is titled, appropriately enough: "Stash Pad."

Below are some excerpts:

Extreme wealth demands extremely elaborate wealth management, and anyone who has a few million in spare cash will probably already have an entrée to the cloistered world of private banking. An anonymous high-net-worth client of Credit Suisse, who spoke to U.S. Senate investigators after taking advantage of an amnesty for tax cheats, described the process by which he would manage his funds when visiting Zurich. A remote-controlled elevator would take him to a bare meeting room where he and his private banker would discuss his money; all printed account statements would be destroyed after the visit.

 

The theatrical secrecy is designed to build personal trust between such bankers and their clients, which is especially vital when the goal of the transactions is to conceal assets from the prying eyes of rivals, vengeful spouses, or tax collectors. Moving the money itself is a relatively simple matter: A wire or a suitcase can convey cash from China to Singapore, or from Russia to an EU member state like Latvia, and once the funds have made it to a “white list” country, they can usually move onward without triggering alarms. Concealing the true ownership of a property or a bank account is trickier. That’s where the private bankers, wealth advisers, and lawyers earn their exorbitant fees.

 

Behind a New York City deed, there may be a Delaware LLC, which may be managed by a shell company in the British Virgin Islands, which may be owned by a trust in the Isle of Man, which may have a bank account in Liechtenstein managed by the private banker in Geneva. The true owner behind the structure might be known only to the banker. “It will be in some file, but not necessarily a computer file,” says Markus Meinzer, a senior analyst at the nonprofit Tax Justice Network. “It could be a black book.” If an investor wants to sell the property, he doesn’t have to transfer the deed—an act that would create a public paper trail. He can just shift ownership of the holding company.

 

Recently, scrutiny from the United States has punctured some of the traditional secrecy of Swiss banks. But that has just pushed clients to boutique advisory firms, often run by the same personnel. “Banks like working with those firms,” Meinzer says, “because they are then legally in the clear, without the risk of going to prison.” As international blacklisting has pushed some offshore locales toward greater legal compliance, new havens have arisen. New Zealand trusts offer similar secrecy to those of the Caymans, without the stigma.

 

It’s a sophisticated, well-oiled system that rarely requires crude subterfuge. Though U.S. authorities track all transfers over $10,000, a wire into a real-estate lawyer’s escrow account should look perfectly routine. “A lot of times, I don’t even know where my clients are from,” says the lawyer Bruce Cohen. “But I know that certain countries are very careful about the money that leaves their country.”

 

There is nothing illegal—at least from the destination nation’s perspective—about sending money from an anonymous offshore bank account to purchase property in America. On the contrary, it’s an everyday occurrence. That is precisely why experts say that property investment is a favored route for money laundering, a crime that depends on the outward appearance of legitimacy. The laundering process typically happens in stages: Illegal cash enters the world financial system somewhere and is funneled into a maze of accounts and shell companies, a process called “layering.” Finally, at the other end, funds are integrated into a seemingly respectable investment—like a luxury condo.

 

Secretive corporate structuring is a key element in the process. Earlier this year, an international team led by Shima Baradaran, a law professor at the University of Utah, published an ingenious study of its mechanics. The academics sent emails to more than 7,000 firms around the world that offer incorporation services, posing as a variety of characters, like a politically connected Uzbek or a Lebanese representative of an Islamic charity. “We purposely made it as shady as possible,” Baradaran says.

 

The experiment’s results confounded conventional presumptions. It turned out that offshore locales like the Caymans were the most stringent about complying with international anti-money-laundering standards. It was easier to set up an untraceable shell company in the U.S. than in any country other than Kenya. The study found firms in business-friendly states like Delaware and Nevada were particularly “abysmal.”

 

No federal authority, not even the IRS, keeps track of the actual “beneficial” owners behind LLCs, and the more lenient states don’t even require much record-keeping by the firms that handle incorporation. Many of the service providers Baradaran’s team approached asked for no identity documentation and were willing to set up LLCs in even the most suspicious scenarios. Most surprisingly, Baradaran found that the suggestion of foreign corruption actually increased the likelihood that a provider would agree to do business. “It’s really a race to the bottom,” Baradaran says.

 

Lawyers, brokers, and other service providers fall into a category that money-laundering experts refer to as “gatekeepers.” An international organization formed to combat such financial crime has called for gatekeepers to be required to report suspicious activity, and some nations, like Great Britain, have placed disclosure requirements on attorneys. But no such regulation exists in the United States, and while financial institutions are tightly monitored under the 2001 USA Patriot Act, parties to property transactions have been given a specific exemption. “It’s a big hole,” says Louise I. Shelley, director of the Terrorism, Transnational Crime and Corruption Center at George Mason University.

 

In 2010, Senator Carl Levin released the results of an investigation into the role of U.S. property in foreign corruption, highlighting cases like that of the son of the dictator of Equatorial Guinea, who bought a $30 million Malibu mansion. New York real estate often figures in such scandals. Ukrainian politician Yulia Tymoshenko has filed a civil lawsuit claiming a crony of the country’s ousted president moved tainted money into New York development projects, while her opponents claim, in turn, that she laundered money through the city’s real estate. In 2012, federal prosecutors seized a Trump Park Avenue apartment from the son of a Philippine general who had been convicted of taking bribes. A $1.6 million condo in the Onyx Chelsea, belonging to a former Taiwanese prime minister, was seized after it was tied to a corruption scandal.

 

Such cases are rare and laborious, however. “You have to prove the nexus between the corruption and the property itself,” says Jaikumar Ramaswamy, chief of the Justice Department’s Asset Forfeiture and Money Laundering division. “Sometimes judges are skeptical: ‘Why are we are going after some foreign guy who did something in a foreign country?’ ”

That's funny: because why is Obama and Eric Holder going after BNP, Barclays and HSBC for precisely the same reason? The answer is simple: America is desperate for New York to become the money-laundering capital of the New Normal: it desperately needs the offshore money to keep coming in, keeping prices as high as possible. In fact, this has already happened, and furthermore it has the full blessing of everyone in charge.

As for the bottom line:

The best—though still fuzzy—global estimates say as much as $1.5 trillion in criminal proceeds is laundered each year. The United Nations figures that as little as one-fifth of one percent of that is ever recovered. Levin has proposed legislation to extend the Patriot Act’s regulations to real-estate closings and to require disclosure from LLCs, but the bill has gone nowhere. Real-estate attorneys say such rules would violate their legal privilege, and brokers insist the marketplace already provides an incentive to keep transactions clean. “No building wants to have people who have made illegal money,” says Mark Reznik, a broker at A&I Broadway Realty, a firm that primarily serves Russian-speakers. Reznik says he provides a “prescreening” service for developers. “They want to have some kind of filter,” he says. “Like somebody said, Karl Marx or whatever, if the capitalist is going to see a triple return, he’s going to close his eyes. But we are trying not to deal with scumbags.”

Karl Marx did not say that but all those Americans who make money legally and who are trying to buy a place in New York, or any other US city targeted by money laundering foreign oligarchs, and who say "I am priced out of the market by criminals allowed to bid up real estate to the moon", well... sorry, you are out of luck. Thank America's corruption which starts at the bottom and stretches to the very top.

Read the full New York Mag article here.