Regulators charged with enforcing anti-corruption, anti-money laundering, and economic sanctions laws and regulations have turned new attention to the real estate industry, and investigations and enforcement efforts span the globe.
Over recent years, U.S. and UK authorities have investigated real estate investors and their employees for allegedly making payments to government officials in order to construct and sell properties, as well as the conduct of management companies and the use of third parties to pay bribes, launder money, or evade economic sanctions:
U.S. regulators, along with their counterparts around the world, are currently investigating the laundering of funds belonging to Malaysian development fund 1MDB through companies, including those owned by a close confidant of the Malaysian Prime Minister, to purchase significant U.S. real estate properties.
In 2012, in a matter for which Morgan Stanley was lauded by DOJ for having very strong compliance controls that an executive conspired to evade, a former managing director at Morgan Stanley’s real estate investment and advisory business was sentenced to prison for including a Chinese government official in real estate investment deals as a quid pro quo for gaining additional business.
In 2013, prosecutors won a bid to seize a high-profile Fifth Avenue skyscraper after it found that it was owned by entities that were a front for Bank Melli Iran, an institution wholly owned by the Iranian government, and thus subject to U.S. economic sanctions.
Aside from public U.S. and UK investigations relating to bribery, money laundering and sanctions, we have also seen non-public investigations in this space throughout the world, including, for example:
- In Hong Kong, we have seen an increase in enforcement in this area, particularly with investigations into payments made by property managers, at the request of government officials, in order to pass inspections or to obtain licenses in order to carry out daily operations.
- Similarly, Turkish authorities recently investigated a foreign-based property management company for allegedly paying bribes to a government official in order to resolve a safety issue. During an internal investigation, we also came across additional requests for donations and sponsorships by officials related to approvals and relationship building.
While enforcement actions and legal liability are certainly compelling risks, the reality of holding an asset tainted by corruption extends much further. The accompanying financial and reputational damage from investigations, assets which cannot be sold, and the mere appearance of impropriety can destroy investment value.
So it’s imperative that real estate owners, developers, and investors take sufficient measures to assess these risks prior to investing, implement corresponding controls to mitigate the risk, and monitor the investment’s activity on a regular basis.
In the next post, we’ll set out steps to minimize compliance risks connected with real estate investments.
Kim Nemirow and Amanda Raad are partners in Ropes & Gray’s government enforcement practice, based in Chicago and London respectively.
The authors thank Sean Seelinger and Alicia Suarez, associates in Ropes & Gray’s government enforcement practice, based in London and Chicago respectively, for their assistance with this post.