New disclosure requirements for cash home purchases look to stall international money laundering

The battle ground against international criminals, drug dealers, and even terrorists is coming to a home near you – in some cases, literally.

The U.S. Treasury reported this week that their newly formed Financial Crimes Enforcement Network will look to weed out international criminals who launder money by buying luxury real estate.

Starting March 1, title companies – involved in almost every real estate transaction – will be required to report the identities of people who pay cash for luxury properties in certain high-markets, starting Manhattan, New York and Miami, Florida, though Los Angeles and other areas may be added later. In Miami, cash purchases over $1 million will need to be disclosed, and cash sales over $3 million will be reported.

While $1 million or $3 million in real estate is rare in some markets, in Manhattan, more than 1,045 residential sales went for more than $3 million in the second half of 2015 alone. The order for new disclosure is temporary, only running 180 days, though it is likely to be renewed.

Since there are strict disclosure rules in place to source money when a mortgage is involved, foreign criminals often choose to pay cash for these luxury properties, essentially using them as “safe deposit boxes” to hide their money outside of their own country. Paying cash for a U.S. luxury property allows them to avoid detection of embezzled or illegally obtained funds, avoid paying taxes at home, or keeping their money out of national banks.

The Financial Crimes Enforcement Network, or FCEN, will aim for transparency of ownership and sourcing of funds for luxury cash purchases and homes held under shell companies, not individual owners – two common methods for international criminals to launder money.

"We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said Jennifer Shasky Calvery, FinCEN Director.

The prevalence of international criminals and “shadow” multi-national factions parking their money in U.S. luxury real estate through cash sales came to light with a 2015 New York Times article that explored the rise of shell companies used to protect the assets of foreign buyers, both involving legitimate citizens and criminal enterprises.

Homeland Security found that the majority of real estate purchases of $1 million or more in Florida’s Miami-Dade and Broward counties were made through shell companies. When they investigated, they found that money linked to these shell companies and real estate deals came from drug trafficking, foreign corruption, bribery, embezzlement, and other illegal activities.

As of November 2015, 17 percent of the 82,595 cash-only real estate purchases for single-family homes and condos in the U.S. went to buyers with an “LLC” in their name, indicating a corporation, or possibly a shell company. The New York Times reported that nearly half of all U.S. homes sales for $5 million or more went to shell company buyers, and that number spikes in Los Angeles and New York City.

During the tail end of the Great Recession, foreign and cash purchasers were especially active, with about 33% of all home purchases in 2011 cash deals. Between 2014 and 2015, there were about $104 billion in real estate transactions involving foreign buyers in the U.S. More than half of all foreign real estate purchases went to buyers from China, Canada, India, Mexico, and the UK and the vast majority of overseas buyers opt to pay for their homes – even luxury real estate –with cash.

The burden on title companies to locate the true buyers will now be prohibitive. The complexity arises because ownership of real estate through shell companies is actually perfectly legal, and L.L.C.s have myriad legitimate uses. But many shell companies only lead to other shell companies, or list names of attorneys or other representatives, called “nominees” instead of the names of the true buyers. But the Treasury has made it clear that it is not interested in adding nominees or other shell companies to its database, one the true majority owners, or beneficial owners.

In fact, the Treasury defines beneficial owners as "each individual who, directly or indirectly, owns 25 percent or more of the equity interests." Title companies will have to hunt down these actual beneficial owners and provide copies of driver’s licenses or passports to the Treasury Department.

The burden of responsibility is enormous, as a spokesman for the newly formed FCEN stated that if title companies or purchasers provided false information, they could face stiff penalties.

This comes amidst a renewed federal focus on curbing international and criminal money laundering, with a Federal Bureau of Investigation special unity reportedly being formed.