The US Treasury Department has started cracking down on buyers of high-end real estate in hopes of stopping money laundering. As a result, the federal government will now require real estate companies to disclose the names behind all-cash purchases made by shell companies.

Money Laundering and Real Estate

Over the past years the real estate industry has seen a boom – mainly fueled by wealthy, secretive buyers that have previously been able to be shielded by shell companies. The new initiative, being unveiled in Manhattan and Miami-Dade County, will now require companies to disclose the names behind the all-cash transactions. This initiative is part of a federal effort to increase awareness of the money laundering that seems to run rampant through the real estate industry under the guise of shell companies like limited liability companies (L.L.C.s), partnerships, and other entities. In addition to the shell companies, the investigation will also focus on those professionals that handle real estate business, including real estate agents, lawyers, bankers, and L.L.C. formation agents.

Money Laundering and White Collar Crime

Money laundering has become a hot button topic over the years as more and more people throughout the nation become aware of the wide income gap. Specifically, “money laundering” is the term to describe the process of how criminals disguise illegally gained money so that it appears to have been procured through a legitimate source.

Illegal practices such as money laundering is often referred to as “white collar crime.” While this term can refer to a variety of crimes, they all typically involve a crime that is committed through deceit for financial gain.

While it is not illegal to purchase real estate with the use of a shell company, Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network (the Treasury unit running the initiative), has said that the agency has seen cases where the multimillion-dollar homes were actually used as deposit boxes for ill-gotten gains, meaning that those purchasing the homes were doing so will illegally-gotten money. The fact that the homes were purchased under shell companies only helps the purchasers get away with fraud.

“We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery. “We think some of the bigger risk is around the least transparent transactions.”

New Requirements Real Estate Professionals

Previously, real estate professionals had not been legally required to know about the buyers behind the shell company, which only added one more level of secrecy. This new initiative will change that.

Title insurance companies, which are already involved in most sales, will not be required to identify buyers and then disclose this information to the Treasury. This information will then be recorded in a database for law enforcement.

Effects on Real Estate

It’s estimated that this new initiative will affect billions of dollars in real estate transactions.

It appears that states will have individual dollar benchmarks when it comes to reporting. Manhattan will require buyers of sales of more than $3 million to be reported, and for Miami-Dade County, buyers of sales of more than $1 million will be reported.

According to real estate property data company Property Shark, during the second half of 2015, in Manhattan, 1,045 residential sales cost more than $3 million. That comes out to $6.5 billion that would now need to reported under this new initiative.

March Through August

The reporting requirement will run from March through August, and according to Ms. Calvery, if it’s discovered that many sales involve suspicious money, then a permanent requirement might be enforced across the US.

According to Patrick Fallon, a senior Federal Bureau of Investigation official, this new initiative will help investigations that had previously been hindered because of the anonymity that the shell companies provided. He’s hopeful that the new measures will be helpful. “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. “We think it’ll prove its worth.”

Previous Investigation

In a previous investigation conducted by The New York Times, it was discovered that nearly half of US homes worth at least $5 million are purchased using shell companies. That figure is higher in Manhattan and Los Angeles.

The investigation also uncovered the fact that a number of hidden owners at the Time Warner Center, a prominent condominium complex near Central Park, had been the subjects of numerous government investigations. Owners includeda former governor from Colombia, former Russian senators, a British financier, as well as a businessman who had ties to the prime minister of Malaysia who is currently under investigation.

That same investigation found that hidden owner of a condominium in Boca Raton is Mexico’s top housing official. He recently stepped down, but is a leading contender for the Oaxaca governor’s office.

The Times article was pivotal in convincing the Treasury that it was time to start scrutinizing high-end buyers, according to Ms. Calvery. “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.

Smaller Measures

This is not the first time that secretive buyers are feeling the pressure. New York City’s Finance Department began requiring shell companies purchasing real estate to report their members last spring. The Treasury’s new action is taking that practice one step farther.

Money Laundering

The Treasury isn’t the only group looking into this potential fraud. It also appears that law enforcement is starting to look into money laundering within real estate deals as well. And the F.B.I. has also created a new unit that focuses on money laundering. Real estate will be included in those investigations. According to F.B.I. officials, the new unit will help the Justice Department investigate the shell companies and any person that might be involved in money laundering, including those roles that are often involved in real estate transactions.

“We’re going after the facilitators of the money laundering,” said Mr. Fallon. “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.”

Headache for Those Involved in Real Estate

Because shell companies are established to conceal the names of those involved, it’s likely that this new initiative will prove to be a headache for all those involved in the real estate industry. Tracking down a buyer’s identity is often made even harder by the fact that shell companies are often layered on top of other shell companies. It’s also a common practice for buyers to fill out L.L.C. formation paperwork with names of other people, including lawyers and place holder “nominees.”

Beneficial Owners, Not Nominees

According to Ms. Calvery, “We’re not looking for nominees.” The Treasury will be seeking actual owners’ names, often called “beneficial owners.”

The Treasure has defined these beneficial owners as “each individual who, directly or indirectly, owns 25 percent or more of the equity interests” of the entity that purchased the property. When title companies identify these beneficial owners they will also be required to get copies of driver’s licenses or passports and then pass the names to the Treasury Department.

Potential Penalties

So what happens if someone is caught under this new initiative? According to Stephen Hudak, a spokesman for the Treasury’s Financial Crimes Enforcement Network, any title companies or buyers who have provided false information might face penalties.

Additionally, the American Land Title Association has agreed to comply with the Treasury’s new requirements.

Additionally, Under the U.S.A. Patriot Act, the Treasury is authorized to require that real estate companies take a closer look at their buyers. In fact, mortgage lenders are already required to scrutinize buyers. The hole, according to Ms. Calvery, is cash buyers who do not require financing.

“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.

Working with a Criminal Defense Lawyer

Being accused of a white collar crime like money laundering is not to be taken lightly. While buyers might face penalties if it has been discovered that they have provided false names, the penalties will be far worse if it’s discovered that money laundering has also taken place.

The sooner a Los Angeles white collar crimes defense attorney can get involved in a white collar case, the better. If you have not already been charged with a criminal offense but believe you are the target of an investigation, contact our Los Angeles law office immediately. We may be able to help you avoid being charged with a crime.

If you have been charged with a white collar crime, we may be able to negotiate a resolution to your case with the prosecution in which you pay restitution and either avoid a criminal conviction, plead guilty to a lesser offense, avoid incarceration or significantly limit any time you may be required to serve. As a former prosecutor, Los Angeles white collar crimes attorney Daniel Perlman is highly adept at communicating with prosecutors and understands the critical importance of proactive case management. Finding creative solutions to criminal problems is a hallmark of our firm.

Contact Us

To schedule a free consultation with one of our Los Angeles white collar crimes defense attorneys, call 562-287-5333 or contact us by e-mail.

Daniel R. Perlman, Esq.
Law Offices of Daniel R. Perlman