Kleptocrats in the Crosshairs

by Sharon Cohen Levin

Let’s say you’re a powerful foreign leader who has accepted millions of dollars in bribe payments, a “Kleptocrat.”  You’ve got a problem: where to stash the loot?  The stacks are too big to stockpile in your piggy bank or sock drawer.  You need to be more creative.   Here is one solution: set up an off-shore company, open a bank account in a jurisdiction with strict bank secrecy laws, load the account with the bribe payments you received, and then buy premium real estate in the United States.  Voila – clean money.

Not so fast.

Foreign corrupt money in the U.S. has become a central focus for both the Department of Justice and domestic financial regulators.  Between money laundering and civil asset forfeiture statutes, the DOJ’s Kleptocracy Asset Recovery Initiative, and the Financial Crimes Enforcement Network’s (FinCEN) Geographic Targeting Orders (GTOs), among others, the U.S. government has the necessary arrows in its quiver to fight the practice of foreign criminals enjoying their spoils in the United States.

Just ask the government of Taiwan.

This past Thursday, the Department of Justice announced that it is returning approximately $1.5 million to Taiwan, proceeds derived from the sale of a forfeited New York condo and a Virginia home.  The DOJ discovered that both properties had been purchased with bribes paid to the family of Taiwan’s former President Chen Shui-Bian.

The story began in 2004, when, according to the civil forfeiture complaints filed by the DOJ, Yuanta Securities Co. Ltd. paid a bribe of 200 million New Taiwan dollars (about $6 million U.S.D.) to former First Lady Wu Shu-Jen, during former President Chen Shui-Bian’s administration.  The bribe was allegedly paid to ensure that the president would use his influence to support Yuanta’s bid to buy a financial holding company.

The U.S. investigation began in 2009 and revealed a textbook case of money laundering.  The DOJ alleges that bribe payments from Yuanta were delivered to the first family in fruit boxes stuffed with cash, stashed in closets, moved to a safety deposit box, and then to a banker’s basement before being transferred into a Swiss Bank account.  From there, the former first family took that money and, using Hong Kong and Swiss bank accounts, shell companies and a St. Kitts and Nevis trust, transferred bribe proceeds to purchase properties in Virginia and New York.

In late 2011, the US Attorney’s Office for the Southern District of New York (SDNY) filed a forfeiture action against the condo in New York.  (Full disclosure:  I was Chief of the Money Laundering and Asset Forfeiture Unit at SDNY the time, and one of the prosecutors that filed the complaint in this case.)  A parallel complaint was filed in Virginia.  In 2012, one of the shell companies, Avallo Limited, which held title to both the U.S. and Virginia properties through U.S. domestic companies, settled both forfeiture actions under terms that provided for the sale of the property and forfeiture to the U.S. government of approximately 85 percent of the net proceeds from the sales of the homes.

In 2013, the U.S. Government sold the two properties and the story came full circle last week when the crime proceeds were returned to the government of Taiwan.  This is precisely the type of misconduct DOJ’s Kleptocracy Asset Recovery Initiative was put in place to combat.  “The Kleptocracy Initiative was established to prevent corrupt leaders from using the United States as a safe haven for their ill-gotten gains,” said Assistant Attorney General Caldwell last Thursday, speaking about the $1.5M return of funds to Taiwan.

But it’s no longer just the DOJ.  In recognition of this issue, FinCEN has issued GTOs that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay all cash for high-end residential real estate in Manhattan and Miami.  According to FinCEN, its primary concern is that “all-cash purchases i.e., those without bank financing may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.”  Accordingly, the GTOs require certain title insurance companies to identify the beneficial owner behind a legal entity involved in residential real estate transactions worth more than $3 million in Manhattan and more than $1 million in Miami-Dade County.

The GTOs are indicative of a recent increase in law enforcement scrutiny of the real estate sector. Treasury and federal law enforcement officials have signaled their interest in investigating luxury real estate sales that involve LLCs, partnerships, and other legal entities as buyers.  Governmental interest is due partly to media reports on the rising use of companies by foreign buyers to shelter money in the United States.  An investigation by The New York Times found many hidden owners of high-end real estate who were the subjects of government investigations, including foreign government officials.  In addition, the FBI recently created a new unit to focus on money laundering, for which real estate will be one main focus, and Justice Department lawyers continue build cases around money laundering in real estate deals.

Through all these methods, the U.S. government is seeking to better understand and root out the risk that corrupt foreign officials, or transnational criminals, are using high-end real estate to hide dirty money.  In addition, the real estate industry, title insurers, and financial institutions are beefing up compliance to ensure they are aware of the true parties to a transaction.

As for the kleptocrats?  They should be aware that their proverbial piggy banks and sock drawers are in the government’s crosshairs.

Sharon Cohen Levin is a partner at Wilmer Cutler Pickering Hale and Dorr LLP.

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