Commercial Real Estate’s Money Laundering Problem

Essay By
Learn more about Albert Torres.
Albert Torres
Albert Torres
Program Manager, Global Policy
George W. Bush Institute

Many of the nation’s midsized cities are facing both an economic crisis and a national security threat as the popularity of remote work has emptied downtowns.  

Falling occupancy rates have triggered a so-called economic “doom loop” that’s beginning to take its toll on tax revenues and downtown vitality. Simultaneously, the dire need for revenue has made midsized cities particularly ripe targets for corrupt actors seeking ways to channel illicit money through the real estate market.  

Corrupt individuals and kleptocratic governments find real estate an attractive place to park shady money and launder their ill-gotten gains – especially in cities like Miami and New York. But midsized cities are particularly at risk now because they are seeing less growth and have less oversight in place than large metros. Federal, state, and local governments all have a role to play in keeping these bad actors out by implementing targeted economic and anti-corruption policies. 

Commercial real estate is one of the least transparent sectors in the United States. Vacant properties can wash large sums of cash and provide a significant return on investment for corrupt individuals who exploit the opacity of the real estate market for their benefit. A case involving oligarch Ihor Kolomoisky, who has been indicted by the United States and arrested in Ukraine on fraud and money laundering charges, took advantage of the shortcomings by hiding his ill-gotten finances throughout several commercial real estate properties in Cleveland. 

With the help of shell companies and the services of professionals like lawyers and real estate agents, individuals like Kolomoisky can facilitate the movement of suspected illicit funds around real estate without investigation or knowledge of who is behind the purchase. Such practices have made real estate money laundering a perfect pathway to cleanse dirty money undetected.  

This vulnerability exists in U.S. real estate because anti-money laundering laws that foster transparency, like background checks and source of wealth verification, don’t apply to lawyers, investment advisers, and real estate brokers. These professions, which usually work with purchasing parties throughout the lifetime of the transaction, should bear the primary responsibility of detecting and reporting suspicious activity to the Treasury Department. 

Real estate needs its own set of anti-corruption obligations unique to the industry, such as detailed background checks on all individuals and companies involved in the acquisition, including the source of funds used in the transaction.  

The U.S. government has previously attempted to regulate the problem by issuing Geographic Targeting Orders, or GTOs, which report ownership information on nonmortgaged purchases of real estate. However, the requirement only applies to major economic regions and residential properties. Regardless of potential pushback from real estate associations, the Treasury Department should create additional, permanent nationwide regulations that require real estate agents to collect ownership details on all purchases, including commercial properties, without restricting GTOs to nonfinanced transactions only.  

Countering corruption requires innovative policies that crack down on financial crime. The United States must instill well-targeted reforms in both areas if it truly wants vibrant cities while at the same time deterring the lechery of corrupt government.   

Albert Torres is Associate of Freedom and Democracy at the George W. Bush Institute.