Identifying Suspicious Activity in Real Estate Transactions
Opera lover Alberto Vilar said he attended about 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 pit orchestra, as well as the singers on the stage.
Co-founder of investment company Amerindo Investment Advisors Vilar became a multi-millionaire in the Dot.com boom of the 1990s. His wealth enabled him to pledge and donate millions to arts organizations, including Metropolitan Opera, Carnegie Hall, the Royal Opera House in Covent Garden, Los Angeles Opera, Kennedy Center, and the Salzburg Festival. In 2002, the Americans for the Arts gave 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 declined when the Dot.com bubble burst in the early 2000s. But Vilar’s undoing was his 2005 indictment fraud and money laundering. With Vilar’s subsequent conviction and Amerindo’s resulting collapse, not only did Amerindo’s investors lose money, but the arts organizations that had depended on Vilar’s pledges suffered too.
Amerindo wasn’t a real estate fund. But some of Vilar’s ill-gotten gains likely found their way into real estate investments. Vilar’s “successful” investments enabled him to purchase several homes, including a 32-room residence near the United Nations Building in New York City.
Unfortunately, real estate is too frequently a vehicle for money laundering. This article discusses red flags that real estate investors and real estate professionals and market participants should look for so they can avoid getting involved in money laundering or another illegal scheme.
FinCEN’s Report On Money Laundering in Commercial Real Estate
Money laundering in real estate has long been the Department of Treasury Financial Crimes Enforcement Network’s (FinCEN) focus. In 2006, FinCEN published a report (FinCEN Report) on Money Laundering in Commercial Real Estate, which examined ten years of suspicious activity reports (SAR) by financial institutions and evaluated where risks were most significant in the real estate industry.
The FinCEN Report found that real estate investment companies were the businesses most likely to be potentially involved in activities indicating money laundering, followed by property management companies, realty companies, individuals, and construction companies. Title companies, mortgage companies, real estate agents, and loan brokers experienced less than 1.5% of the SARs. The report doesn't give a reason, but those industries are generally more heavily regulated than those that showed more suspicious activity. And perhaps, the issues in those industries simply weren’t detected until the subprime mortgage crisis, which came in 2007.
Real-Life 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 caused concern because they seemed to attempt to circumvent the Bank Secrecy Act requirement that cash transactions over $10,000 be reported.
Using Cash to Purchase Cashier’s Checks for a Real Estate Transaction: On one day, someone used cash to purchase three cashier's checks at or near $10,000 at three bank branches – all made payable to the same title company.
Mortgage Loan Payments from Someone Other than the Borrower: Many mortgage loans initiated by a particular bank loan officer were past due, and payments made came from someone other than the debtor and were in cash or cashier's checks purchased with cash.
Attempt to Pay a Line of Credit With Cash: An individual with a commercial real estate line of credit when to the bank with a bag of cash and asked the teller to count out enough money to pay an amount nearly equal to $10,000 toward the principal balance.
Purchase of Numerous Cashier’s Checks in Amounts near to $10,000: The owner of a property management company purchased numerous cashier’s checks payable to themself in amounts at or near $10,000 from a corporate account.
Change in Rent Deposit Pattern from Checks to Cash: An owner of commercial rental properties changed their deposit pattern. They had made monthly deposits of commercial checks from various businesses indicating “rent” on the checks’ memo lines. But now, all deposits were made in cash.
Red Flags of Possible Suspicious Activity in Real Estate
Money laundering in real estate isn't limited to the United States. European Parliament has issued a publication on understanding money laundering through real estate transactions. Red flags identified in this publication include:
Unusual income sources or suspicious source of funds: For instance, the FinCEN Report tells of a foreign national who applied for a large loan for a business purchase. The individual claimed to have been a government official in his native country and received large wires into his U.S. account from that country. Yet, his reported income was low.
Concealment of the actual owner through entities: Mortgage lenders require that commercial real estate be held through special purpose entities. And individuals may put their homes in a trust or legal entity to minimize probate concerns. However, sometimes, the use of entities to hold real estate—especially residential real estate, can be a red flag.
Manipulation of value through appraisals: Certain real estate appraisers were implicated in the sub-prime mortgage loan crisis when they issued inflated appraisals to support mortgage loans with a loan-to-value ratio above lender standards. Appraisals issued close together but showing significantly different real estate values (without explanation, such as renovations) can be a red flag for illicit activity.
Successive transactions or complex structures, particularly if no financial professionals are involved: Many legitimate commercial real estate transactions are complicated, but they usually include a team of attorneys, accountants, and other financial and real estate professionals. Complex transactions or ownership structures without the involvement of professionals can be a red flag, particularly if they involve residential real estate.
Suspicious leasing activity: Numerous leases to the same tenant, increases in the rent mid-lease without concessions benefitting the tenant, or a sudden influx of tenants (except in lease-up or a turnaround context) can be red flags. While apartment dwellers may sometimes pay their rent in case, paying rent on commercial buildings in cash can also be a red flag.
Property renovations using cash from an unknown or questionable source: The use of cash for a large real estate development project can be a red flag for illicit activity. In United States vs. Yao Zhungjun, Yao was accused of investing $11.6 Million he received in kickbacks from Chinese companies into 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 company.
A party’s lack of concern about price or a buyer’s lack of concern about property characteristics or profitability (any price or property will do): Most people want to get a good value when buying or selling real estate. They also usually want to conduct a home inspection (for residential real estate), have a due diligence period, and obtain third-party reports (for commercial real estate). Even someone planning to tear down a structure and build a new building usually will be concerned about the property's zoning and suitability for this purpose. If a buyer seems unconcerned about the condition of the property or either party seems unconcerned about price, that can be a sign that the party’s motivation is something other than financial—money laundering is one possibility.
What to Do if Your Real Estate Transaction Raises Red Flags
Red flags don’t necessarily indicate illegal behavior. But they are a warning to look more deeply into a transaction before proceeding.
For example, numerous apartment leases all entered into with the same tenant in a short period could have been made by a social service agency obtaining housing for refugees—rather than suspicious leasing activity indicating illicit behavior. A seller’s lack of concern about the sale price of their home because they need to move quickly due to a job transfer and their employer has agreed to cover any price shortfall—rather than a sign of fraud. A changed appraisal could indicate the correction of an error rather than an inflated valuation.
But professionals and investors who encounter a real estate investment they don't understand or that seems too good to be true should ask questions. If the answers don’t provide a benign explanation or aren't supported by documents, that could indicate poor documentation or lack of sophistication rather than illegal behavior. However, if there are lingering questions, it’s best not to get involved in the transaction.
© 2022 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
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