On March 3, 2022, we published an article titled The Effect of US Sanctions on Russia on Commercial Real Estate Documentation (there “Article by Seyfarth”) who discussed a number of different ways that U.S. people in real estate can undertake due diligence to ensure that they do not engage in transactions with companies and individuals blocked under recently expanded OFAC rules.
As an extension of the article above, we thought it would be useful to highlight two recent alerts from the Financial Crimes Enforcement Network (“FinCEN”):
(1) warning financial institutions to be vigilant about efforts to evade U.S. sanctions against Russia (https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Sanctions%20Evasion%20FINAL%20508.pdf) and
(2) alert financial institutions to the importance of identifying suspicious transactions involving, among other things, real estate (https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf).
FinCEN is an office of the United States Department of the Treasury whose mission is to protect the United States financial system from illicit uses and to combat money laundering and to promote national security through the collection, analysis and dissemination of intelligence and the strategic use of financial authorities. .
On March 7, 2022, FinCEN alerted all financial institutions to be vigilant against efforts to evade US sanctions implemented in connection with Russia’s invasion of Ukraine . Following the sanctions mentioned in the Article by Seyfarth, FinCEN warns that sanctioned persons (especially Russians and Belarusians) may seek to evade sanctions through a variety of means, including through unsanctioned Russian and Belarusian financial institutions and financial institutions in other countries. FinCEN highlighted several potential red flags to consider:
(1) the use of company vehicles to mask
(ii) the source of funds, or
(iii) the countries concerned, in particular the sanctioned jurisdictions,
(2) the use of shell companies to make international wire transfers,
(3) the use of third parties to obscure the identity of sanctioned persons seeking to disguise the origin or ownership of funds,
(4) accounts in jurisdictions or with financial institutions experiencing a sudden increase in value are transferred to their respective areas or institutions,
(5) jurisdictions previously associated with Russian financial flows that are identified as having recently experienced a notable increase in new business start-ups,
(6) newly created accounts that attempt to send or receive funds from a sanctioned institution or an institution withdrawn from SWIFT, and
(7) non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions.
On March 16, 2022, FinCEN issued a second alert specific to the real estate sector, noting that sanctioned Russians may seek to evade sanctions by buying and selling high-end commercial or residential real estate. According to the alert, real estate lends itself to storing wealth due to its high value, potential for appreciation and the use of layered transactions that could potentially hide the ultimate beneficial owner of a property. FinCEN warns that sanctioned Russians may buy or hold real estate through shell companies or trusts, or may liquidate real estate held in countries that have imposed sanctions on Russian individuals. FinCEN notes several red flags for the real estate industry to consider:
(1) the purchase, sale, gift or transfer of legal ownership of high value real estate in the name of a foreign legal person, shell company or trust,
(2) the use of legal entities or arrangements that may have a connection with Russian sanctioned persons to conceal the ultimate beneficiary or the origin or source of funds,
(3) changes to the transaction patterns of a business located in a country other than the United States, Russia, Belarus, and Ukraine, where the new transactions involve convertible virtual currency and related investments or businesses to Russia,
(4) if a Russian person or entity requests a wire transfer to a non-US (especially non-Russian) bank to pay for a purchase entirely in cash,
(5) the dilution of the equitable interest held in immovable property by sanctioned Russian individuals, by the addition or transfer of immovable property to an individual unaffiliated with the buyer or seller, and
(6) the maintenance, purchase or termination of property insurance by persons with a known connection to sanctioned Russian persons.
FinCEN’s issuance of two alerts within two weeks that identify the potential for sanctions evasion by Russian individuals underscores the need for parties to real estate transactions to exercise due diligence regarding the exact identity of a party with whom one is dealing (including the Beneficiary Owners of that party), so as not to inadvertently violate any statement of OFAC made in the real estate documents or the reporting obligations required by FinCEN. As noted in Seyfarth’s March 3 article, transacting with an OFAC-listed party can result in criminal or administrative penalties, in addition to possible breaches of real estate documents that could have serious ramifications, such as a lease termination, termination of property management services, JV buyout rights, cash trap trigger or foreclosure. All parties to real estate transactions should keep the above evasion tactics in mind when doing due diligence to ensure that they do not engage in transactions with companies and individuals blocked under the recently expanded OFAC rules.