Program to Track Laundered Money in Luxury Real Estate Continues

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February 23, 2017
By Carla Vianna

What began as temporary oversight over two of the nation’s hottest luxury real estate markets — Miami and Manhattan — has been extended by the federal government for a second time.

Aimed at tracking laundered money in the nation’s luxury housing market, the Treasury Department last year issued geographic targeting orders, or GTOs, described as a temporary data-gathering tool for specific metro areas, over South Florida and other high-end housing markets.

Spearheaded by the Financial Crimes Enforcement Network, the anti-money laundering initiative required title insurance companies to disclose the names of people behind the limited liability companies, or shell corporations, paying cash for $1 million-plus homes in Miami-Dade, Broward and Palm Beach Counties.

The orders were extended Thursday for an additional 180-day period.

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector,” said FinCEN acting director Jamal El-Hindi. “The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

The additional reporting requirements went into effect early last
year targeting pricey housing purchases in Miami and Manhattan for 180 days. The feds soon expanded their reach to the Los Angeles, San Francisco, San Diego and San Antonio metro areas while expanding the orders’ lifespan another six months.

The orders were set to expire Thursday.

FinCEN said about 30 percent of the transactions covered by the program involve a beneficial owner or buyer representative that was subject to a previous suspicious activity report. The findings confirm the agency’s concerns about the use of shell companies to buy real estate in “all-cash” transactions.

Andrew Ittleman, a partner with Fuerst Ittleman David & Joseph, said the regulation’s renewal is a way for the new administration to “wrap its arms” around the underlying problem — real estate being used as a vehicle to hide dirty money.

“But at some point this process of serial GTOs is going to have to end,” Ittleman said. “That’s when you will get a better understanding of the new administration’s position on all of this.”

Because wire transfers fall outside of FinCEN’s authority, little effect has been noted on the South Florida real estate industry as most home purchases are funded via wire. Real estate attorney James Marx said the regulation had no impact on homebuying activity. The sole purpose for its renewal was to avoid the negative dialogue, “President Donald Trump favors money laundering,” he added.

When the initiative was launched last year, the Miami lawyer with Marx Rosenthal said the move signified a shift toward more transparency in the banking and real estate industries, but he doesn’t see the Trump administration supporting the measure.

“I don’t think it makes economic sense to have more transparency for real estate transactions because you’re going to discourage people from other countries from investing in the U.S.,” Marx said. International investors have historically eyed the U.S. real estate market as a safe, private place to park their capital, and that’s something Trump will continue to support.

“I’d be very surprised if they made things more difficult for individuals or entities buying real estate in the U.S.,” he said.

 

Feds renew crackdown on dirty money in Miami real estate

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February 23, 2017
By Nicholas Nehamas

After months of “will-they-or-won’t-they” speculation, the U.S. Treasury Department announced Thursday that it will extend its search for dirty money in six high-end real estate markets, including South Florida, for another six months.

The rules, initially imposed early last year as a temporary measure on Miami- Dade County and Manhattan, require shell companies buying expensive homes with cash to report their true owners to the Financial Crimes Enforcement Network (FinCEN), a Treasury agency. Law enforcement officials have said a lack of oversight allows criminals from around the world to launder money through luxury real estate in the United States.

In the weeks following the election of President Donald Trump — a former real estate developer — it was unclear if the new administration would continue the effort, which was set to expire on Thursday.

“This is an administration that says it is both pro-business and pro-law enforcement,” said Lee Stapleton, a South Florida attorney and former federal prosecutor. “This order shows that they’re not incompatible. … It’s not good for real estate or for business if illicit dollars are artificially inflating the market. And law enforcement doesn’t want real estate to be a safe haven for money laundering.”

The so-called geographic targeting order had already been renewed once before when it was also expanded to Broward and Palm Beach counties; the other four boroughs of New York City; Los Angeles County; San Diego County; the greater San Francisco area; and the county that includes San Antonio, Texas. The rules kick into effect at different price points depending on the market. In South Florida, home sales of $1 million or more are covered.

By extending the order rather than announcing a plan to craft permanent regulations that would apply nationwide, the Trump administration showed it has perhaps not made up its mind on whether to continue the crackdown long-term, said Andrew Ittleman, a Miami-based attorney who is an expert on anti-money laundering compliance laws.

“I wouldn’t read too much into the extension,” Ittleman said. “Trump was only inaugurated a month ago. To me, this is a sign the administration could be kicking the can down the road a little bit. … They have plenty of issues on their plate right now.”

The cities chosen for enhanced scrutiny all feature pricey real estate markets and an abundance of foreign buyers, a combination federal law enforcement officials believe make them prime targets for money laundering.

“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida, told the Miami Herald in January. “We come across real estate being purchased with illicit funds once every other case.”

Money laundering fight

In a news release, FinCEN said 30 percent of reported transactions across the nation were linked to buyers who had been flagged by banks and other financial institutions for suspicious activity.

The agency has not said how many transactions have been reported or whether any have led to criminal investigations. Officials have described the rules as a temporary data-gathering activity meant to determine if money laundering in real estate deserves permanent national regulations.

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector,” FinCEN acting director Jamal El-Hindi said in a statement. “The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

Some brokers and developers have worried the rules would affect sales — although a Herald analysis found that doesn’t appear to be the case — and criticized the government’s efforts as unnecessary and poorly designed. But a national trade group for the title industry said it supports the anti-money laundering push.

“Our members have collected this information for more than a year and the good news is those efforts appear to be beneficial to the government’s work identifying money laundering schemes and the illegal purchase of real estate,” Michelle Korsmo, chief executive officer of the American Land Title Association, said in a statement. “We continue to work closely with our members and FinCEN to collect the needed information as efficiently as possible.”

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U.S. Renews Real-Estate Data Targeting Order

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February 23, 2017
By Samuel Rubenfeld

The U.S. Treasury Department extended for another six months a data- collection program to aid a crackdown on money laundering in real estate.

The program, which began in March 2016 and was expanded in August, requires title insurance companies to identify the true owners of limited liability companies that buy luxury real estate in all-cash transactions in some large cities, including New York City, Los Angeles, San Francisco and Miami. It was set to end Thursday; the renewal expires Aug. 22.

Treasury’s Financial Crimes Enforcement Network, or FinCEN, which issued the directives, known as geographic targeting orders, said in a statement that the data collected thus far corroborate the agency’s concerns about the use of shell companies to buy high-end property.

Acting FinCEN director Jamal El-Hindi said in the statement that the geographic-targeting orders are “producing valuable data” that’s assisting law enforcement and are “serving to inform our future efforts to address money laundering in the real-estate sector.”

Stephen Hudak, a FinCEN spokesman, declined to comment on any future plans to address the issue. Risk & Compliance Journal reported last year on the orders representing the first step toward broader anti-money laundering compliance requirements for the real-estate industry, which had

previously fended off such efforts from the federal government after the Sept. 11, 2001, terrorist attacks.

The goal, Treasury says, is to make it more difficult for buyers, particularly foreigners, to launder money through U.S. property purchases. About one- third of the transactions covered by the orders involve a person who is already the subject of a suspicious-activity report, FinCEN said.

Treasury says the orders impose the requirements on title-insurance companies because such insurance is a common feature in the vast majority of real-estate transactions, including those that don’t involve banks, which would perform checks for money-laundering risks when considering whether to fund a mortgage. As such, Treasury says, the title insurance companies “can provide FinCEN with valuable information” about transactions of concern.

Michelle Korsmo, chief executive of the American Land Title Association, a trade group representing the companies covered by the orders, said the efforts of their member for the past year “appear to be beneficial” to the federal government’s work identifying money-laundering schemes in real- estate purchases.

“We continue to work closely with our members and FinCEN to collect the needed information as efficiently as possible,” said Ms. Korsmo.

FinCEN collects and analyzes suspicious-activity reports filed by financial institutions, and Mr. Hudak said banks have also been filing more reports related to potential money laundering involving real estate as a result of the attention generated by the geographic targeting orders.

Mr. Hudak said the orders flagged, among others, beneficial owners suspected of being involved in public corruption in Asia and South America, and a beneficial owner who engaged in $160 million of suspicious financial activity and sought to disguise ownership of related financial accounts. He declined to provide further detail.

At some point, said Andrew Ittleman, a partner at Fuerst Ittleman David & Joseph PL, FinCEN will have to start the process of writing regulations to permanently formalize the process.

“Kicking the can down the road isn’t the way this is supposed to be addressed. It’s not the way federal agencies are supposed to create rules,” he said.

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Federal regulator renews real estate money laundering dragnet in South Florida

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February 23, 2017
By Nina Lincoff

In its continuing effort to crackdown on real estate money laundering, the Financial Crimes Enforcement Network (FinCEN) announced it will renew an order requiring title companies to identify the natural persons behind companies in residential currency transactions of $1 million or more in South Florida.

FinCEN announced Thursday that it would renew a temporary order – for the second time – which aims to end secrecy in real estate purchases in six major metropolitan areas, including South Florida. The goal of “geographic- targeting-orders,” or GTOS, is to make it more difficult for mysterious shell companies to drop millions of dollars of cash on luxury condos and homes.

The ruling could have an impact in Miami-Dade County, where there is the largest supply of $1 million-plus condos in the region’s history.

The FinCEN order, which has been in place since last year, has proven very effective when it comes to identifying potential high-risk real estate money laundering transactions.
FinCEN found that 30 percent of the transactions covered by the order thus far have involved an owner that is also named in a suspicious activity report, or red flag report. Banks file SARs when a customer does something that is outside the normal course of business and seems potentially suspicious.

The FinCEN geographic targeting order first came into effect on March 1, 2016 and was set to expire on August 27 of the same year. That order targeted deals in Miami-Dade and Manhattan. In July, regulators decided to expand the dragnet, adding Broward and Palm Beach counties, among other areas, to the order. The expanded order also covered business and personal checks, as well as currency transactions and cashier’s checks.

That expanded order was set to expire on Thursday, but it seems that FinCEN likes the information that it has been getting.

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector,” said FinCEN Acting Director Jamal El-Hindi on Thursday. “The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

The renewed order becomes effective on Friday, and will stay in place for 180 days, according to FinCEN. The six major metro areas covered by the GTO are all boroughs of New York City, South Florida, Los Angeles County, three counties in the California Bay Area including San Francisco, San Diego County, and Bexar County in Texas, which includes San Antonio.

The order essentially means that for all residential transactions over a certain price threshold, law enforcement wants to know the actual person buying the property. The price thresholds change depending on region – in South Florida it’s still $1 million, while in Manhattan it’s $3 million.

Cash sales are huge in South Florida, and Miami-Dade County has the biggest supply of $1 million-plus condos for sale in the region’s history. As of Dec. 31, there were approximately 2,549 $1 million-plus condos for sale in Miami- Dade.

While this order isn’t meant to discourage legitimate buyers from purchasing real estate, it may have an effect on buyers who don’t want their identities tied to properties they own.

FinCEN is an arm of the U.S. Department of Treasury. Treasury has been tasked by President Donald Trump via executive order to review existing regulation and legislation and how such oversight impacts business success. The fact that the FinCEN GTO has been renewed, despite a new administration viewed as more business-friendly, suggests that either the GTO has been very effective, and/or that the problem of real estate money laundering is very severe.

“The GTO presents an interesting conundrum for the new administration. On the one hand, President Trump made his name as a real estate developer and has held himself out as being friendly towards development,” said Andrew Ittleman, a partner at Miami law firm Fuerst Ittleman David & Joseph. “On the other hand, Trump was the ‘law and order’ candidate, and appears to be taking an aggressive posture towards crime, especially the international variety.”

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States Keep Passing Laws On Marijuana As Anti-Marijuana Leaders Take Over

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February 8, 2017
By Debora Borchardt

The states may be pushing forward with more legalization of marijuana, but Washington, D.C., might be stepping back. The marijuana business community has a mixed outlook regarding how the new administration will address their emerging multimillion-dollar industry. Some say “the genie is out of the bottle and they won’t roll it back,” while others are nervously parsing each political utterance about cannabis.

In Tom Angell’s Marijuana Moment newsletter, he pointed out that during yesterday’s nomination hearing for Jeff Sessions as Attorney General, Elizabeth Warren noted his penchant for “aggressively prosecuting marijuana offenses” before she was silenced. Hawaii Senator Brian Schatz said that he believed Sessions’ views on marijuana were out of the mainstream and suggested that Sessions tell cancer victims that “good people don’t smoke marijuana,” a reference to one of Sessions well-known quotes. Washington Senator Maria Cantwell said Sessions “refused to respect the rights of states” to enact their own marijuana laws.

Separately, President Trump met with law enforcement officials and the topic of asset seizures came up. This is a very sensitive subject for many marijuana businesses. Several dispensaries tell stories of being raided and losing inventory as well as cash that they store in their vaults because they can’t get bank accounts. They are either not charged with a crime or have the charges dropped, but then never get their money or their inventory returned. A Texas sheriff complained that a state senator wanted to ban the practice and Trump threatened, perhaps jokingly, that he wanted to destroy that lawmaker’s career. That’s definitely not what cannabis owners want to hear.

Not only is Sessions going to work against the marijuana industry, but also the next Health and Human Services Secretary Tom Price is decidedly anti-marijuana. He will oversee the Food and Drug Administration, the National Institutes of Health and the Substance Abuse and Mental Health Services. Price has consistently voted against marijuana legislation. It’s hard to imagine these two won’t convince Trump to see things their way. The president already believes that all drugs are the reason behind a lot of crime today.

“There’s been nothing created at the federal level to let any of this [legalization] happen,” said Andrew Ittleman a partner at Fuerst Ittleman who works with marijuana issues. “If they want to change the course of the industry, it is well within their power to do so.” He added that he doesn’t see the scheduling of marijuana moving in a positive direction under Trump.

Meanwhile, states continue to approve and advance various laws surrounding medical marijuana and decriminalization. Georgia wants to expand qualifying conditions for medical marijuana, Wisconsin is voting to expand cannabidiol access this week, Utah approved a medical cannabis research bill and New Hampshire voted to move forward with decriminalization. There are however, signs of push back as well. Maine is looking at delaying retail sales marijuana in the state and Arkansas is trying to amend a voter-approved medical marijuana law.

For now, the industry is moving forward with the assumption that it will be business as usual and that marijuana is a low priority item on Trump’s agenda. However, nothing in this new administration is business as usual.

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Will Trump end crackdown on dirty cash in luxury real estate?

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January 22, 2017
By Nicholas Nehamas

Just a month after President Donald Trump’s inauguration, a federal anti-money laundering program that targets luxury real estate is set to expire.

The dragnet monitors pricey home deals for signs of dirty cash, helping detect criminals who launder money through real estate. Manhattan and Miami-Dade County were the first markets scrutinized by the feds.

Here’s the big question: Will Trump — who made his money as a developer — keep the heat on the real estate industry? And if the administration of a developer-turned-president chooses not to renew or expand the regulations, will it be perceived as a conflict of interest?

Unlike other industries where cash changes hands freely, real estate has few checks on buyers.

Drug dealers and corrupt foreign officials have been busted buying condos and mansions in the United States. While the Obama administration rules were blasted by developers and brokers as faulty, they don’t seem to have hurt business as much as first feared since going into effect in March.

Trump’s decision could affect home prices in South Florida and other top markets. Streams of foreign cash are driving up prices beyond what many locals can afford, even as they’ve created jobs in the construction and real estate sectors. More than 70 percent of foreign buyers in South Florida pay cash, according to the Miami Association of Realtors. (Cash deals are vulnerable to money laundering because they don’t involve banks, which are required to report suspicious activity.)

The new president’s team did not respond to interview requests. And the Financial Crimes Enforcement Network (FinCEN) — the U.S. Treasury Department agency responsible for the rules — said it could not comment on its plans.

“As we are still in the data-gathering phase …. we cannot speculate on any future actions,” said Stephen Hudak, a FinCEN spokesman. The agency has described the regulations — renewed for 180 days at a time — as a pilot program to decide if real estate deserves permanent anti-money laundering rules.

Law enforcement supports the push.

In the United States, it’s possible for a shell company to buy a home without anyone knowing who the real owner is. That allows criminals to stash cash in real estate, officials say.

“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” said John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida. “We come across real estate being purchased with illicit funds once every other case. And then the challenge becomes who is the real owner. … When we knock on the door of the individuals involved in the real estate transaction, they say they don’t know.”

The initiative — known as a geographic targeting order (GTO) because it zeroes in on specific metro areas — is set to expire on Feb. 23. Before then, FinCEN could renew the order for another six months. Or it could announce plans to make the measure permanent. Or it could simply allow the rules to lapse, saying it had accomplished its data-gathering mission.

Another GTO targeting electronics exporters in Doral was not renewed after a year.

FinCEN’s director, Jennifer Shasky Calvery, left the agency last year. That means Trump’s nominee for Treasury secretary, former Goldman Sachs executive Steven Mnuchin, if confirmed, will appoint her successor.

Decision time

Trump staked his presidential campaign on business-friendly policies and support for law enforcement.

But in real estate, those pledges could clash like bulldozers playing chicken. via GIPHY

In a video address previewing his first 100 days in office, Trump said he would “formulate a rule which says that for every one new regulation, two old regulations must be eliminated.”

“So important,” he added.
In other speeches, he cast himself as a “law and order” candidate.

“On crime, I am going to support more police in our communities, appoint the best prosecutors and judges in the country, pursue strong enforcement of federal laws, and I am going to break up the gangs, the cartels and criminal syndicates terrorizing our neighborhoods,” he said in an August speech.

Laundering money through real estate is a key way criminal organizations hide their profits.

Lee Stapleton, a South Florida attorney and former federal prosecutor, said even with a change to an anti-regulation administration, she feels a reversal is unlikely.

“It’s difficult to un-ring the bell,” Stapleton said. “Once these regulations have been put in place, it’s more likely that they will be expanded to other cities rather than removed from the cities where they already exist. … If it’s

something that’s been successful in the test cities, it’s possible to see it nationwide.”

So far, there’s been little indication which way FinCEN will go.

Andrew Ittleman, an attorney who focuses on anti-money laundering compliance, said he was sure the rules were here to stay — when it seemed like Democratic nominee Hillary Clinton would be the next commander-in- chief.

“We now have a president who used to be a real estate developer,” Ittleman said. “That’s a big wild card. … He’s going to have a decision to make as to his priorities: Do we want to curb this kind of money laundering? If so, is it worth curbing future real estate development?”

For the Trump administration, any decision on the issue presents a conflict of interest, said Richard Painter, a former chief ethics lawyer for George W. Bush who has urged Trump to divest his family’s business holdings.

“If the regulation gets rescinded, it could appear Treasury is backing off money laundering in real estate,” Painter said. “And why? Because the president is a real estate developer who sells a lot of high-end units? Or because of a legitimate policy goal? No one will know.”

As a developer, Trump signed licensing deals for several luxury condo towers in South Florida. Among the buyers at three Trump-branded properties in Sunny Isles Beach were members of a Russian-American organized crime group, a Venezuelan oilman convicted in a bribery scheme and a Mexican banker accused of robbing investors of their life savings, a Miami

Herald investigation found. (An attorney for Trump said his organization was not involved in sales.)

Crackdown begins

In January 2016, FinCEN announced it would begin monitoring secretive luxury home transactions in two markets: Miami-Dade and Manhattan.

The agency chose Miami and Manhattan because in both places many homes are bought with cash and banks report a high number of suspicious transactions. The regulations were later expanded to other markets in New York, Florida, Texas and California.

The rules require title insurance companies to report the true owners of shell companies using cash to buy luxury homes. In Miami-Dade, the regulations kick in for deals of $1 million or more. In Manhattan, the price point starts at $3 million. (Title insurers play a role in almost all real estate transactions.)

Banks operate under similar “know-your-customer” rules.

At the time, real estate players balked, worried about a negative effect on business and the industry’s reputation. The Miami Realtor’s Association hosted a seminar entitled “How to Avoid the Treasury Trap.”

So far, however, the effect on sales has been muted, according to Realtors, analysts and industry data.

While it’s true that luxe sales fell dramatically in South Florida in 2016, most of the decline is attributable to a strong dollar, economic instability in Latin America and overbuilding, said Ron Shuffield, president and CEO of EWM Realty International, one of South Florida’s top brokerages.

“When you started getting to a point where it was 100 percent more expensive to buy here than it was the year before, many of the big Latin American buyer markets shut down,” Shuffield said.

The number of sales began to fall before the GTO went into effect. Since then, the free-fall has continued. In Miami, sales of more than $1 million fell 19 percent year-over-year since the order began in March 2016, according to EWM and Trendgraphix. In New York City, sales were down 6 percent, appraisal firm Miller Samuel found.

In July, FinCEN announced it would expand its order. Now under heightened scrutiny: all five boroughs of New York City; Miami-Dade, Broward and Palm Beach counties; the San Francisco bay area, Los Angeles and San Diego; and the county that includes San Antonio, Texas.

Sales in affected markets in California and Texas markets have boomed, suggesting the GTO is playing only a small role in the South Florida and New York slowdowns.

FinCEN hasn’t said how many transactions have been reported. In a conference call with reporters last year, a Treasury official revealed that a quarter of the transactions reported to the agency in Miami-Dade and Manhattan involved people whose banks had also filed suspicious activity reports about their business dealings.

Not so bad for business

The narrowly tailored order hasn’t been as burdensome as the industry feared.

“I don’t think our title companies have had to deal with more than a couple of these transactions,” Shuffield said. “We thought there might be a stigma that would attach to New York and Miami. But I think people have forgotten about it.”

One reason for that: Cash, in FinCEN’s definition includes hard currency, personal checks, business checks, traveler’s checks and money orders. But it does not include bank wire transfers, the most common way buyers pay for pricey homes.

FinCEN’s authority does not allow it to track wire transfers. But it has asked Congress for that power, with the support of law enforcement.

“We’re one of the only countries in the world that doesn’t keep track of incoming and outgoing wires,” said Tobon. “The banks do it, but they do it for their business purposes. I have to get a subpoena, and the info is very limited.

If I were working for the [Royal Canadian Mounted Police], I would have that in real time.”

If permanent regulations allow monitoring of wire transfers, the order could have a more dramatic affect, brokers agree.

Some buyers have tried to avoid the disclosure requirements by using wire transfers instead of cash, according to Leonard Prescott, Florida counsel for First American Title Insurance, who spoke at a Greater Miami Chamber of Commerce event last year.

While the effects of the crackdown are difficult to measure in economic terms, they have helped educate the business community and the public, said Jonathan Miller, a New York-based housing analyst.

“Before this ruling, I don’t think most were aware of the scale of kleptocracy around the world, so it helped shed some light on it,” he said. “With the new administration and their outward goal to reign in regulations, I have to wonder if it will be remain in place indefinitely.”

Richard Steinberg, a luxury broker in New York and Palm Beach, said he doesn’t think the order was well conceived. But he has changed the way he does business since it was issued: Even though the rules apply to title insurers, not brokers, he now insists on knowing the names of all his buyers, not just their lawyers or accountants. So far, he said, clients have agreed.

“Why look for problems?” he asked. “I don’t want anything to come back and haunt me.”

 

Andrew S. Ittleman, a founder and partner of Fuerst Ittleman David & Joseph in Miami, concentrates his practice in white-collar criminal defense, anti-money laundering compliance, and food and drug law. He litigates extensively against the U.S. government in civil and criminal matters. He may be reached at aittleman@fidjlaw.com.

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The Money Services Banking Crisis: A Complex Solution for a Simple Problem

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Commentary by Andrew S. Ittleman
Daily Business Review

Money services businesses, a broad category of nonbank financial institutions running the gamut from brick-and-mortar money transmitters, check cashers and currency exchangers to more modern e-wallet and prepaid access providers and bitcoin exchangers, provide millions of Americans with financial services they cannot receive from banks.

To show how critical MSBs are to the functioning of the U.S. financial system, a 2013 Federal Deposit Insurance Corp. survey found 9.6 million U.S. households did not have bank accounts and 24.8 million households — 20 percent of the U.S. population — were underbanked, meaning they had bank accounts but also used alternative financial services outside of the banking system.

Today, MSBs worldwide are caught in a banking crisis showing no signs of relenting. Based on real and imagined enforcement risks, most banks have categorically decided against providing accounts to MSBs, while others have been ordered by regulators to stop serving MSBs. This process of “de-risking,” by which banks terminate relationships with “high-risk” customers, has been brutal for the MSB industry and resulted in unforeseen consequences, including:

• Banks as de facto regulators.

Banks have become the primary MSB industry regulators, a role they neither desire nor can fulfill. Even for MSBs with the required state licenses and Financial Crimes Enforcement Network registration, banks hold the exclusive authority to decide which MSBs live or die, and exercise this authority without due process or standards comporting with the rulemaking requirements of any first-world jurisdiction.

• Elimination of MSBs.

Many longstanding MSBs have ceased operations because of a lack of access to banks. Startups offering digital and virtual solutions for their customers have failed for the same reason. All of this leads to fewer choices, poorer service and higher prices for MSB customers.

• Unsafe and unsound financial activities.

Some MSBs have clouded the nature of their businesses to open bank accounts, defeating the banks’ anti-money laundering programs. By deceiving banks, numerous MSBs have committed federal felony offenses and been criminally prosecuted. In other cases, as recently reported by the Wall Street Journal, money transmitters have been forced to fly cash-filled duffel bags to Dubai for distribution throughout the Middle East and Africa because banks in the U.S. have ceased providing accounts to MSBs serving the African diaspora. Rather than allowing these transfers to occur bank-to-bank and under the U.S. government’s watchful eye, the banking crisis has driven huge volumes of money underground, benefiting none more than the international black-market financial system.

Buy-in Needed

As simple as the problem may be, the solution requires the full buy-in and cooperation of regulators, banks and the MSB industry.

While various domestic and international governmental bodies — including Financial Action Task Force, Federal Financial Institutions Examination Council and FinCEN — have made clear that banks can and should service the MSB industry commensurate with their anti-money laundering responsibilities, these announcements are not binding on the agencies regulating banks or the agencies’ employees and examiners. Without consistency in these announcements, banks will remain concerned about inconsistent enforcement, and continue making financially motivated business decisions to stay away from MSBs.

But blaming banks for the banking crisis accomplishes nothing. They have only recently emerged from a historical era of government enforcement with billion-dollar fines stemming from unsafe, unsound and/or fraudulent business activities. No wonder they want to avoid high-risk accounts. If banks should be criticized for anything it is lack of vision or a failure to recognize the benefits MSB clients bring. In addition to dealing in money as their inventory and often being required to maintain sizable cash deposits to remain compliant with state licensing laws, MSBs have access to advanced financial technology, customer bases, and international partners that could benefit US banks suffering from a generational shift in trust and goodwill.

So, who should take the lead in this issue? Without a doubt, the MSB industry — and with a single voice. Among other critical issues that the industry must continue to champion is how MSBs can support law enforcement and anti-money laundering initiatives, encourage financial inclusion and accelerate international commerce.

The International Money Transfer Conferences are an excellent platform for this discussion, and hopefully the conferences continue to expand. The Money Services Businesses Association, which I helped create with key members of the industry and other MSB attorneys and consultants, also provides a valuable resource and platform. Through these combined efforts and ideally with the with the help of the international banking community and its regulators, MSBs will soon find banks that wish to have them as customers.

Andrew S. Ittleman, a founder and partner of Fuerst Ittleman David & Joseph in Miami, concentrates his practice in white-collar criminal defense, anti-money laundering compliance, and food and drug law. He litigates extensively against the U.S. government in civil and criminal matters. He may be reached at aittleman@fidjlaw.com.

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How secret offshore money helps fuel Miami’s luxury real-estate boom

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By Nicholas Nehamas
April 2, 2016

At the end of 2011, a company called Isaias 21 Property paid nearly $3 million — in cash — for an oceanfront Bal Harbour condo.

But it wasn’t clear who really owned the three-bedroom unit at the newly built St. Regis, an ultra-luxury high-rise that pampers residents with 24-hour room service and a private butler.

There the trail ran cold.

Until now.

That’s because the Miami Herald, in association with the International Consortium of Investigative Journalists, has obtained a massive trove of confidential files from inside a secretive Panamanian law firm called Mossack Fonseca. The leak has been dubbed the “Panama Papers.”

Mossack Fonseca specializes in creating offshore shell companies for the world’s richest and most powerful people.

The firm’s leaked records offer a glimpse into the tightly guarded world of high-end South Florida real estate and the global economic forces reshaping Miami’s skyline.

And MF’s activities bolster an argument analysts and law-enforcement officials have long made: Money from people linked to wrongdoing abroad is helping to power the gleaming condo towers rising on South Florida’s waterfront and pushing home prices far beyond what most locals canafford.

The leak comes as the U.S. government unleashes an unprecedented crackdown on money laundering in Miami’s luxury real-estate market.

Buried in the 11.5 million documents? A registry revealing Mateus 5’s true owner: Paulo Octávio Alves Pereira, a Brazilian developer and politician now under indictment for corruption in his home country.

A Miami Herald analysis of the never-before-seen records found 19 foreign nationals creating offshore companies and buying Miami real estate. Of them, eight have been linked to bribery, corruption, embezzlement, tax evasion or other misdeeds in their home countries.

That’s a drop in the ocean of Miami’s luxury market. But Mossack Fonseca is one of many firms that set up offshore companies. And experts say a lack of controls on cash real-estate deals has made Miami a magnet for questionable currency.

“The guys who want to clean up dirty money are always going to try to penetrate the system at its weakest spot,” said Joe Kilmer, a former Drug Enforcement Administration special agent. “You’ve got so much real estate being bought and sold in South Florida. It’s easy to hide in plain sight.”

Take Octávio, a dentist’s son who built a fortune developing shopping malls and hotels in Brazil and married the granddaughter of a former Brazilian president before launching his own political career.

In late 2009, Octávio was serving as the vice governor of the capital state of Brasília when federal police filmed his boss, the governor, accepting a thick stack of bills. Prosecutors said it was a bribe. Other tapes caught their associates stuffing pockets, bags and even their socks with cash. Their alleged total take? About $43 million.

When Gov. Jose Roberto Arruda was arrested early the next year, Octávio replaced him. But an informant claimed Octávio also took bribes. The newly minted governor didn’t appear in the videos and denied the allegations, but he resigned anyway. His term lasted 12 days.

Six months later, Octávio’s Miami lawyer asked Mossack Fonseca — which has recently been implicated in a bombshell Brazilian corruption scandal — to set up Mateus 5.

‘Funny money’

In Miami, secretive buyers often purchase expensive homes using opaque legal entities such as offshore companies, trusts and limited liability corporations.

Offshore companies are legal as long as the companies declare their assets and pay taxes. But the secrecy that surrounds those companies makes it easy and tempting to break the law.

The U.S. Treasury Department is so concerned about criminals laundering dirty money through Miami-Dade County real estate that in March it started tracking the kind of transaction most vulnerable to manipulation: shell companies buying homes for at least $1 million using cash.

Those deals are considered suspicious because a) the real buyers can hide behind shell companies and b) banks aren’t involved in cash transactions, circumventing any checks for money laundering.

Cash deals accounted for 53 percent of all Miami-Dade home sales in 2015 — double the national average — and 90 percent of new construction sales, according to the Miami Association of Realtors.

“A property owned in the name of a shell company is not transparent,” said Jennifer Shasky Calvery, director of the U.S. Financial Crimes Enforcement Network (FinCen), the Treasury agency behind the new policy. “There may be legitimate reasons to be non-transparent, but it’s also what criminals want to do.”

The temporary initiative also applies to Manhattan and expires in August. It requires that real-estate title agents identify the true, or “beneficial,” owners behind shell companies and disclose their names to the federal government. In Miami-Dade, the rules apply to homes sold for $1 million or more. In Manhattan, where real estate is more expensive and where foreign buyers also flock, the threshold is $3 million.

No other jurisdictions are being targeted.

The feds will know the real buyers but won’t make the information public. Experts say the crackdown could be the first in a series of stronger regulations on cash deals.

Miami has a long history of money laundering. Its financial institutions report more suspicious activity than any other major U.S. city besides New York City and Los Angeles, according to FinCen data. And a recent case of money laundering involving fancy condos and the violent Spanish drug gang Los Miami drew further scrutiny to South Florida.

Jack McCabe, an analyst who studies the booming local housing market, said it’s impossible to know how many homes are purchased with dirty money.

“But I think many people believe it could be a sizable portion of the new condominium market in Miami,” McCabe said. “Even though developers and real-estate professionals suspect many of these units are bought with illegal funds, they realize their projects may not be successful without that support.”

Flight capital from other countries fuels Miami’s economy. It revived the construction, real-estate and tourism industries after the Great Recession.

Foreign nationals bought nearly $6.1 billion worth of homes in Miami-Dade, Broward and Palm Beach counties last year, more than a third of all local home spending, according to the Miami Association of Realtors. It’s not only foreign money that’s suspect. Mauricio Cohen Assor and Leon Cohen-Levy, a Miami Beach father-and-son duo convicted of a $49 million tax fraud in 2011, used Mossack Fonseca offshores to hide assets.

“No one wants to kill the goose that laid the golden egg,” McCabe said.

Law firms like Mossack Fonseca and their Miami partners operate in a shadow economy, largely free from the “know-your-customer” rules imposed on U.S. banks. Others in the real-estate industry, including Realtors, are also exempt.

The corrupt know they can park their cash here with few questions asked.

In Brazil, prosecutors claim Mossack Fonseca created offshore companies that allowed officials of the state oil company to collect and hide bribes. At a news conference in January 2016, prosecutors called the firm “a big money launderer” and announced they had issued arrest warrants for four employees of its Brazilian office for crimes ranging from money laundering to destroying and hiding documents.

In an email, Mossack Fonseca spokesman Carlos Sousa defended its business practices: “Our firm, like many firms, provides worldwide registered agent services for our professional clients (e.g., lawyers, banks, and trusts) who are intermediaries. As a registered agent we merely help incorporate companies, and before we agree to work with a client in any way, we conduct a thorough due-diligence process, one that in every case meets and quite often exceeds all relevant local rules, regulations and standards to which we and others are bound.”

Mossack Fonseca also said that its Brazilian office was a franchise, and that the Panama law firm, which practices only in Panama, “is being erroneously implicated in issues for which it has no responsibility.”

You can read MF’s full response on MiamiHerald.com.

From Brasília to Bal Harbour

Paulo Octávio was indicted on corruption charges a year after stepping down as governor. He did not respond to a request for comment. But his local lawyer Julio Barbosa, who keeps an office on pricey Lincoln Road and asked Mossack Fonseca to set up the offshore, said the purchase of the Bal Harbour condo violated no laws.

“Any transactions in South Florida handled by my firm complied with all applicable laws, including U.S. and Brazilian taxation and disclosure requirements,” Barbosa wrote in an email to the Miami Herald.

Owning U.S. property through offshore companies is popular with foreign nationals because it allows them to claim significant breaks on their estate taxes, thanks to the U.S tax code. But offshores are also useful for shifting money around beyond the reach of regulators and tax authorities — not to mention estranged spouses and angry creditors.

Routing money through a web of offshores and other entities can help add a patina of legitimacy to dirty cash, said Ellen Zimiles, a former federal prosecutor in New York. That’s crucial for bringing tainted money from abroad into the United States without raising suspicion, Zimiles said.

Many of the people named as owning offshore companies belong to Brazil’s upper echelon, which has pumped money into Miami real estate as the Brazilian economy has collapsed.

Other people in the files include:

▪ Helder Rodrigues Zebral, the former owner of a popular Brazilian steakhouse convicted twice for embezzling public funds and avoiding public bidding in his home country. Known for driving a Mercedes and dating socialites, Zebral paid $1.9 million for a condo in Sunny Isles Beach in 2011, between his two trials.

▪ Marcelo Carvalho Cordeiro, the former president of Rio de Janeiro’s pension fund, who wasfired after allegedly handing out a multimillion-dollar contract through improper back channels. Cordeiro paid $2.7 million for a home on Key Biscayne last year. He is suing a business partner in Miami for libel.

▪ Luciano Lobao, a construction magnate and the son of Brazil’s former energy minister. The elder Lobao is under investigation for corruption in a massive scandal over alleged bribes for state oil company contracts.

Lobao himself has been investigated over allegations he overcharged the government on 2014 World Cup contracts. He bought a condo at Eden House in Miami Beach for $636,000 in 2013 and sold it for $1.1 million the next year.

There’s no proof that dirty money was used in any of the transactions uncovered by the Herald.

Several of the men, including Lobao and Cordeiro, made no effort to hide the deals. They set up BVI offshores and then bought the properties using Florida companies registered under their own names. Emails between Mossack Fonseca employees and the men’s lawyers say the purpose of the offshores was to purchase Florida real estate but don’t go into detail.

The Miami Herald called, emailed or sent registered letters to the buyers, as well as their lawyers, asking what role the offshore companies played in the transactions or whether their assets were declared to Brazilian tax authorities, as required by law. Two of them responded.

Marcelo Calvo Galindo is a top executive at a Brazilian network of universities that is facing criminal charges for tax evasion in Brazil. He paid $2.7 million for two units — one of them a 2,900-square-foot penthouse — at the St. Tropez in Sunny Isles Beach. He showed the Miami Herald tax returns stating that he had paid taxes for his offshore companies in Brazil.

Marcos Pereira Lombardi, who runs a newspaper, as well as several other businesses in Brasília, said he set up an offshore for estate-tax benefits. He spent $2.7 million on two condos at Trump Towers I and II in Sunny Isles Beach and said he pays all his taxes in Brazil and the United States.

“I bought these properties in Miami because it was a business opportunity, as prices in Florida were very attractive,” he wrote in an email. “I love Miami and the United States, so I chose to invest here.”

Lombardi, known as “Marcola,” has been investigated in Brazil for allegedly getting an insider deal on government land and conspiring to fix gas prices, charges he denies. He bought one Trump Tower unit through a Florida company that listed him as its manager and another under his own name.

But transparency doesn’t always mean legality.

Prosecutors argued that he was laundering profits from a lucrative cocaine-smuggling business. They said he had been the leader of a violent drug ring called Los Miami andseized his assets, including a fleet of luxury cars and 13 condos, after he was found guilty of money laundering.Peter Zalewski, a local condo market analyst, said López Tardón’s case prompted the feds to take a hard look at Miami real estate.

“Locally, people have been talking about illicit money propping up the condo market since the 1980s,” Zalewski said. “The government usually needs a catalyst like this before it can act.”

A Miami federal judge sentenced López Tardón to 150 years in prison.

“I call it funny money, and we have a plethora of funny money here,” U.S. District Judge Joan Lenard said during his sentencing hearing in 2014.

A cleaned-up game?

“Funny money” includes more than briefcases brimming with hundred-dollar bills, a common sight during Miami’s cocaine cowboy era in the 1980s. Today, “cash” more commonly signifies certified checks, traveler’s checks, cashier’s checks and money orders.

For now, FinCen is tracking only transactions that use cash in those forms, as well as hard currency. It will not require reporting on deals that use wire transfers or personal checks, which leave more of a paper trail at banks, opening up a potential loophole.

By not monitoring those financial instruments, investigators will miss out on most sales of new condos, said Alan Lips, a Miami accountant.

Theresa Van Vliet, a former federal prosecutor in South Florida, said FinCen could have been uncomfortable stretching its authority to cover wire transfers.

“This is a strategic move,” she said. “It’s good to start small.”

Cash home deals are one of the last unregulated sectors of the U.S. real-estate market; there are already strict reporting requirements for homes bought with mortgages.

Despite the federal scrutiny, most industry professionals say money laundering doesn’t play a role in real estate — at least not anymore.

“When I was selling real estate in Davie in the late ’80s, we used to get bags of cash,” said Jeff Morr, a Realtor at Douglas Elliman. “There were no rules. … Today, everything is watched. It’s clean.”

Developer David Martin, who is closing sales for a 319-home development in Doral, said the new FinCen rules haven’t caused a single buyer to back out.

“I think this is really blown out of proportion,” agreed Carlos Rosso, president of the condo division for local mega-developer Related Group. “Everything is done through the banking system for new construction. Maybe for [single-family] homes and existing condos they are using cash.”

Dirty or not, the surge of foreign money means big changes for people who livehere.

The real-estate boom that kicked off in 2011 spawned construction jobs and tax dollars. City boosters touted the foreign investment as a sign that Miami had arrived on the world stage. But the boom also sent home prices soaring beyond the reach of many working- and middle-class families. Locals trying to buy homes with mortgages can’t compete with foreign buyers flush with cash and willing to pay the list price or more.

Two-thirds of Miamians now rent their homes — more than any other major city in the United States — and that number is up eight percentage points since 2006, according to a recent study from New York University. High housing costs have combined with low incomes to make Miami the least affordable city for renters in the country.

“If we’re stifling people’s ability to create a financial asset like a home, we’re stopping their ability to start new businesses [and] to invest in education for their families,” said Ali Bustamante, a researcher at Florida International University.

Feds are watching

In 2001, the USA Patriot Act mandated that all parties involved in real-estate closings perform due diligence on their clients. Lobbying from the industry won it a temporary exemption that has been in place for nearly 15 years.

Real-estate agents argue they don’t have the expertise to investigate their clients.

The American Bar Association has also opposed stronger disclosure requirements for real-estate lawyers, saying they would violate attorney-client privilege.

But the new federal initiative centering on Miami-Dade and Manhattan may be the first sign that the exemption is ending.

“This is the ceremonial first pitch,” said Miami lawyer Andrew Ittleman said. “We still haven’t gotten into the game.”

Between the federal crackdown on secret cash home deals and strengthening anti-money-laundering rules around the world, it may grow harder to pump dirty cash through Miami real estate.

Other countries have stricter rules than the United States.

The European Union has started building a centralized database of beneficial owners. The EU’s compliance rules extend to real-estate agents, law firms and trust agents, as well as financial institutions.

That disparity frustrates some American bankers, who say they bear too much of the burden in the United States.

“It would be a lot easier for a bank like us to do our job if others [in the real-estate industry] had similar responsibilities,” said Scott Nathan, an executive vice president at Miami Lakes-based Bank United.

A number of events and blog posts have explored loopholes in the new FinCen rules.

One local seminar held in March was headlined “How to Avoid the Treasury Trap.” It promised to teach real-estate professionals “how to avoid money-laundering charges and stay on the right side of the law” while working with clients who want to keep their deals secret for legitimate reasons.

“You can not only survive, you can thrive,” an advertisement said.

The Miami Association of Realtors hosted the event.

Teresa King Kinney, the association’s CEO, said the intention was not to dodge the regulations. “It was to make sure our members understand what the rules are, how they can affect a deal and what the alternatives are,” Kinney explained.

Jennifer Shasky Calvery, FinCen’s director, disagreed. She compared the industry’s behavior to a drunk driver turning around before reaching a roadside DUI checkpoint.

“It’s always amazing that the drivers think the police aren’t watching that,” Calvery said. “I feel like we’re really learning about the culture of the real-estate economy in Miami.

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DOJ Changing of the Guard Could Impact Corporate Compliance

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Board of Contributors
Commentary by Andrew S. Ittleman
March 29, 2016

Several recent critical changes within the U.S. Justice Department could impact corporate compliance in the U.S. regardless of who assumes the presidency.

First, after Eric Holder resigned as attorney general amid public outcry resulting from DOJ’s failure to prosecute anyone responsible for the 2008 global financial crisis, Loretta Lynch took over and immediately focused on prosecuting FIFA executives for international racketeering activities.

Three months later, Deputy Attorney General Sally Yates published “The Yates Memorandum,” outlining how DOJ will prioritize individual accountability in all future investigations into corporate fraud and other misconduct. Weeks later, DOJ announced the creation of a new compliance counsel position to advise DOJ on corporate compliance programs and whether companies should receive credit for having them.

These changes, coupled with recent enforcement actions against individual executives of food manufacturers, money services businesses, casinos, and other regulated entities, create an immediate impact on corporate compliance programs, corporate governance, white-collar defense in government investigations or prosecutions, and all places in-between.

In Practice

Although it was not the first DOJ memorandum to address individual liability for corporate misconduct, the Yates Memo is unusual for its direct language and the highly charged environment in which it was published. It directs DOJ to “focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct” and requires prosecutors to obtain special authorizations from Main Justice to avoid charging responsible individuals.

To effectuate this policy shift, it focuses on the relationship between companies and their employees, making clear that “to be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their positions, status or seniority, and provide to the department all facts relating to that misconduct.”

Using the carrot of “cooperation credit,” it pits corporations against executives and employees, and raises complicated privilege issues by requiring corporations to disclose “all relevant facts with respect to individuals” to be eligible for cooperation credit regardless of how the companies obtained the information. In today’s heightened enforcement environment, the Yates Memo makes internal communications more sensitive and redefines the needs of employees in regulated industries.

Corporate Governance

Having announced its new enforcement priorities and hired compliance counsel, the government is perhaps more motivated than ever to scrutinize companies and focus on their executives and employees, potentially exposing them to attorney fees and monetary penalties not contemplated by their employment agreements. As these stories make headlines, compliance professionals and other executives are recognizing new levels of exposure even when they act innocently but work within the radius of a compliance failure. They are wondering, “How am I protected?”

For companies seeking to attract and retain talent, it is no longer sufficient to wait for the start of government investigations to address how to provide for individual executives and employees. First, talented professionals mindful of the shifting enforcement environment may want answers to those questions as a condition of employment. Second, the company may be too focused on addressing the compliance flaws that led to the government investigation to be able to address which of their employees should have their attorney fees advanced and on what terms. Third, the government and the courts could perceive ad hoc decision making in this context as merely “protective” of culpable employees and hold it against the company.

Companies, and particularly those in regulated industries, should carefully review their governing charters and corporate policies to ensure they articulate how they will provide for individual executives and employees in the event of government intervention.

Compliance Programs

Companies can make relatively small investments now into compliance programs or face the inevitable expenses associated with government enforcement actions and individual prosecutions.

As DOJ’s recent maneuvers make clear, “paper” compliance programs are no longer enough to withstand government scrutiny. Companies across all industries must ensure they satisfy what the government would describe as a “culture of compliance.” Critical questions to address include:

• Does the company genuinely support and communicate compliance policies?

• Do the people responsible for compliance have stature?

• Are policies and practices current with evolving risks and circumstances?

• Are there mechanisms to adequately enforce compliance policies?

• Are business relationships with third parties terminated based on compliance concerns?

• Is the company candid with regulators and law enforcement?

Coupled with customized compliance programs, these questions can help companies understand whether their compliance programs will withstand government scrutiny and lower the risk of enforcement.

Andrew S. Ittleman is a founder and partner of Fuerst Ittleman David & Joseph in Miami. He concentrates his practice in white collar criminal defense, anti-money laundering compliance and food and drug law. He litigates extensively against the U.S. government in civil and criminal matters. He may be reached at aittleman@fuerstlaw.co.

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What Barclays’ Africa Pullout Means for De-Risking Phenomenon

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By Lalita Clozel
March 24, 2016

WASHINGTON — In a recent decision to reduce its Africa presence, Barclays emphasized the regulatory costs of maintaining operations on the continent. But compliance professionals see the move as yet another marker of the de-risking phenomenon as global banks continue to pull out from emerging markets around the world.

Earlier this month, Barclays said in its annual report that it would lower its 62.3% ownership stake in Barclays Africa Group down to a “non-controlling, non-consolidated position.” The British banking giant also said it was separately investigating Absa Bank, the large South African bank that Barclays acquired in 2005, for a series of potentially fraudulent advance foreign exchange transfers.

Some compliance professionals praised Barclays for what appeared to be a prompt response to a potential anti-money-laundering situation, but others said the decision to downsize so significantly in an emerging region is just another lost opportunity to make a mark in fast-growing markets around the world.

De-risking “leads institutions to making wholesale decisions rather than making decisions on a case-by-case basis,” said Chrisol Correia, the director of LexisNexis Risk Solutions’ global anti-money-laundering office. “This is potentially a significant impediment to banks’ profitability.”

A spokesperson for Barclays told American Banker that the two announcements were not related. But the bank, which was fined nearly $2.4 billion by regulators last year for its involvement in the rigging of foreign exchange markets and is the target of several ongoing investigations, probably took regional risks into account in its decision, experts say.

“You get out of something either because you can’t manage the risks or the dollars don’t make sense based on what you have to do to manage” the risks, said John Byrne, executive vice president at the Association of Certified Anti-Money Laundering Specialists. “Until things change, sadly the safer thing to do is to exit.”

In the report, Barclays noted that despite performing strongly, its African arm did not bring in enough revenue to justify the costs of doing business there, because of the strains of capital requirements and taxes on debt.

“Barclays has been in Africa for over 100 years,” the bank said. “But we face a regulatory environment where we carry 100% of the financial responsibility for Barclays Africa, and receive only 62% of the benefits.”

But observers said de-risking appeared to play a hand in the bank’s decision, especially in light of concerns about possible fraud at Absa Bank, and the move to draw down its presence on the continent is similar to decisions by other banks to depart emerging markets.

There is a “general de-risking phenomenon that’s occurring because of AML-related concerns,” said Eric Lorber, a senior associate at the Financial Integrity Network. The Barclays case, he added, is a “perfect microcosm of a major bank having to deal with all these different elements.”

After the revelation of possible fraud at Absa, experts said Barclays probably gauged the regional risk of maintaining operations on the continent against other recent regulatory hits the company has taken.

Other recent moves by global banks to pull out of certain regions includes the decision last year by Bank of America and other institutions to begin to cut off their correspondent relationships with the largest bank in Belize. Following that move, only two out of five domestic banks in the country have retained correspondent banking relationships with the U.S., a February Moody’s report found.

And Iran has complained that despite the recent lift of nuclear sanctions from the U.S. and European Union, many large banks still refuse to conduct business there, because of lingering U.S. concerns related to terrorism funding.

In the U.S., regulators have insisted that they are not telling banks to divest from certain regions or businesses; those are cost-and-benefit analyses firms do themselves, they say. “We don’t make those decisions. Banks make those decisions,” Comptroller of the Currency Thomas Curry told reporters after announcing earlier this month that the agency might publish guidance on best practices for de-risking.

In some cases, regulators have urged banks to stay involved in regions they are afraid to touch, like Iran. Prime Minister David Cameron recently rebuked Barclays’ moratorium on customers transacting with Iranian firms. In a letter to Barclays CEO Jes Staley, Cameron said the bank has acted “in opposition to the policy of the UK government,” according to The Times.

Yet others say large banks should be commended for quickly acting when they recognize a potential anti-money-laundering problem or other reputational risk.

“Given how quickly [Barclays] noticed this and how quickly the bank responded, you can look at that as a win” for AML awareness, said Tammy Eisenberg, the vice president of product development at the AML consulting firm NextAngles. She said the financial sector has become increasingly sensitive to reputational damage since the financial crisis, preferring to proactively avoid violations rather than let the problems snowball.

“It can send a strong message about a bank’s values,” Eisenberg said.

But she added that the moves bear their own costs for the local economies that lose an avenue to the international banking infrastructure.

“It’s just not a decision that’s made lightly,” Eisenberg said. “It impacts customers, it impacts local economies [and] employees that are stationed out there.”

Some experts have argued that international banks’ departure from certain regions has created a void that can benefit criminals.

“When the banks do this they create more of a black market for these international transactions,” said Andrew Ittleman, a partner at Fuerst Ittleman David & Joseph. “In a lot of ways it creates money laundering problems of its own.”

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