Transcript of "Money Laundering Through Real Estate"
The Thin Line Between Tax Avoidance and Tax Evasion: How Legitimate Business Helps the Ruling Elites in the FSU Ethan S. Burger, Esq. American & Georgetown Universities RFE/RL June 29, 2006 Why is the Price of Real Estate So High in London and Moscow?
Preliminary Remarks <ul><li>For every generalization there are exceptions; nonetheless accurate and informed generalizations are often important tools for understanding social phenomena. </li></ul><ul><li>The themes in this presentation should be kept in mind when performing your job or critically reading. </li></ul>
Raw Material Exporting - Oil (Middle Eastern and other exporters as well are large investors in the London real estate market.) - Natural Gas; Aluminum; Nickel; Diamonds; Palladium; Uranium and timber. - Goal keep profit from sales off-shore minimize tax and other potential problems. - Find investment opportunities in a stable country and live abroad.
Some Consequences of Governments Financed by Raw Material Exports <ul><li>First, no “social contract” is formed between the government and the governed (though those exercising power must maintain good working relations with elite/oligarchy). </li></ul><ul><li>Second, no replication of Magna Carta conditions: There is no need to collect taxes paid by the populace in exchange for the provision of governmental services and the protection of civil/property/ human rights. </li></ul>
Three Traditional Stages of Money Laundering <ul><li>Stage 1 – Placement, moving the funds from direct association with the crime (remember not all large sums of money are obtained illicitly); </li></ul><ul><li>Stage 2 – Layering, disguising the trail to foil pursuit; and, </li></ul><ul><li>Stage 3 - Integration, making the money available to the criminal once again with its occupational and geographic origins hidden from view. </li></ul>
Did Someone Forget to Tell Dick Cheney? <ul><li> - The U.S. State Department’s latest report on money laundering and financial crimes gives Russia high marks for its efforts to combat a scourge at the root of both terrorism and the narcotics trade. </li></ul><ul><li>- Russia has developed a solid legislative and regulatory foundation for combating money laundering and terrorism financing and its political will and capability to improve the region’s capacity for countering these crimes. </li></ul><ul><li>- Who wrote the Report and what was its history? </li></ul>
Existing Laws, Regulations and Structures May be Anachronisms <ul><li>Existing system focuses on narcotics, organized crime, and terrorism – fighting the last war? </li></ul><ul><li>Organizations involved in the law enforcement process have a stake in the system and function as “interest groups” in the political and budgetary process. </li></ul><ul><li>Overlooks that value that be transferred through commodities, stock, etc. </li></ul>
Why Own London and Moscow Real Estate? <ul><li>As a home; </li></ul><ul><li>To generate rental income; </li></ul><ul><li>As an investment for future resale; and </li></ul><ul><li>As a form of insurance (holder of value). </li></ul><ul><li>But the rent will be too high for an unrelated renter and the carrying costs are too high to live in for a reasonable amount of money </li></ul><ul><li>Why are the implications if the purchaser and seller of property have the same ultimate owner? A legitimate source of income appears. </li></ul><ul><li>Consequence: Value is transferred below the radar screen. </li></ul>
Western Facilitators of Money Laundering and Other Illicit Activities <ul><li>Accounting Firms (tax havens and tax treaties) – when does tax avoidance become tax evasion? Ask KPMG. </li></ul><ul><li>Banks – how can one know one’s customer? How many layers must the onion be peeled? The problem of employee turnover remains. </li></ul><ul><li>Law Firms – conflicts of interests and following the rules of professional responsibility (can lawyers be gatekeepers?). </li></ul><ul><li>Real Estate Brokers – real estate can be a good place to place money if there is no crash. </li></ul><ul><li>REMEMBER: ORGANIZATIONS ARE NOT UNITARY ACTORS. </li></ul>
What is the likelihood for a changes in policy? <ul><li>Public choice theory suggests that those profiting for the existing system will ensure that it continued (both government officials and other actors). </li></ul><ul><li>The problem is that no one is looking out for the common good. </li></ul><ul><li>Politicians usually only take action in response to crises. </li></ul>
Recent International Narcotics Control Strategy Report on Amount of Money Laundered, Not the Effectiveness of Anti-Money Laundering Policies? Are we focused on what really matters? <ul><li>Countries of Primary Concern – Russia, Latvia (but also Canada & Germany); </li></ul><ul><li>Countries of Concern – Belarus, Uzbekistan (but also Poland & Saudi Arabia); and </li></ul><ul><li>Countries Monitored – Armenia, Azerbaijan, Estonia, Georgia, Kazakhstan, Kyrgyz Republic, Lithuania, Moldovo, Tajikistan & Turkmenistan (but also Denmark & Equatorial Guinea). </li></ul>
What is FATF Doing? <ul><li>Setting standards for national anti-money laundering: concerns are narcotics, terrorism and organized crime; </li></ul><ul><li>Evaluating the degree to which countries have implemented measures that meet those standards; and </li></ul><ul><li>Identifying and studying money laundering and terrorist financing methods and trends. </li></ul>
Now 9 Special FATF Recommendations and 40 General Recommendations for Combating Money Laundering <ul><li>Ratification and Implementation of UN Instruments; </li></ul><ul><li>Criminalizing the Financing of Terrorism and Associated Money Laundering; </li></ul><ul><li>Freezing and Confiscating Terrorist Assets; </li></ul><ul><li>Reporting Suspicious Transactions Related to Terrorism; </li></ul><ul><li>International Cooperation; </li></ul><ul><li>Alternative Remittance (e.g. Hawala); </li></ul><ul><li>Wire Transfers; </li></ul><ul><li>Non-Profit Organizations; and </li></ul><ul><li>Cash Couriers. </li></ul><ul><li>BUT WHAT ABOUT MOVING VALUE THROUGH COMMODITIES? </li></ul><ul><li>ARE WE FIGHTING THE LAST WAR? </li></ul>
Crime is Transnational <ul><li>But law enforcement tends is generally national. Improvements in coordination are incremental and face many hurdles. </li></ul><ul><li>Only wealthy countries that share our goals can implement effective programs. </li></ul>
Money Laundering & the Successor States <ul><li>Illicit money flows will continue so long as the rewards are perceived to outweigh the risks. </li></ul><ul><li>The U.S. is more likely to punish its own nationals than go against </li></ul><ul><li>leaders in power (James Giffen not Nursultan Nazerbayev). </li></ul><ul><li>Coordination among countries, within countries, multinational </li></ul><ul><li>institutions, and private entities is hindered by the struggle between strategic objectives, international law enforcement, and human rights. </li></ul><ul><li>The U.S. must understand that its policy towards the countries in the </li></ul><ul><li>regions operate on multiple levels – cooperate when possible, but what is </li></ul><ul><li> to be done where interests clash? Realpolitik usually wins out. </li></ul><ul><li>Significant change in composition of FSU successor countries’ elites will come slowly and can be reversed. </li></ul>