Real estate purchases by anonymous shell companies can distort appraisals and tax assessments.

The federal government is heightening its scrutiny of dirty money flowing into Hawaii real estate.

The Financial Crimes Enforcement Network, a branch of the U.S. Department of the Treasury, has begun requiring title companies on Oahu, Maui, Big Island and Kauai to report the identities of the true owners for all-cash purchases of residential real estate exceeding $300,000.

New federal legislation, meanwhile, means this information will soon be shared in a national database for prosecutors to use in tracking down stolen assets.

The information Hawaii’s prosecutors are receiving through this process has become “an integral part in the development of investigations,” Elliot Enoki, spokesman for U.S. Attorney Clare Connors, said via email.

Left, Sheraton Hotel, Hilton properties with Century Center (left center). Convention center located in middle of frame.
Federal regulators first asked for the real names of Honolulu real estate buyers in 2018 but have expanded their review to major neighbor islands as well. (Cory Lum/Honolulu Civil Beat/2022)

Local prosecutors and title-company officials declined to speak on the record about why Hawaii has been identified as one of the nation’s primary locations for enforcement, but the United States is a “favored destination for illicit activity,” according to financial transparency scholars Lakshmi Kumar and Kaisa de Bel.

Buyers purchasing U.S. real estate include Russian oligarchs, officials of foreign countries who embezzle from government funds and drug dealers, they wrote in their 2021 report, “Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream.” The Russian invasion of Ukraine in 2022 has also heightened scrutiny of those assets.

Chinese firms in particular have been identified as sources of illicit funds because China is the primary source country for the drug fentanyl, an enormously lucrative industry, according to recent congressional testimony. Some of this money is laundered through real estate purchases, expert witnesses have told federal lawmakers.

The amount of dirty money flowing through the American economy is estimated to be equivalent to 2% of the country’s gross domestic product, according to Sen. Sheldon Whitehouse, a Democrat from Rhode Island who has led the push for the crackdown. That translates to about $500 billion per year.

Corporate transparency advocates acknowledge that many law-abiding buyers and sellers of real estate legitimately prefer privacy in their transactions for personal reasons. But they say criminal purchases and sales at inflated prices to launder money can artificially jack up real estate appraisals and tax assessments.

Criminals are also more apt to engage in unpermitted home renovations to boost the value of homes and to engage in flipping properties to associates, which further drives up property values, according to Kumar and de Bel.

All kinds of properties have been identified as storing places for illegal assets, including high-end condos, single family homes and simple bungalows used for storing drugs and cash.

Behind The Curve

The Virginia-based Financial Crimes Enforcement Network began issuing what is known as “geographic targeting orders” in 2016, starting with Manhattan and Miami, as a pilot project. Its effectiveness helping identify problematic purchases has led to continual expansions into other areas of the country that have attracted questionable investment, including Los Angeles, San Francisco and Boston.

The seal of the U.S. Treasury’s Financial Crimes Enforcement Network or FinCEN. (Provided: U.S. Department of the Treasury)

In 2018, FinCEN added Honolulu to that list, and last year, the agency expanded the obligatory reporting requirements to cover all four main islands.

The pilot project is becoming permanent, as a result of new anti-money-laundering reform legislation recently passed by Congress.

The Corporate Transparency Act of 2021, which got bipartisan support and was grafted onto the National Defense Authorization Act, authorized FinCEN to use the information it is compiling to create a corporate ownership database to assist prosecutors.

They are identifying what they call “beneficial ownership information,” the technical term for true owners.

Himamauli Das, the former acting director of FinCEN, said among the targets for investigation are “criminals and corrupt actors” who illegally sell fentanyl and other drugs, help the Russian government evade sanctions and acquire sensitive technologies, commit fraud and ransomware attacks and facilitate human trafficking and child exploitation.

These entities have “historically been hidden behind anonymous shell companies,” Das said during congressional testimony.

While the information will be made available to law enforcement some transparency advocates are saying that it should also be accessible to the public.

The U.S. is behind the global curve in terms of financial transparency, according to Matti Kohonen of the Financial Transparency Coalition. (Courtesy: Financial Transparency Coalition)

“The United States is now behind the curve in terms of ownership transparency as other states have started to create their own beneficial ownership registries,” said Matti Kohonen, executive director at the Financial Transparency Coalition. Other nations, including the United Kingdom, Canada, Argentina, Costa Rica, South Africa and Kenya are farther along toward creating beneficial ownership registries.

Under FinCEN’s geographic targeting orders, title companies in the specified U.S. jurisdictions are requiring purchasers paying cash over a set amount to complete a document that records the name and contact information of the person completing the form; the name and contact information for individuals representing the buyer; the source of the funds for the purchase and in what currency and the name of the primary purchaser, verified by government-issued identification.

This information is reported to FinCEN.

Cooperation Of Title Companies

There are 16 title insurance carriers in Hawaii, according to the Hawaii Department of Commerce and Consumer Affairs. On Oahu, there are about 10 firms offering title services, several of them with branch offices on Maui, Kauai and Hawaii island. They are reportedly cooperating with federal officials in preparing the reports, as have most companies nationwide.

“They have recognized there are bad actors out there using the market and they are saying, ‘OK, we will do our part,’” said Gary Kalman, executive director of Transparency International’s United States office.

Local title company executives contacted for comment all declined to be interviewed. A spokeswoman for the Pietsch family, owners of Title Guaranty, Hawaii’s oldest and largest title company, forwarded a message saying they were “advised not to comment on the matter.”

Marcus Ginnaty, a spokesman for First American Title, referred questions to the American Land Title Association, the trade group that represents title companies.

In an interview, Steve Gottheim, ALTA’s general counsel, said title companies are cooperating with federal officials because of the need to “protect our country from being a haven for money laundering.”

He said the country is seeking a balance “in terms of the ability to have privacy,” versus the needs of law enforcement.

Title company officials have said that FinCEN establishes geographic targeting orders at the behest of local U.S. attorneys.

United States Attorney Clare Connors charge former Senator Jamie Kalani English and Representative Ty Cullen with one count of honest services wire fraud.
Information about “beneficial owners” of real estate in Hawaii, collected by FinCEN, is being made available to federal prosecutors, including United States Attorney Clare Connors, whose office called it “integral” to the development of investigations. (Cory Lum/Civil Beat/2022)

Enoki, of the U.S. Attorney’s Office, said that although the FinCEN data from Hawaii has not resulted in publicly releasable information, it has played a role in “contributing to prosecutions and convictions of corrupt foreign actors concealing wealth in the United States and increasing transparency on the national level.”

According to Kalman, warning signs of potential criminal activity include purchasers who do not want to be named on the deeds but instead use the names of their attorneys or real estate agents, and purchases made by low-level government officials from other countries who claim that large sums of money came from their inherited family wealth, but where funds may have been embezzled from public coffers.

Kalman said criminals who buy real estate to launder their money are looking for places that they can get away with stashing their cash under the radar screen.

“This money is stolen,” he said. “They are not buying houses in Honolulu because it is a nice place to vacation.”

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