FinCEN Warns of Potential Sanction Evasion by Russian Entities Involved in U.S. Commercial Property Investments

On January 25, 2023, the Financial Crimes Enforcement Network (FinCEN) published an alert to financial institutions warning of the heightened risk of investment in commercial real estate by sanctioned Russian elites, oligarchs, their families and the entities through which they act. This alert is an update to a previously published alert from March of 2022 regarding the crisis in Ukraine and resulting sanctions affecting those conducting business in the real estate and insurance industries, among others. This FinCEN alert puts the industry on notice that financial regulators are watching the commercial real estate space closely for instances of sanctions evasion and money laundering by sanctioned Russians and the entities and individuals serving as their proxies.

FinCEN identified several vulnerabilities exposing the U.S. commercial real estate market to potential sanction evasion:

• Stability of the U.S. commercial real estate market and its high value commercial real estate properties make such investments ripe for generating steady income and storing large volumes of illicit wealth.
• Commercial real estate transactions involve complex financing methods that lack transparent ownership structures.
• Lack of transparency can provide a vehicle for bad actors to conceal unlawful funds within commercial real estate investments.

In addition to noting the reasons for additional diligence, FinCEN’s prior alert also noted the following select red flags for real estate transactions:

• The purchase, sale, donation, or legal ownership transfer of high-value real estate in the name of a foreign legal entity, shell company or trust, especially if the transaction: (i) is far above or below fair market value, (ii) involves all-cash transfers, or (iii) is funded by a third party with a known nexus to sanctioned Russian elites and their proxies.
• The use of legal entities or arrangements that may have a nexus to sanctioned Russian elites and their proxies to hide the ultimate beneficiary or the origins or source of the funds.
• Changes, without an apparent business reason, to the transaction patterns of a firm located in a country other than the United States, Russia, Belarus and Ukraine, where the new transactions involve convertible virtual currency and Russian-related investments or firms.
• A Russian individual or entity requests a wire transfer from a non-U.S. (particularly non-Russian) bank to pay for an all-cash purchase, especially if the wired funds come from an account held by an individual or entity other than the original requestor.
• The dilution of equitable interest held in real property by sanctioned Russian elites and their proxies, by the addition of, or the transfer of real estate to, an individual not affiliated with the buyer or seller.
• The maintenance, purchase, or termination of real estate insurance by persons with a known nexus to sanctioned Russian elites and their proxies.

The most recent alert builds upon these red flags and includes additional red flags that FinCEN, the Department of Treasury’s Office of Foreign Assets Control (OFAC), and the Department of Justice (DOJ) have been monitoring over the past 10 months since the increased Russian sanctions took effect last year. It also provides diligence guidance for insurance companies, financial institutions and other parties that may be involved in commercial real estate transactions.

We continue to closely monitor the situation and provide updates on ongoing developments and we advise clients in the real estate space and elsewhere on sanctions compliance and due diligence. Please to not hesitate to reach out to a member of the Faegre Drinker International Trade team or our Construction & Real Estate Litigation team if you have any questions.