Concerned about illicit money flowing into luxury real estate, the Treasury Department said
Wednesday that it would
begin identifying and tracking secret buyers of high-end properties.
The initiative
will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of
the real estate market: all-cash purchases made by shell companies that often
shield purchasers’ identities.
It is the first time the federal government has
required real estate companies to disclose names behind cash transactions, and
it is likely to send shudders through the real estate industry, which has
benefited enormously in recent years from a building boom increasingly
dependent on wealthy, secretive buyers.
The initiative is part of a broader federal effort to increase the focus
on money laundering in real estate. Treasury and federal law enforcement
officials said they were putting greater resources into investigating luxury
real estate sales that involve shell companies like limited liability
companies, often known as L.L.C.s; partnerships; and other entities.
Future investigations, they said, will focus
increasingly on professionals who assist in money laundering, including real
estate agents, lawyers, bankers and L.L.C. formation agents.
Officials said the new government efforts were
inspired in part by a series last year in The New York Times that examined the rising use of shell companies as foreign buyers
increasingly sought safe havens for their money in the United States. The
investigation found that real estate professionals, especially in the luxury market,
often do not know much about buyers. Until now, none of them have been legally
required to.
The use of shell companies in real estate is legal, and L.L.C.s have a
range of uses unrelated to secrecy. But a top Treasury official, Jennifer
Shasky Calvery, said her agency had seen instances in which multimillion-dollar
homes were being used as safe deposit boxes for ill-gotten gains, in
transactions made more opaque by the use of anonymous shell companies.
“We are concerned about the possibility that dirty money is being put
into luxury real estate,” said Ms. Calvery, the director of the Financial
Crimes Enforcement Network, the Treasury unit running the initiative. “We think
some of the bigger risk is around the least transparent transactions.”
The department will focus on sales that are both paid
for all in cash and conducted using shell companies.
The government is requiring title insurance companies,
which are involved in virtually all sales, to discover the identities of buyers
and submit the information to the Treasury.
The government will put the information into a database for law
enforcement.
The Treasury’s program will affect billions of dollars
in real estate transactions.
In Manhattan, the initiative requires buyers in sales of more than $3 million to be
reported; in Miami-Dade County, it requires reporting on sales of more than $1
million. In Manhattan, 1,045 residential sales cost more than $3 million in the
second half of 2015, worth some $6.5 billion in aggregate, according toPropertyShark, a real estate data company.
In addition to
starting in only two markets, the requirement runs from March through August.
If Treasury officials find that many sales involved suspicious money, Ms.
Calvery said, they will develop permanent reporting requirements across the
country.
A senior Federal Bureau of Investigation official,
Patrick Fallon, 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
Mr. Fallon, chief of the bureau’s financial crimes section. “We think it’ll
prove its worth.”
In its investigation, The Times found that nearly half
of homes nationwide worth at least $5 million are purchased using shell
companies. In Manhattan and Los Angeles, the figure is higher.
In New York, The Times examined a decade of ownership at a prominent condominium complex near Central Park, the
Time Warner Center, and found a number of hidden owners who had been the
subjects of government investigations. They included former Russian senators, a
former governor from Colombia, a British financier, and a businessman tied to
the prime minister of Malaysia, who is now under investigation.
In Florida, The Times uncovered a condominium in Boca Raton tied to Mexico’s top housing official, who recently stepped down and is
now a leading contender for the governor’s office in the southern state of
Oaxaca.
Ms. Calvery said the findings helped convince the
Treasury that more scrutiny of high-end buyers is needed.
“It’s easier to talk about it with people who aren’t specialists in our
area when they read about it in the newspaper,” she said.
Indeed, last spring, New York City’s Finance
Department began requiring shell companies buying real estate to report their members to the city. That rule,
however, is less far-reaching than the Treasury action.
Real estate
is becoming a larger target for law enforcement as well. According to two
people with knowledge of cases at the Justice Department, lawyers there have
begun to shape cases directly around money laundering in real estate deals
rather than adding such transactions to other cases.
The F.B.I.
has in recent months created a new unit to focus on money laundering, and real
estate will be one main focus. The unit, which has 10 agents, will help the
Justice Department delve into shell companies and the people involved in money
laundering, F.B.I. officials said.
“We’re going
after the facilitators of the money laundering,” Mr. Fallon, of the F.B.I.,
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.”
The new
scrutiny is likely to increase headaches for the real estate industry, in part
because shell companies are not easy to penetrate. Buyers often mask their
identities by layering companies on top of other shell companies. Buyers also
commonly fill out L.L.C. formation papers using the names of lawyers or other
place holders, often called “nominees,” instead of their own names.
The Treasury
is looking for the actual owners behind shell companies, often referred to as
the beneficial owners. “We’re not looking for nominees,” Ms. Calvery said.
In its
order, the Treasury defined beneficial owners as “each individual who, directly
or indirectly, owns 25 percent or more of the equity interests” of the entity
that bought the property. Once title companies identify those people, they are
required to copy driver’s licenses or passports and also pass the individuals’
names to the Treasury Department.
Stephen
Hudak, a spokesman for the Treasury’s Financial Crimes Enforcement Network,
said any title companies or purchasers who provided false information could
face penalties. The American Land Title Association said in a statement that it
would help its members comply with the Treasury’s new naming requirements.
Under the
U.S.A. Patriot Act, the
Treasury is already authorized to require real estate companies to scrutinize
real estate buyers, but the department has in the past faced fierce lobbying
against issuing such rules. The department already requires mortgage lenders to
scrutinize buyers. But cash buyers have been a big hole in the government’s
oversight of the market, Ms. Calvery said.
“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,” she said.
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