• Thu. Dec 1st, 2022

Identification of suspicious activity in real estate transactions | Whitman Legal Solutions, LLC

Opera lover Alberto Vilar said he attends around 100 opera performances a year. He had a front row seat at the Metropolitan Opera in New York, saying he wanted to see the conductor and the pit orchestra, as well as the singers on stage.

Co-founder of investment firm Amerindo Investment Advisors, Vilar became a multi-millionaire during the Dot.com boom of the 1990s. His wealth allowed him to pledge and donate millions to arts organizations including the Metropolitan Opera , Carnegie Hall, the Royal Opera House in Covent Garden, the Los Angeles Opera, the Kennedy Center and the Salzburg Festival. In 2002, Americans for the Arts awarded Vilar its National Arts Award.

Yet when Vilar died in 2021, he was living on his meager Social Security payments living with a friend in an apartment in Queens. Vilar’s financial situation deteriorated when the Dot.com bubble burst in the early 2000s. But Vilar’s loss was his 2005 indictment for fraud and money laundering. With Vilar’s subsequent conviction and the resulting collapse of Amerindo, not only did Amerindo’s investors lose money, but the arts organizations that depended on Vilar’s promises suffered as well.

Amerindo was not a real estate fund. But some of Vilar’s ill-gotten gains likely ended up in property investments. Vilar’s “successful” investments allowed him to buy several houses, including a 32-room residence near the United Nations building in New York.

Unfortunately, real estate is too often a vehicle for money laundering. This article discusses the red flags that real estate investors, real estate professionals, and market participants should look for in order to avoid becoming involved in money laundering or another illegal scheme.

FinCEN report on money laundering in commercial real estate

Real estate money laundering has long been a priority of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). In 2006, FinCEN released a report (FinCEN Report) on Money Laundering in Commercial Real Estate, which reviewed ten years of Suspicious Activity Reports (SARs) by financial institutions and assessed where the risks were the most important in the real estate sector.

The FinCEN report found that real estate investment companies were the companies most likely to be potentially involved in activities indicative of money laundering, followed by property management companies, real estate companies, individuals and property companies. construction. Title companies, mortgage companies, real estate agents and loan brokers recorded less than 1.5% of SARs. The report doesn’t give a reason, but these industries are generally more regulated than those that showed more suspicious activity. And perhaps the problems in these sectors simply went undetected until the subprime mortgage crisis, which erupted in 2007.

Concrete examples of suspicious activity involving real estate

The FinCEN report includes examples of suspicious activity reported to FinCEN, which appeared to involve real estate. Several activities raised concerns because they appeared to attempt to circumvent the Bank Secrecy Act’s requirement that cash transactions over $10,000 be reported.

Using cash to buy cashiers checks for a real estate transaction: Someone once used cash to buy three cashiers checks worth $10,000 or nearly three bank branches – all made payable to the same securities company.

Mortgage payments from someone other than the borrower: Many mortgage loans initiated by a particular bank loan officer were in arrears and the payments made came from someone other than the debtor and were in cash or cashier’s checks purchased in cash.

Attempt to pay a line of credit in cash: A person with a commercial home equity line of credit went to the bank with a bag of cash and asked the teller to count enough money to pay an amount almost equal to $10,000 for the balance of the capital.

Purchase of numerous bank checks for an amount close to $10,000: The owner of a property management company purchased numerous cashier’s checks in his name for at or near $10,000 from a business account.

Modification of the rent guarantee model from checks to cash: A commercial rental property owner has changed their filing method. They had made monthly deposits of business checks from various companies with “rent” on the memo lines of the checks. But now all deposits were made in cash.

Red flags of possible suspicious activity in real estate

Real estate money laundering is not limited to the United States. The European Parliament has published a publication on understanding money laundering through real estate transactions. Red flags identified in this post include:

Unusual sources of income or suspicious source of funds: For example, the FinCEN report talks about a foreign national who applied for a large loan for the purchase of a business. The individual claimed to have been a government official in his home country and received large transfers to his US account from that country. Yet his reported income was low.

Hiding the real owner through entities: Mortgage lenders require commercial real estate to be held through special purpose entities. And individuals can place their home in a trust or legal entity to minimize probate issues. However, sometimes the use of entities to hold real estate, especially residential real estate, can be a red flag.

Manipulation of value by appraisals: Some real estate appraisers were implicated in the subprime mortgage crisis when they issued inflated appraisals to back mortgages with a loan-to-value ratio above lenders’ standards. Appraisals posted nearby but showing vastly different real estate values ​​(without explanation, such as renovations) can be a red flag for illicit activity.

Successive transactions or complex arrangements, particularly in the absence of finance professionals: Many legitimate commercial real estate transactions are complicated, but typically involve a team of lawyers, accountants, and other finance and real estate professionals. Complex transactions or ownership structures without the intervention of professionals can be a red flag, especially if dealing with residential real estate.

Suspicious rental activity: Many leases to the same tenant, rent increases during the lease without concessions to the benefit of the tenant, or a sudden influx of tenants (except in the case of a lease or reversal) can be warning signs. While apartment dwellers can sometimes pay their rent just in case, paying commercial property rent in cash can also be a red flag.

Property renovations using money from an unknown or dubious source: Using cash for a large real estate development project can be a red flag for illicit activity. In the United States against Yao Zhungjun, Yao was accused of investing $11.6 million he received in bribes from Chinese companies in real estate development projects in Hawaii. The properties were sold for $11.4 million (less than Yao’s investment), and Yao transferred the sale proceeds to an investment account at a real estate brokerage firm.

A party’s lack of concern about price or a buyer’s lack of concern about the features or profitability of the property (any price or property will do): Most people want to get good value when buying or selling real estate. They also typically want to complete a home inspection (for residential real estate), have a due diligence period, and obtain third-party reports (for commercial real estate). Even someone considering demolishing a structure and constructing a new building will usually be concerned about the zoning of the property and its suitability for this purpose. If a buyer doesn’t seem to care about the condition of the property or if either party doesn’t seem to care about the price, it may be a sign that the motivation of the party is other than financial – money laundering is a possibility.

What to do if your real estate transaction triggers red flags

Red flags do not necessarily indicate illegal behavior. But they are a warning to examine a transaction more thoroughly before proceeding.

For example, many apartment leases all entered into with the same tenant over a short period of time might have been entered into by a social service agency securing housing for refugees, rather than by suspicious rental activity indicating illicit behavior. A seller’s lack of concern about the sale price of his home because he has to move quickly due to a job transfer and his employer has agreed to cover any shortfall, rather than a fraud sign. A modified rating could indicate the correction of an error rather than an inflated rating.

But professionals and investors who come across a real estate investment that they don’t understand or that seems too good to be true should ask themselves questions. If the answers do not provide a benign explanation or are not supported by documentation, this could indicate poor documentation or a lack of sophistication rather than illegal behavior. However, if there are still questions, it is better not to get involved in the transaction.

This series draws on Elizabeth Whitman’s experience and passion for classical music to illustrate creative solutions to legal challenges faced by businesses and real estate investors.