Secretive corporate structuring is a key element in the process. Earlier this year, an international team led by Shima Baradaran, a law professor at the University of Utah, published an ingenious study of its mechanics. The academics sent emails to more than 7,000 firms around the world that offer incorporation services, posing as a variety of characters, like a politically connected Uzbek or a Lebanese representative of an Islamic charity. “We purposely made it as shady as possible,” Baradaran says.
The experiment’s results confounded conventional presumptions. It turned out that offshore locales like the Caymans were the most stringent about complying with international anti-money-laundering standards. It was easier to set up an untraceable shell company in the U.S. than in any country other than Kenya. The study found firms in business-friendly states like Delaware and Nevada were particularly “abysmal.”
No federal authority, not even the IRS, keeps track of the actual “beneficial” owners behind LLCs, and the more lenient states don’t even require much record-keeping by the firms that handle incorporation. Many of the service providers Baradaran’s team approached asked for no identity documentation and were willing to set up LLCs in even the most suspicious scenarios. Most surprisingly, Baradaran found that the suggestion of foreign corruption actually increased the likelihood that a provider would agree to do business. “It’s really a race to the bottom,” Baradaran says.
Lawyers, brokers, and other service providers fall into a category that money-laundering experts refer to as “gatekeepers.” An international organization formed to combat such financial crime has called for gatekeepers to be required to report suspicious activity, and some nations, like Great Britain, have placed disclosure requirements on attorneys. But no such regulation exists in the United States, and while financial institutions are tightly monitored under the 2001 USA Patriot Act, parties to property transactions have been given a specific exemption. “It’s a big hole,” says Louise I. Shelley, director of the Terrorism, Transnational Crime and Corruption Center at George Mason University.
In 2010, Senator Carl Levin released the results of an investigation into the role of U.S. property in foreign corruption, highlighting cases like that of the son of the dictator of Equatorial Guinea, who bought a $30 million Malibu mansion. New York real estate often figures in such scandals. Ukrainian politician Yulia Tymoshenko has filed a civil lawsuit claiming a crony of the country’s ousted president moved tainted money into New York development projects, while her opponents claim, in turn, that she laundered money through the city’s real estate. In 2012, federal prosecutors seized a Trump Park Avenue apartment from the son of a Philippine general who had been convicted of taking bribes. A $1.6 million condo in the Onyx Chelsea, belonging to a former Taiwanese prime minister, was seized after it was tied to a corruption scandal.
Such cases are rare and laborious, however. “You have to prove the nexus between the corruption and the property itself,” says Jaikumar Ramaswamy, chief of the Justice Department’s Asset Forfeiture and Money Laundering division. “Sometimes judges are skeptical: ‘Why are we are going after some foreign guy who did something in a foreign country?’ ”
One notorious international fraud case illustrates the difficulty of tracing laundered money that allegedly made its way to New York. In June 2007, Russian police invaded the Moscow offices of William Browder, an American investor who had fallen out with the Kremlin. Documents hauled away during the raid were allegedly later used to transfer ownership of three subsidiaries to a shadow company, controlled by a criminal ring with government ties, which then used sham lawsuits to run up enormous liabilities. Based on the fake losses, the ring purportedly applied for a $230 million tax refund, which was immediately approved by Russian officials.
Browder suspected the swindle was pulled off with the complicity of powerful government players and dispatched a Russian attorney named Sergei Magnitsky to investigate. Magnitsky was arrested and died in prison under mysterious circumstances, prompting international outrage. In 2012, President Obama signed the Sergei Magnitsky Rule of Law Accountability Act, imposing sanctions on a list of Russian officials and other alleged accomplices in the fraud. Meanwhile, investigative reporters at the Organized Crime and Corruption Reporting Project, an Eastern European nonprofit, obtained leaked bank records that appeared to reveal the destination of some of the missing funds: 20 Pine Street.
According to the allegations in a civil complaint filed by federal prosecutors in Manhattan, the tax money was deposited into three corporate bank accounts and then diced up into smaller amounts and bounced around several Russian banks. Ultimately, about $50 million was sent to a pair of companies headquartered in the capital of Moldova. From there, a small portion, $857,000, was transferred into a Swiss bank account belonging to a company called Prevezon Holdings Limited, now controlled by the son of a Russian political figure. The company had many interests in real estate, including an investment in a venture with a Soviet-born diamond and property magnate named Lev Leviev—who also happened to be one of the developers of 20 Pine.
Starting in late 2009, Prevezon began purchasing units in 20 Pine, acquiring five in total. The company later added three Manhattan commercial spaces to create a $24 million portfolio, which prosecutors sued to seize last year. “While New York is a world financial capital,” U.S. Attorney Preet Bharara said in a press release announcing the action, “it is not a safe haven for criminals seeking to hide their loot.”
In reality, the 20 Pine case shows just how hard it is to police the flow of money into real estate. It took a vocal American victim, a diplomatic furor, and an act of Congress to get the authorities’ attention. And the seizure is far from assured. Prevezon’s attorneys contend that, despite the elaborate chain of events alleged in the government’s civil complaint, prosecutors have offered little explanation for the company’s supposed connection to the Russian tax fraud. The only link the complaint alleges is a pair of wire transfers amounting to less than $1 million, which Prevezon claims were made in the course of normal business dealings.