Time to Clean House: Unpacking the Harms of Massive Money Laundering in the Real Estate Sector – The FACT Coalition

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Do you ever think about the connection between avocado toast and the abuse of shell companies by kleptocrats looking to shield their criminal and corrupt funds from the eyes of their constituents, facilitating corruption, weakening the integrity of the global economy, and creating geopolitical firestorms in the process? No? Just me?

Well it’s time to start thinking about it, because the United States and Australia – two major jurisdictions that I’ve been lucky enough to call home – are considering major changes to how they safeguard their real estate sectors from money laundering. These governments must follow through and put in place strong regulations to tackle this multi-billion dollar crisis.

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In 2017, Australian property developer Tim Gurner claimed that millennials could not afford property because they were wasting money on avocado toast and good coffee. The comment received such a severe backlash that the connection between avocado toast and real estate remains part of the cultural milieu in Australia, and elsewhere, to this day. Millennials (of which I am one), hit back, claiming it would take over 100 years of skipped brunch to make up an initial deposit in today’s housing market. 

But real estate is not just a lightning rod for intergenerational skirmishes – it’s a lightning rod for dirty money. While the occasional avocado toast is not likely to make buying property more difficult, dirty money laundered through the real estate sector just might. As an Australian living in the United States, and with long overdue anti-money laundering reforms on the horizon in both jurisdictions, I want to take a moment to reflect on the scale of the issue in both countries, the road to reform, and the importance of getting it right. There is much more at stake than avocados and flat whites (or property prices alone, for that matter). 

Dirty Money in Real Estate in the United States and Australia

The scale of the problem in the United States is significant. Researchers at FACT-member Global Financial Integrity have found that, at a bare minimum, $2.3 billion has been laundered through real estate in the U.S. from 2016 to 2021, with the real number likely much higher. Anonymous shell companies and complex corporate structures are often common features of these cases. In its recent report, A Welcome Mat for Corruption, FACT member Transparency International U.S. compared the U.S. anti-money laundering protections in the real estate market to 21 other jurisdictions, mostly in the OECD (though not Australia). “The United States is a singular outlier among surveyed countries,” the report found, “with [anti-money laundering] deficiencies that must be resolved in order to realistically provide a robust and effective framework for guarding the U.S. real estate sector.”

The real estate sector has long been identified as an area of vulnerability, but solutions have been deferred, or piecemeal at best. In 2002 (well before the avocado generation was so busy purportedly frittering away their real estate dreams), Treasury’s FinCEN department was directed under the PATRIOT Act to apply anti-money laundering monitoring and reporting requirements to the real estate sector. At that time, Treasury instituted a ‘temporary exemption’ that, unbelievably, remains in place today.

Treasury did take a small step to pull back the veil of opacity in 2016, when the department instituted Geographic Targeting Orders (GTOs) to scrutinize “all-cash” transactions, or those not involving a bank-loan, in counties it identified as ‘high-risk’. But the dirty money problem is not limited to ‘non-financed’ transactions, nor is the problem limited only to high-end markets like Manhattan and Miami. As Global Financial Integrity demonstrates in its report, Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream, over one-third of the known instances of money laundering through real estate in recent years were in locations not covered by GTOs. When you think of dirty money in real estate, you might not immediately think of Anchorage, Alaska, Colorado Springs, or Eugene, Oregon, where Kenneth Zong allegedly laundered proceeds from helping the Iranian government evade sanctions to the tune of over US$1 billion in transfers around the world. 

Money laundering through real estate is also a significant issue in the land of the flat white. Australia’s anti-money laundering regulator, AUSTRAC, identified money laundering through real estate as a significant issue in a 2015 strategic brief. “Compared to other methods, money laundering through real estate – both residential and commercial – can be relatively uncomplicated, requiring little planning or expertise,” the brief stated. “Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.” 

AUSTRAC estimated that in 2016 over AUD$1 billion from Chinese interests alone was laundered through Australian real estate, and in 2021 the Australian Federal Police (AFP) seized AUD$116 million in real estate assets connected with money laundering. In 2021 and 2022, over half of the value of assets confiscated by the AFP was attributed to real estate. The takeaway, according to John Chevis, an independent anti-money laundering consultant, during an inquiry by the Australian Senate, is that laundering money through real estate in Australia “is too easy.” 

The Social Cost of Dirty Money in Real Estate

The problem is widespread, and has widespread impacts. While difficult to quantify, studies do indicate that money laundering affects real estate prices. For example, a study in the Canadian province of British Columbia found that real estate money laundering resulted in estimated price increases of between 3.7% to 7.5%. While increases in demand – including by questionable buyers – may fuel this price hike, it’s likely that the overwhelming inflow of cash into the real estate sector is incentivizing developers to prioritize luxury real estate properties over affordable housing. Flows of illicit cash into real estate only exacerbate this problem. When the supply of affordable housing drops, prices spike. 

But its effects are not limited to property prices. Mismanaged commercial real estate investments purchased to obfuscate ill-gotten gains can lead to real-world harms for ordinary workers. Look to West Virginia: when a Ukrainian oligarch’s dirty money was laundered through residential and commercial real estate in America’s midwest and ‘rust belt’, it left a trail of injured workers and shuttered factories in the middle of towns that could have benefited from genuine investment. “Not only does real estate money laundering undermine public safety, but it further puts a strain on housing markets in vulnerable communities, fanning the flames of the fair housing crisis in the United States,” said Ian Gary, executive director of the FACT Coalition, when FinCEN proposed addressing real estate vulnerabilities in late 2021.

In February 2023, it was revealed that a massive money laundering network in Australia had purchased properties and luxury assets worth over AUD$150 million – including a plot of land in a rural area on Sydney’s western fringes, where they planned to turn the plot into a housing development. (This is a common way for criminals to both obscure the origins of dirty money and make profit on a legitimate looking enterprise.) As prices in Sydney’s inner and eastern suburbs become more and more unaffordable, many are moving to more affordable housing developments in Sydney’s west, setting up long commutes back to the city for work. What happens, then, if it turns out that the development someone bought into was owned by a money laundering syndicate like this one?

Along with economic instability and inequality, issues like environmental degradation and climate change are cited as leading causes for pessimism for younger generations, and here too there is a real estate connection, because behind all money laundering is a crime and its proceeds being obscured. As we see an increasingly fragmented and warming world, the proceeds of crimes that destabilize our communities and destroy our environment are funneled into the places, our homes, where we ought to feel safest. Kleptocrats, sanctions evaders, and corporate entities that profit from the degradation of the environment launder money through real estate. Those who traffic in drugs, wildlife, or even humans launder money through real estate. There is added indignity in seeing those who profit illegally off economic instability and environmental degradation placing those proceeds into real estate that law abiding citizens will never afford, and turn that into an investment ordinary people will never have access to. 

The United States and Australia are Finally Starting to Play Catch-up

Directly regulating professionals working in the real estate sector – yes, real estate agents, but also real estate brokers, lawyers, and accountants – is key to addressing this issue. While the U.S. and Australia are two of only five countries who do not apply anti-money laundering regulations to these “enabling” professions, there is long-overdue progress on the horizon. Though the U.S. Congress has yet to pass the ENABLERS Act, the Department of the Treasury has recently announced plans to propose a rule covering the residential real estate sector in February 2024, as well as a proposed rule covering the commercial real estate sector in September 2024. Enablers reform has been in consideration for some time in Australia, and has been called for by the Financial Action Task Force, the foremost international anti-money laundering standard setter, and by AUSTRAC’s CEO. A March 2022 Senate review of the adequacy of Australia’s anti-money laundering regime has urged the government to speed up this process, and public consultations began in April 2023. 

The U.S. and Australia must move swiftly, with effective and robust rules, as they seek to close these loopholes that threaten our collective economic, social, environmental, and political stability. Doing so will bring us one step closer to a society where corrupt actors have no avenues to hide and use their ill-gotten gains, least of all in our backyards.

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