Nine Red Flags for Russian Sanctions Evasion

FinCEN - the Financial Crimes Enforcement Network of the U.S. Treasury - has issued an alert to financial institutions and investors regarding potential investments in U.S. commercial real estate (CRE) by sanctioned Russian elites, oligarchs, their family members and other entities through which they act. FinCEN refers to this group collectively as "sanctioned Russian elites and their proxies."

The alert is important guidance to banks and other financial institutions who are subject to FinCEN regulation under the Bank Secrecy Act. (31 U.S.C. 5312; 31 CFR 1010). The alert is also important for project developers and investors in CRE who should be alert to transactions that carry "red flags" of potential sanctions evasion.

The alert is also helpful guidance to U.S. investors who are preparing to report their beneficial ownership information under the Corporate Transparency Act, taking effect at the end of this year.

U.S. Sanctions on Russian Elites

In light of Russia's ongoing war against Ukraine, FinCEN and other U.S. agencies have expanded the sanctions regime against Russian oligarchs and others linked to the aggression. FinCEN has previously warned financial institutions of their need to remain vigilant against potential Russian attempts to evade its sanctions.

FinCEN believes that the CRE market presents unique challenges for financial institutions to detect sanctions evasion. CRE transactions involve highly complex financing methods and complex ownership structures. These complexities can make it easier for illicit actors to hide their intent to evade sanctions.

CRE transactions often involve several layers of legal entities for legitimate financing purposes. While these layers may have legitimate purposes, they also make it easier for sanctioned entities to hide their involvement.

Typologies Used by Illicit Actors to Evade Sanctions

To help financial institutions and deal organizers identify prohibited transactions, FinCEN analyzed the type of activities it believes may be used by illicit actors to evade sanctions.

FinCEN believes that parties trying to evade sanctions will use pooled investment vehicles in CRE transactions. In its alert, FinCEN describes the several types of pooled investment vehicles, which often involve investments from many participants.

FinCEN believes that illicit actors will keep their investments in pooled investment vehicles below the 25% threshold in order to stay below reporting limits. FinCEN is warning financial institutions to remain vigilant in their KYC (or "know your customer") and CDD ("customer due diligence") procedures to spot participation in pooled investment vehicles by sanctioned parties.

FinCEN also believes that shell companies and trusts are likely to be exploited by sanctioned parties. In its Final Rule on beneficial ownership reporting under the Corporate Transparency Act, FinCEN describes said "[s]hell companies are typically non-publicly traded corporations, limited liability companies, or other types of entities that have no physical presence beyond a mailing address, generate little to no independent economic value, and generally are created without disclosing their beneficial owners. (87 Fed. Reg. 59,501).

FinCEN wrote that "when analyzing trusts for which a sanctioned person was at any time the grantor/settlor, trust protector, trustee, or beneficiary, financial institutions should take particular care to ensure that sanctioned persons do not have a present, future, or contingent property interest in the trust."

Nine Red Flags for Financial Institutions and Investors

To help U.S. financial institutions and investors spot potential evidence of sanctions evasion, FinCEN compiled a list of nine "red flags" that should prompt U.S. persons to examine a transaction for an increased risk of illicit activity:

1. The use of a private investment vehicle that is based offshore to purchase CRE and that includes PEPs or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors.

2.When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information.

3. Multiple limited liability companies, corporations, partnerships, or trusts are involved in a transaction with ties to sanctioned Russian elites and their proxies, and the entities have slight name variations.

4. The use of legal entities or arrangements, such as trusts, to purchase CRE that involves friends, associates, family members, or others with a close connection to sanctioned Russian elites and their proxies.

5. Ownership of CRE through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose.

6. Transfers of assets from a PEP or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation.

7. Implementation of legal instruments (e.g., deeds of exclusion) that are intended to transfer an interest in CRE from a PEP or Russian elite to a family member, business associate, or associated trust following a legal event such as an arrest or an OFAC designation of that person.

8. Private investment funds or other companies that submit revised ownership disclosures to financial institutions showing sanctioned individuals or PEPs that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.

9. There is limited discernable business value in the CRE investment or the investment is outside of the client's normal business operations.

About The Author

Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.

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