How art dealers, real estate agents, and hedge funds enable corruption
If Biden is serious about fighting corruption, he needs to regulate 10 key white-collar professions
The FBI has long viewed obscure private investment funds as dangerous financial pathways for malevolent foreign activities. Nearly a decade ago, the bureau caught Moscow trying to use venture capital funds in Boston and Silicon Valley to steal US military secrets. Last year, a leaked FBI intelligence bulletin warned about cryptocurrency scammers, drug cartels, and Russian organized crime increasingly using loosely regulated investment vehicles for crime and corruption in the United States.
The same FBI leak also pointed to the threat of foreign governments using investment funds for political influence operations. Russia and the United Arab Emirates allegedly tried to influence the Trump administration's foreign policies through investment fund managers who were friends with then-President Donald Trump and his family, including by dangling lucrative deals before them.
Private investment companies such as hedge funds and private equity firms are only one sector among 10 types of white-collar professions whose loose rules pose grave dangers to US national security, as I've detailed in a new research report. Others are real estate title insurers, company formation agents, art dealers, lawyers, accountants, covert public relations firms, real estate agents, luxury car sellers, and cryptocurrency businesses. Highly nontransparent and insufficiently regulated, these financial professions have a long record of being used by hostile regimes and their cronies to weaponize corruption, launder funds, or skirt sanctions. For US President Joe Biden to advance the anti-corruption agenda he has announced, he needs to ensure that the US Treasury Department makes these professional enablers watch out for dirty money in the same way commercial banks are already required to do.
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One sector that particularly threatens US security is real estate, where hidden ownership by foreign oligarchs and corrupt officials is common. In addition to providing a haven for laundering illicit funds, real estate is also a potential avenue to bankroll and influence political actors. It's still unresolved whether the Kremlin and its cronies deliberately enriched Trump through investments in his properties. According to his former personal attorney Michael Cohen, Trump privately acknowledged that a $54 million windfall he received from a property sale during the 2008 financial crisis was "Putin's money." The special counsel tasked with investigating the president, Robert Mueller, reportedly speculated that if Trump was compromised by Russian President Vladimir Putin, "it would be about money." The fact that no reporter or prosecutor has arrived at a definitive conclusion despite probing over the past six years demonstrates the urgent need for more transparency around US real estate ownership. The easiest way for the Treasury to shine a light on this market would be to make title insurance companies tell the government who owns all US properties, permanently extending a now temporary requirement that they share targeted data.
Additionally, the murky markets for high-priced art similarly provide secret channels for hostile regimes and their cronies to launder corruption proceeds and undermine US national security interests, including by skirting sanctions. For example, when Russia invaded Ukraine and the US Treasury sanctioned Kremlin officials and oligarchs, email records obtained by Senate investigators suggest that a manager at the world's largest auction house—Christie's—saw an opportunity in selling art to Russians who needed to put their money in "safe" assets. The same Senate investigation alleges that only a few weeks after the brothers Arkady and Boris Rotenberg were sanctioned, shell companies and intermediaries linked to them started buying $18 million worth of art from major auction houses and private dealers. The Senate investigators found the transactions were facilitated by their Moscow-based art advisor, who was a US citizen and thus required to comply with sanctions—but not with anti-money laundering rules, because art advisors are unregulated.
These three sectors—private investment funds, real estate title insurers, and art dealers—are the lowest-hanging fruit where the US Treasury Department already has all the information and resources it would need to finalize regulations within a few short months. Because even though the section within the Treasury in charge of anti-money laundering is severely underfunded, it is authorized by a well-developed statutory framework to require financial professionals to look for dirty money by identifying customers, scrutinizing transactions, keeping records, and reporting suspicious activity to the government.
The problem is that the Treasury has traditionally been hesitant to extend these rules to most white-collar enablers outside of banks. Particularly for the most ubiquitous and problematic (in terms of corruption) professions—such as realtors, lawyers, and car dealers—it would take substantial time, resources, and political support to overcome entrenched interest groups, and it would require regulations to be carefully calibrated to avoid undue economic costs or protracted legal battles. One unfortunate result of this hesitancy is that the United States is among only about 10 percent of the world's countries that fail to comply with the international standard on regulating enablers. The Financial Action Task Force, an international standard-setting body, calls this the worst vulnerability in the US financial system. That, in turn, creates a global threat, considering that the United States is the world's largest provider of offshore financial services.
The good news is that this may change now that Washington has recognized corruption as a top national security threat. Regulating enablers has become an urgent priority among US lawmakers, law enforcement, and civil society. Biden's memorandum establishing anti-corruption as a core national security interest prominently warned that "professional service providers enable the movement and laundering of illicit wealth, including in the United States and other rule-of-law-based democracies." Likewise, the top policy priority identified by the White House was reforming the regulatory structure that governs illicit finance. The US Treasury cited Biden's memo when it ranked corruption as the United States' top financial threat and specifically warned about the role of "financial facilitators."
The moment to proceed from rhetoric to implementation will come in December, when the White House will reveal its full anti-corruption strategy and Biden will host his first of two planned summits for democracy. The US Treasury should leverage the occasion to launch a major campaign to impose anti-money laundering regulations on nonbank enablers. The department should credibly demonstrate it means business by making a formal announcement that new rules will take effect in 2022 covering a first set of professions. It could start with the three white-collar sectors described above: private equity and hedge funds, real estate title insurers, and art dealers.
In time for Biden's second summit for democracy—planned for the end of 2022—the administration should tee up the second half of this campaign, focused on the harder political fights. These include regulating the four horsemen of dirty money: lawyers, company formation agents, accountants, and covert public relations firms. If legislators in both parties are uncooperative and prefer to protect these corruption-enabling professions from scrutiny, the administration might focus on the possibly easier agenda of repealing regulatory exemptions for real estate agents, luxury vehicle sellers, and cryptocurrency service providers.
Twenty years ago, Congress's smartest initial response to the 9/11 attacks was legislation requiring professional enablers to establish anti-money laundering compliance programs. A year later, unfortunately, the George W. Bush administration issued exemptions for key professions and refocused its energies on the wars in Afghanistan and Iraq. With the Biden administration looking to take a more effective approach to national security than militarized attempts at nation building, it could do worse than to restart efforts to regulate enablers, stop the United States from being the world's biggest haven for dirty money, and start showing how democracies can deliver against crooked adversaries and powerful special interests.
Josh Rudolph is a fellow for malign finance at the Alliance for Securing Democracy.
Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.
