Why the Trump Organization Can Play Dumb on Money Laundering

Oct 05, 2017   

October 01, 2017
By Maren McInnes

Due diligence for buyers is minimal, but Treasury is tightening rules on shell companies

President Trump has been connected to allegations of money laundering as far back as 1987, when a Russian gangster forfeited five condos in Trump Tower that authorities said he purchased with ill-gotten gains. And the appearance of impropriety hasn’t faded: A Kazakh family who bought apartments in Trump’s SoHo building is facing laundering charges from their government as well as the United States.

Yet even with special counsel Robert Mueller now reportedly investigating even more questions surrounding laundering between Trump and Russia, legal experts say the Trump Organization’s habit of selling to suspicious individuals over and over may be perfectly legal.

In fact, a privately held company like Trump’s is “generally not” obligated to investigate buyers of its property, says Stefan Cassella, former deputy chief of the Justice Department’s asset forfeiture and money laundering section. But that may change, as the Treasury Department has been steadily building a body of regulations that increase the responsibility of sellers across the board.

Laundering money via high-end real estate is a fairly common practice among criminals and corrupt organizations. Criminals create a shell company, which they use to buy a property. When they finally sell it, the money is clean. The Treasury Department’s Financial Crimes Enforcement Network said in an August advisory that real estate can be “an attractive vehicle for laundering illicit gains” because it appreciates in value, “cleans” large sums in one transaction, and shields buyers from market instability.

A New York Times investigation in 2015 found that more than half of all condo sales at the Trump International in New York were by hidden buyers. A more recent USA Today study found such transactions with the Trump Organization have rose 70 percent since Trump’s nomination.

The law hasn’t historically made many demands on sellers of such properties. University of Pennsylvania Law School professor Stuart Ebby said while the doctrine of caveat emptor—”let the buyer beware”—dates to the 17th century, there doesn’t exist an equivalent principle for sellers.

“Logically, the sellers aren’t in a position to investigate or deter buyers of their property,” said Katie Johnson, general counsel for the National Association of Realtors. “They don’t really have any incentive or desire to do that. They want to sell their property.”

There is a concept called customer due diligence, she explained, and the NAR has been strongly encouraging their member agents to “know your customer” for years. The association has a document that outlines recommendations for their members to spot potential illicit financial activities such as money laundering.

The August FinCEN advisory said while real estate agents and brokers are not required by law to report suspicious activity, they are encouraged to.

Property owners themselves are confined largely by criminal law. “Regulations are not yet designed for the sellers of the property, but to say that there’s no obligation on them I think is going a little bit too far,” said Andrew S. Ittleman, partner at Fuerst Ittleman David & Joseph. If a seller knowingly sells to a criminal and receives money derived from a crime, he could be prosecuted.

Cassella added that sellers who are “willfully blind” could still be charged. And anyone receiving more than $10,000 in a cash transaction must report it to the IRS. “There’s not a bright line, but there is a line that can be crossed,” he said.

If the seller is a financial institution, however, they are required by law to check out buyers. The Bank Secrecy Act of 1970 explicitly authorized FinCEN to create anti-money-laundering regulations for financial institutions, including those, like mortgage lenders, that deal in real estate. They also must file reports of suspicious activity.

In an email, a FinCEN spokesperson noted the law defines financial institutions as businesses and professions that could be vulnerable to money laundering or financial crime—banks, brokers, insurance companies, and even casinos. (In 2015, the Trump Taj Mahal casino had to pay the Treasury Department millions for violating anti-money- laundering laws.)

The BSA statute that defines financial institutions was amended by the PATRIOT Act to include persons involved in real estate closings and settlements. However, Jack Hayes, counsel at Steptoe & Johnson, explained that FinCEN hasn’t published final regulations implementing specific anti-money-laundering-compliance obligations that apply to such persons as financial institutions.

In the wake of the PATRIOT Act, FinCEN called for public input, but after reviewing comments, “recognized the complexity of the problem and chose not to impose anti-laundering requirements across all persons involved in real estate closings and settlements.” Therefore, they started with the real-estate-finance sector first and let individual sellers be.

In May 2016, Treasury announced new actions to combat illicit financial activities, including a customer due diligence rule that said financial institutions have to collect and verify personal information on the real people behind companies. Then in August, FinCEN announced requirements that title-insurance companies identify the real people behind shell companies that pay “all-cash” for high-end residential real estate in big markets such as New York and Miami.

Despite these new requirements, Cassella wonders at what point Treasury will impose on the real estate industry the full complement of rules that have been imposed on banks and other financial institutions.

“Financial institutions resisted this for some time, but they’ve come around in the 30 years I’ve been doing this,” he said. “I would expect the real estate industry, including title insurers, real estate agents and developers, would [initially] resist in the same fashion,” but eventually come around as well.