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Criminals love the high-end real estate market. Not for the great schools or the water views, but for the unique smokescreen a luxury home purchase can provide for ill-gotten funds. Historically, when money launderers and other bad actors have invested in real estate in the U.S., they have done so through all-cash purchases, using complicated—but legal on their face—ownership structures that obscured their identities and distanced them from the source of their income. Without being able to trace the origin of proceeds derived from such unlawful activity, law enforcement has struggled to police money laundering in this sector.
To address this deficiency, the U.S. is aggressively exploring means of obtaining beneficial ownership information in the luxury real estate market. On March 1, 2016, the Financial Crimes Enforcement Network (FinCEN) launched a pilot program for Manhattan and Miami, temporarily requiring U.S. title insurance companies to “identify the natural persons behind companies used to pay ‘all cash’ for high-end residential real estate.”1 The six-month program will end on August 28, 2016.
As often happens with new mandates, the devil is in the details. The pilot program is being implemented through a pair of Geographic Targeting Orders (GTOs), which require title companies, within 30 days of closing, to report any business entity’s purchase of certain high-value residential properties—exceeding $1 million in Miami-Dade County2 and $3 million in Manhattan3—made without external financing through any of the following: currency, cashier’s check, certified check, traveler’s check, or money order. The title companies must submit an IRS/FinCEN Form 8300,4 which collects identifying information relating to the sale: the address and purchase price of the property; the closing date; the identity of the “purchaser,” insofar as it constitutes a legal entity; the identity of any person representing the purchaser; and the identity of the “beneficial owner(s),” defined as “each individual who, directly or indirectly, owns 25 [percent] or more of the equity interests of the [p]urchaser.”5 If the purchaser or legal entity is an LLC, the title company must also provide the name, address and taxpayer identification number for each of its members.
According to FinCEN, this data collection will serve dual purposes to “understand the risk” underpinning how corrupt officials and other criminals may be using luxury real estate to hide the proceeds of wrongdoing and to provide law enforcement authorities with data to facilitate the investigation of those suspected of unlawful activity.
The pilot program is an important first step toward cracking down on dirty money in the luxury real estate industry; however, it may fall short—due, in part, to a lack of guidance for the affected title companies. For one thing, the GTOs do not spell out the extent of such companies’ compliance obligations under the program, nor do they contain practical guidance on the steps that title companies should take to determine who exactly owns a particular company. This inquiry can be complicated. Needless to say, shell companies can be layered on top of shell companies on top of shell companies, like an intricate nesting doll.7 And “ownership”—as in the case of an offshore trust or foundation—may itself be subject to multiple definitions.
Guidance that FinCEN could provide to title companies would fill the gaps left open in the GTOs. By way of example, to fulfill their obligations under the GTOs, should the insurers accept the information provided by the purchaser and pass it along on a Form 8300, or are they expected to perform an enhanced level of diligence? And what about “all cash” deals funded by wire transfer? Although that would seem to be exempt from the mandate of the GTOs, should a prudent company nevertheless flag the data just in case? Missing, too, is guidance on what to do in transactions in which a purchaser refuses to identify an entity’s beneficial ownership to the title company. The GTOs also specify that title insurance companies, along with their officers, directors, employees and agents, can be subject to civil and criminal liability for violating the terms of the orders. But neither FinCEN nor its GTOs address whether penalties could arise from failure to undertake sufficient due diligence regarding beneficial owners. These and other questions underscore that title insurance companies need direction regarding their expected level of diligence and some of the situations they might encounter as they seek to comply with these rules.
Notwithstanding such lingering questions, in the absence of targeted legislation or regulation, FinCEN’s pilot program marks an important first step toward promoting greater transparency in an area of enhanced money laundering risk. In the short run—especially given its limited geographic scope—the program may not add much to the government’s understanding of the risk in all-cash real estate transactions, or materially contribute to criminal or regulatory investigations. But as the program matures and potentially expands to other major markets (Los Angeles and Chicago come to mind), it could eventually prove to be a game changer in terms of detecting and deterring money laundering in this sector. This will only happen, though, if those responsible for executing the GTOs receive sufficient guidance on their obligations.
This article was originally published in the July 2016 issue of ACAMS Today.
