Follow The Money: Part III

"Mica" for Borderland Beat.  

This is the 3rd installment. Links for I and II

Texas money laundering investigations provided federal regulators with a roadmap for overseeing the real estate industry. They didn’t follow it.

In July 2016, as a Texas-based federal task force seized millions of dollars in property investigators believed was owned by kleptocrats from Mexico, federal regulators decided to take action. According to prosecutors, corrupt officials and government contractors used Texas businessmen to set up limited liability companies, through which they funneled funds stolen from Mexican taxpayers to buy dozens of empty lots, homes, and commercial buildings. Washington, D.C.-based regulators, the Financial Crimes Enforcement Network (FinCEN), responded with an expansion of its real estate regulations meant to detect and deter money laundering in selected U.S. cities.

But there was a problem.

Federal prosecutors had just alleged they’d found real estate strewn all across Texas that was purchased with money stolen from Mexican taxpayers. In their response, regulators focused on residential property in just one city.

Back in 2001, Congress had directed the branch of the Treasury Department known as FinCEN to regulate the real estate industry. But it wasn’t until early 2016 that the agency first experimented with oversight of home sales, initially in Manhattan and Miami. The regulation, called a Geographic Targeting Order, or GTO, required title companies to track certain residential transactions. If the purchase was made by a company, was made with cash, and was over a certain dollar amount, it would be reported to FinCEN.

In mid 2016, the agency extended the requirement to the rest of New York City, as well as Los Angeles, San Diego, and San Francisco—coastal cities with high-dollar real estate that attract foreign investors. In Texas, only San Antonio made the list.

In May, the Texas Observer detailed how the U.S. government uncovered networks of shell companies used by public officials from four Mexican states to launder millions in Texas from 1998 to 2017, then abandoned those prosecutions. Those investigations, named Operation Green Tide and Operation Politico Junction, prompted FinCEN to add San Antonio to its regulations.

Prosecutors alleged that 50 pieces of Texas real estate, valued at $58 million today, had been purchased by Mexican kleptocrats. But only 11, worth less than $7 million, would have been covered by the Geographic Targeting Orders, according to an Observer analysis of court records. In 2018, FinCEN extended its oversight to Dallas and Fort Worth, but left off Houston, long considered a money laundering hub, and the Rio Grande Valley, the location of nearly half of the real estate prosecutors tried to seize during Green Tide and Politico Junction.

Elise Bean, a former staff director and chief counsel of the Senate Permanent Subcommittee on Investigations, said the existing targeting orders are “riddled with holes when it comes to stopping money laundering, corruption, and other crimes. Texas cases prove that money launderers are happy to clean cash using commercial properties in smaller cities and towns, and can easily dodge the GTO reporting.”

In early December, more than five years after it first started regulating real estate, FinCEN proposed new rules that could massively expand its oversight of the real estate industry. Money laundering experts are excited about the proposals, but wonder how far and how fast the government will move.

Earlier this year, the think tank Global Financial Integrity released a study exposing severe shortcomings in FinCEN’s real estate regulations. The authors, Lakshmi Kumar and Kaisa de Bel, analyzed 56 schemes to launder more than $2.53 billion in U.S. real estate over the last five years, including the allegations detailed in Operation Green Tide and Operation Politico Junction. They found that more than half of money laundering schemes identified in the United States involved counties outside the 12 regions covered by Geographic Targeting Orders. In Texas, six of the eight counties where money launderers bought real estate are not covered by the current monitoring order, which includes Bexar, Tarrant, and Dallas counties, the report said. For example, in Green Tide and Politico Junction, prosecutors alleged kleptocrats laundered money by purchasing two condominiums on South Padre Island, nine homes in a north Brownsville neighborhood, and a 7,884-square-foot mansion in West Austin.

Kumar, Global Financial Integrity’s policy director, called the current regulations “a whack a mole way of making policy.” “Real estate money laundering is not a problem of select hubs,” she said. “It is a national problem. It can happen anywhere. Because there is money to be made everywhere.”

The report also found that a significant amount of money is laundered through commercial real estate, which is not covered by FinCEN’s oversight. In Green Tide, prosecutors alleged that a former governor of Mexico’s Tamaulipas state used embezzled money to buy 46 acres of prime real estate near the Shops at La Cantera in a tony section of San Antonio. In Politico Junction, the former treasurer for the state of Coahuila agreed to forfeit a San Antonio strip center, pharmacy, and self storage tower when he pleaded guilty to a money laundering conspiracy. The six pieces of commercial real estate in Bexar County prosecutors tried to seize as part of Green Tide and Politico Junction are valued today at $33 million, nearly five times the value of the 11 pieces of San Antonio residential real estate they targeted.

FinCEN’s proposed expansion of its rules were announced this month in conjunction with the Biden administration’s Strategy on Countering Corruption, which promises more resources and new tactics for combating kleptocracy abroad and money laundering in the U.S. They could directly address some of the shortcomings exposed by Green Tide and Politico Junction. Among FinCEN’s proposals: creating uniform, national reporting requirements for the real estate industry and including commercial real estate in the anti-money laundering regulations.

If FinCEN expands its regulations, it needs to address more issues, Kumar said: Make sure large commercial deals involving multiple investors and transactions that don’t involve title companies also receive scrutiny.

One strategy might be to require lawyers or real estate agents to report suspicious activity, Kumar said.

The Green Tide and Politico Junction court records detail commercial transactions involving many investors. In late 2009, a front man for corrupt officials and businessmen in Coahuila transferred $18 million from JP Morgan Chase bank accounts in the names of three LLCs to his lawyer’s account, according to a search warrant affidavit filed by a Drug Enforcement Administration agent. One day later, the money was wired out of the lawyer’s bank to accounts under two new LLCs. Those companies then used the money to purchase real estate, including $8 million for a San Antonio strip mall.

The lawyer whose account was used in the 2009 real estate purchases, San Antonio attorney Alvaro Briseño II, wouldn’t talk about the allegations in the search warrant citing attorney-client confidentiality. He did say he believed it would be an unfair burden for small business owners to be required to report suspicious activity, especially when banks, often massive institutions with large compliance divisions, are already required by the government to monitor it.

“Generally speaking, we are relying on the IRS and the banks,” Briseño said. “Once the money is in the U.S. institutions … there’s a higher level of confidence someone has screened the money and you’re dealing with legitimate funds.”

As the Observer reported in November, Chase employees repeatedly asked questions about the money involved in the Coahuila money laundering case. However, the bank continued doing business with former state treasurer Héctor Javier Villarreal Hernández until the U.S. seized his accounts, court records show.

In response to an interview request, the FinCEN press office referred the Observer to the documents published December 8 in the Federal Register seeking public input on plans to expand regulation of the real estate industry. “FinCEN understands from various law enforcement agencies that the Real Estate GTO data has been highly useful to the investigation of money laundering and financial crimes,” the agency wrote.

Kumar called the proposed regulations a “watershed moment” in anti-money laundering policy.

December’s announcement came after Congress separately ordered FinCEN to maintain a list of “beneficial owners” of companies that do business in the U.S., essentially tracking human beings behind shell companies. But the new federal law only requires entities already registered with state governments to register with FinCEN.

The FinCEN registry has not yet been implemented, but experts warn that a Texas law will weaken it. In 2009, the state legislature amended the Texas Business Organizations Code to allow foreign companies to own real estate without having to register with the Secretary of State. In doing so, Texas created a loophole that could allow foreign kleptocrats to buy real estate through shell companies that won’t appear on the FinCEN’s registry, experts say.

“That exemption immediately opened up Texas to money laundering and corruption by foreign shell companies whose owners don’t have to disclose their presence in the state,” Bean, the former Senate investigator, wrote in an email.

Source: Texas Observer

Author: Jason Buch