How To Launder Drug Money: Start An LLC And Buy Real Estate

An explosion in cash-only home sales reveals a possible loophole in laws designed to prevent money laundering.
By @FrederickReese |
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    Pictured, condos under construction in Miami, Fla. A boom in cash-only real estate sales may indicate an enormous rise in money laundering. (Photo/Daniel Lobo via Flickr)

    Pictured, condos under construction in Miami, Fla. A boom in cash-only real estate sales may indicate an enormous rise in money laundering. (Photo/Daniel Lobo via Flickr)

    Alvaro Lopez Tardon is currently facing criminal charges in Miami. Lopez, the alleged leader of Spain’s Los Miami drug gang, is thought to have laundered $26.4 million in illegal drug proceeds via the purchasing of 14 condo units from 2001 to 2006 through a number of limited liability companies (LLCs), almost all of the properties being bought directly from developers with cashier’s checks.

    “Mr. Lopez’s ownership of real estate was done openly, purchased under his own name or corporations in which his financial interest and his family’s financial interest was fully disclosed,” said Richard Klugh, Lopez’s attorney. “He paid for the properties with certified bank funds relying on reputable law firms to close the transactions.”

    Court records show that Fabiani Krentz, an UPS manager who moonlighted as the gang’s frontwoman, purchased five units and transferred them to Lopez’s companies through quitclaim deeds, per testimony given in Krentz’s 2012 guilty plea. Krentz testified that she did this to legitimize the gang’s cocaine money.

    For those watching this unfold, it’s all just a little bit of history repeating.

    South Florida was crushed under the housing market crash of 2007-2008. With a 10 percent unemployment rate and a recession that weakened tourism and hospitality, the region — built up primarily on drug money during the 1970s and 1980s — was in dire straits.

    …until it wasn’t. In the last year, 45 new condominium towers have been proposed to be built in the region. Condo complexes that were finished and opened just weeks ago are now selling out. The area is undergoing a discount condo craze, with two out of every three sales being made in cash and with a large majority of the buyers being from Latin America.

    “Some are buying just because they’re wealthy,” said Peter Zalewski of CondoVultures.com, an online data firm specializing in the condo market. “The Mexican drug wars have brought a lot of money into Miami.”

    “That’s one hell of a pace,” Zalewski said. “I joke that they are 500 percent sold out in an hour … The average prices for these units are mind-boggling … Some developers are arguing that preconstruction prices are what prices in the market will be two years from now. … At this point, statistically, it’s kind of shocking to me.”

     

    The exploding cash market

    This phenomenon isn’t limited to Florida. Tuesday, U.S. prosecutors sued to seize the assets of several New York-situated corporations that allegedly have laundered up to $230 million through a scheme that includes the purchasing of four luxury apartments and other high-end commercial units. This came four years after the death of whistleblower Sergei Magnitsky, who uncovered the scheme and may have been silenced by Russian officials.

    “A Russian criminal enterprise sought to launder some of its billions in ill-gotten rubles through the purchase of pricey Manhattan real estate,” Manhattan U.S. Attorney Preet Bharara said Tuesday. “While New York is a world financial capital, it is not a safe haven for criminals seeking to hide their loot, no matter how and where their fraud took place.”

    Prevezon Holdings, Ltd., a Cyprus-based real estate corporation, is the alleged recipient of some of the funds, received via 11 holding corporations that control the properties.

    Meanwhile in Brownsville, Texas, Freddy Centeno, a south Texas real estate agent, was indicted in July for laundering narcotic-trafficking money through real estate sales for Mexico’s Armando Arambul drug trafficking organization. Arambul and his operation transported multi-ton lots of cocaine to Houston and throughout the United States, and sent millions of dollars back to the Gulf Cartel — laundered in part due to Centeno. Arambul was convicted and is scheduled to be sentenced in October.

    “The regulation of real estate transactions for financial crime and money laundering is worse than Swiss cheese for all the holes it’s got,” said Charles Intriago, president of the Association of Certified Financial Crime Specialists, and a former assistant U.S. attorney. “Real estate is one of the most ripe areas for the hiding of the proceeds for financial crime and the laundering of those proceeds.”

     

    Limited liability

    The increase in cash sales on high-valued properties and the condo craze in Miami does not necessarily mean anything illicit is going on beyond these particular laundering cases. However, it increases the likelihood that something could be happening. Real estate and the nation’s limited liability laws offer money launderers an extraordinary amount of cover and maneuverability.

    A limited liability company is a sole proprietorship or partnership that maintains a veil of partial anonymity for its owners or “members.” An LLC works by creating an assumed “personage” that acts on the behalf of the LLC holders’ interests. An LLC can hold property, enter into agreements, create accounts and act as a legally-compliant individual, while not bearing the corporate tax obligations and filing requirements of a proper corporation.

    As long as LLC’s resources and those of its “members” do not directly or conspicuously mingle and as long as the LLC does not create a “nuisance” — such as incurring debt beyond its means to repay or causing felonious offenses — the veil of anonymity cannot be pierced. This means that “members” of the LLC can enter or leave the agreement undetected, can change ownership without requesting permission, and in some states, with only one natural person needed to maintain the validity of an LLC, the LLC can collapse without the need to reassign or restructure the company’s holdings.

    Most importantly, for most states, setting up an LLC is an easy three-step process. First, a person has to pick a unique LLC name that complies with the state’s business naming laws. Second, a person has to fill out the LLC Articles of Organization and mail it to the state’s Secretary of State, along with the filing fee and any taxes that may be due on filing. Finally, a notice of the LLC filing must be published in the filer’s local newspaper, if the filing state requires this.

    States vary on additional requirements, but fundamentally that’s all that is needed. Based on this, a launderer can easily set up an LLC, have the LLC set up a business banking account, receive the money to be laundered to the LLC (or to a second LLC, which sends the money to the first LLC via cashier’s check). The LLC then uses the money to buy real estate in cash, sells the real estate at a later date and the illicit money is now “clean” — associated solely with the sale of the real property.

    The practical implications of all of this can be daunting. Last year, a 10-bedroom private island estate in Florida’s Biscayne bay sold for $47 million — one-fourth less than the original asking price. Despite this, the sale marked the single largest sale of property in the area. The new homeowner’s identity is shielded by the LLC that bought the property on his or her behalf, making the purchase remarkably suspect: nearly $50 million has traded hands with no one being able to vet the transfer.

    “They can form a corporation and bury you so no one ever knows who you are,” said Michael McDonald, an international money laundering consultant with Wellington-based Michael McDonald & Associates and a former IRS criminal investigator. “You have criminal groups outside the U.S. trying to park money here. One of the best ways to do it is to buy real estate because no one asks who you are.”

     

    History repeating

    The ease of anonymous real property purchasing is an issue in light of recent trends that show, per Goldman Sachs, that cash purchases of homes increased threefold since the start of the Great Recession. With less than half of all home sales mortgage-based, it is safe to interpret that the real estate market is now controlled by elements other than middle-class America.

    As argued by Nick Timiroas in the Wall Street Journal:

    The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index.

    There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.

    Current regulations do not require real estate agents and title insurers to file financial suspicious activity reports (but banks and mortgage brokers must). In light of allegations of the big banks engaging in large-scale money laundering, this seemingly blind spot to non-fiduciary laundering opens a little-challenged route for the financing of criminal and terrorist organizations.

    In addressing this, however, lies the rub. Since the condo craze began, Miami saw its unemployment rate drop by half. In an area desperate for innovation and economic relief, it’s hard to make the case that there is such a thing as a bad infusion of capital.

    However, the White House is working to force the issue. In June, the White House introduced the G-8’s Action Plan Principles to Prevent the Misuse of Companies and Legal Arrangements, which would make companies directly responsible for the knowing misconduct of bad actors. The plan, which would require congressional approval, would make a developer that accepts money from someone on the Office of Foreign Assets Control list liable — forcing a complete forfeiture of all revenues received and the incurrence of a $50,000 fine per transaction, regardless of whether the developer is aware of the person’s status on the list.

    Despite this and the general shakiness that comes with dealing with a shell company, many feel that there are no real incentives for developers to vet funding sources in selling properties.

    “If illegitimate activity was behind a portion of the sales, it makes an impact. It can cause artificial inflation of the real estate market,” McDonald said. “Realtors don’t want to hear it because they are running to the bank. Developers want to sell their units. It will generate additional real estate tax revenue for the municipalities. … If you want the drug money problem to go away, are you OK with reduced revenue to your restaurant or auto dealership?”

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