Much to the chagrin of the real estate industry, the Treasury Department announced last Wednesday that due to growing concerns “about illicit money flowing into luxury real estate” they would no longer allow buyers to hide behind corporations and shell companies.
Initially, tracking and identification of formerly secret buyers will be focused on Manhattan and Miami-Dade County. These two areas represent two of the nation’s top metropolitan markets for a recent influx of global wealth.
Los Angeles is also considered a major concern and the Treasury Department hinted at tracking California transactions soon, though Los Angeles County has already taken steps to uncover parties behind private sales.
The goal of the initiative is to “shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.” This marks a big first for the federal government, previous cash buyers were not required to disclose their names, especially if they received further projection from a shell corp.
The question remains how such an unveiling will affect the real estate industry. The past few years have resulted in a both a building and sales boom largely dependent on cloaked transactions from wealthy buyers.
But the Treasury Department isn’t just after transparency, the “initiative is part of a broader federal effort to increase the focus on money laundering in real estate,” said the New York Times in their coverage of the new task force. Government officials clarified that they would be focusing on real estate sales that use L.L.C’s, limited liability companies, and other corporate entities as well as all forms of shell companies.
The crackdown will not only focus on secretive buyers, but the professionals who aid and abet such transactions. This includes but isn’t limited to, lawyers, bankers, L.L.C. formation agencies and, yes, even real estate agents themselves.
The New York Times ran an in depth series last year that detailed how foreign buyers are now seeking safe havens for their money in American real estate. Their investigative reporting was so influential, even the officials behind the new government initiative admitted that The New York Times journalism inspired their efforts.
The Times discovered how common the then legal use of hiding behind shell companies was, noting that real estate professionals servicing the luxury market often know nothing about buyers, not even their identify.
Top Treasury official, Jennifer Shasky Calvery admitted “We are concerned about the possibility that dirty money is being put into luxury real estate.” Ms. Calvery is now the official in charge of the Treasury unit overseeing the new Financial Crimes Enforcement Network. “We think some of the bigger risk is around the least transparent transactions,” she added.
The Treasury’s new program will no doubt alter billions of dollars in real estate transactions. Their focus will be on all cash buyers who are also using shell companies.
Going forward, the government will form a database for law enforcement by requiring title insurance companies to unveil the identities of buyers. Since such title insurance companies are used in nearly every high end transaction, it’s going to be increasingly difficult for real estate owners to remain difficult.
The new disclosure requirements are scheduled to run from March through August. During that period, Manhattan buyers of $3 million plus properties and Miami-Dade buyers of $1 million plus properties will be reported to and recorded in the new government database. After that, Ms Calvery said Treasury officials will review the results and examine the amount of suspicious money before making the requirements permanent and nationwide.
said the anonymity possible under existing shell companies had stymied investigations and the Treasury initiative would help trace illicit money.
“We fully intend to encourage expansion of it, so, not only to different geographic areas but as far as the time frame as well,” said senior Federal Bureau of Investigation official Patrick Fallon. “We think it’ll prove its worth.”
In The Times investigative piece, they were surprised to discover that almost half of all homes nationwide worth at least $5 million are purchased using shell companies. In Manhattan and here in Los Angeles, the numbers are even higher, much higher in fact.
The Time Warner Center, a prominent condominium complex near Central Park, was a focal point of the Times journalism. They examined a decade of buyers and uncovered many who were subjects of government investigations, some ongoing. “Former Russian senators, a former governor from Colombia, a British financier, and a businessman tied to the prime minister of Malaysia” were all discovered in that one complex alone.
Ms. Calvery said the reportings were instrumental in getting the Treasury department to increase scrutiny of high-end buyers. “It’s easier to talk about it with people who aren’t specialists in our area when they read about it in the newspaper,” Calvery said.
It’s not just the Treasury Department that has its watch on the real estate market. Sources also reported to the Times that the Justice Department is now shaping single cases that directly link money laundering and real estate deals, instead of just tacking them on to other larger cases.
“We’re going after the facilitators of the money laundering,” FBI agent Fallon said. “They’re the bankers, they’re the accountants, lawyers, folks who are setting up L.L.C.s, they are setting up foundations, folks who are setting up nonprofits, real estate investment trusts, etc.”
So what does this mean for those of us in the real estate industry? At the least, we can expect some increased headaches. By their very nature, shell companies are not easy to penetrate. Companies are often stacked and layered on top of one another to further obfuscate and protect buyers. In fact, many buyers don’t even use their own names, but instead use the names of lawyers as “nominees” when forming their corporations.
“We’re not looking for nominees,” Ms. Calvery clarified. “The Treasury is looking for the actual owners behind shell companies, often referred to as the beneficial owners.”
Specifically, the Treasury Department’s new requirements look like this. Once title companies identify people who own 25 percent or more of equity interests in a corporation purchasing a high end real estate asset, they’ll be required to disclose driver’s licenses or passports and report names to the Treasury Department.
Currently mortgage lenders are already required to scrutinize and even disclose buyers if asked, but all cash buyers have previously been out of the government’s reach. “Repeated anecdotal information where we see criminals of different stripes putting money into real estate all suggest to us that this is an area we need to pay attention to,” said Calvery.
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