DOJ Targets CRE: Fraud, Foreign Funds, & Compliance Risks

Introduction

Introduction Commercial real estate (CRE) developers and their business partners are now navigating a significantly heightened landscape of federal enforcement risks, largely driven by the U.S. Department of Justice (DOJ) refocusing its priorities. This shift is characterized by an intense focus on activities aligned with the current administration’s mandates, specifically targeting foreign criminals who exploit American businesses. Developers must now be acutely aware that large-scale projects are increasingly viewed as potential conduits for illicit funds, triggering aggressive investigations into Money Laundering and Foreign Investment stemming from sanctioned countries or entities like narcotics cartels. Beyond financial crimes, the construction industry's reliance on global supply chains places developers at high risk for Tariff Evasion charges related to mislabeled building materials. Further complicating the environment is the DOJ's overhauled Corporate Compliance strategy, which features unprecedented incentives for whistleblowers and new paths for companies to achieve a Voluntary Disclosure and possibly a declination of criminal charges. This new enforcement regime necessitates that developers immediately address potential vulnerabilities in their operations to mitigate severe penalties. Key risks include DOJ enforcement, CRE, Due Diligence, and the need for robust internal controls against Fraud

DOJ Scrutiny of Commercial Real Estate: FAQ

This FAQ addresses the key risks, regulatory changes, and compliance recommendations for commercial real estate (CRE) developers and their partners, focusing on the U.S. Department of Justice’s (DOJ) renewed enforcement priorities.

1. New Enforcement Priorities and Risk Areas

1. What is the primary reason for the increased DOJ scrutiny on commercial real estate (CRE) developers?

The increased scrutiny stems from the DOJ's new focus on the Trump administration's regulatory priorities, particularly targeting foreign criminals who use American businesses to further their illegal activities. This includes strict enforcement against funds derived from sanctioned individuals/countries, narcotics cartels, and foreign terrorist organizations (FTOs) being laundered through CRE projects.

2. Which specific high-impact crime areas announced by the DOJ are most relevant to CRE developers?

Several areas are highly relevant, given the nature of CRE projects, including:

• Complex Money Laundering (especially foreign investment and illegal funds).
• Trade and Customs Fraud (specifically tariff evasion on building materials).
• Bribery and associated money laundering (involving relationships with public officials).
• Material support by corporations to FTOs/Cartels (funds tracing).
• Waste, fraud, and abuse (government programs and procurement fraud).

3. How does "Trade and Customs Fraud" relate to a CRE development project?

Trade and customs fraud relates to the risk of tariff evasion charges. This occurs if a project uses building materials originally sourced from a country with high tariffs but the materials are mislabeled or misclassified to reduce the cost of duties, violating trade and customs laws.

4. What types of foreign investment are federal prosecutors most interested in scrutinizing?

Prosecutors are increasingly interested in foreign investment in CRE projects where the funds may have originated with sanctioned individuals or in sanctioned countries (such as Iran and Russia). They are also interested in funds derived from illegal activities, particularly those linked to narcotics cartels and foreign terrorist organizations (FTOs).

5. Besides financial crimes, what other significant compliance risk do CRE developers face under the current regulatory regime?

Developers face a greater risk of immigration-related action, including criminal investigations, if they fail to take appropriate steps to review the work eligibility of their employees and contractors.

2. DOJ Enforcement and Corporate Reporting

6. What are the three core tenets guiding the DOJ Criminal Division’s overhaul of white-collar enforcement?

The three core tenets announced by Division Head Matthew R. Galeotti are:

• Focus: Targeting high-impact crimes.
• Fairness: Ensuring individualized, proportionate enforcement.
• Efficiency: Streamlining investigations to reduce their impact on corporations and stakeholders.

7. Why is conducting an internal investigation now more important for a developer concerned about inadvertent criminal activity?

Internal investigations have taken on new importance due to enhanced incentives for voluntary corporate self-disclosure. A developer may secure a significantly more favorable outcome, including declination of criminal charges, by proactively investigating and reporting wrongdoing.

8. What is a "Declination" under the DOJ’s new Corporate Enforcement and Voluntary Disclosure Policy?

A declination is a formal decision by the Criminal Division to decline prosecution of a company. To qualify, a company must voluntarily self-disclose misconduct before the government knows of it, fully cooperate, and timely remediate the misconduct (e.g., implement an effective compliance program).

9. What fine reduction benefit does a company receive under a Non-Prosecution Agreement (NPA)?

If receiving an NPA, a company gets up to 75% fine reduction off the low end of the U.S. Sentencing Guidelines range. NPAs typically last fewer than three years and do not require an independent compliance monitor.

10. What is the maximum fine reduction offered to a company that does not self-report or cooperate?

Even if a company qualifies for neither declination nor NPA, the DOJ may impose an "Other Resolution" such as guilty plea with up to 50% fine reduction off the low end of the Guidelines.

3. Whistleblowers and Risk Mitigation

11. What is the purpose of the DOJ Corporate Whistleblower Awards Pilot Program?

The three-year pilot program incentivizes individuals (employees, vendors, competitors) to report corporate misconduct directly to the DOJ, filling gaps left by programs like the SEC’s.

12. How much of an award can a successful whistleblower potentially receive?

If the DOJ obtains asset forfeiture exceeding $1 million based on a tip, whistleblowers may receive up to 30% of the first $100 million in forfeited proceeds, and up to 5% for amounts from $100 to $500 million, creating powerful incentives.

13. What is meant by the "race to DOJ" that CRE companies must avoid?

The "race to DOJ" means individuals report misconduct before a company can investigate and self-disclose, causing loss of enhanced self-reporting incentives because originality of information is paramount.

14. What is the single most critical step a CRE developer should take regarding their internal policies right now?

Developers should routinely review and update policies to ensure confidential reporting of suspected misconduct, and clearly communicate compliance requirements to employees and third parties.

15. Besides updating written policies, what two immediate steps can developers take to mitigate procurement and customs fraud risks?

• Review internal procedures for vendor selection, bidding, and procurement for transparency and fraud prevention.
• Evaluate and document compliance practices of contractors and suppliers, focusing on supply chain transparency and tariff evasion due diligence.