The U.S. Treasury Department announced on Wednesday that it would begin identifying and tracking secret buyers of high-end properties. Based on an article in the New York Times by Louise Story, the new federal initiative to identify luxury real estate buyers will begin in the real estate hot spots of Manhattan and Miami. The program is designed to dig into a murky corner of the high-end real estate market: cash purchases by shell companies set up to conceal purchasers’ identities.
Federal officials note that this is the first time the government has required real estate firms to report the names involved in all-cash transactions, and the new policy is already rocking the luxury real estate industry, which has boomed in the last couple of decades due to a never-ending series of transactions involving wealthy, secretive buyers.
The new government initiative is one prong of an ongoing federal effort to crack down on money laundering in real estate in the United States. Several federal law enforcement officials that spoke to the NYT commented they were now committing more resources into probing luxury real estate sales that set up shell companies using minimal-reporting required corporate structures such as limited liability companies and partnerships.
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Shell companies are used relatively frequently in larger real estate transactions today, and it is legal, as LLCs offer other benefits besides the fact they allow greater secrecy.
That said, Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative, pointed out that officials had seen multimillion-dollar properties being used as “safe deposit boxes” for illegally obtained monies, and almost all of the deals involved anonymous shell companies owned by unidentified third parties.
The new program is only directed at luxury real estate sales that are cash transactions with shell firms as the buyers. The Treasury department is now mandating that title insurance companies provide the identities of buyers and give the data to the government. The real estate buyer information provided by the title companies is being entered into a database for law enforcement purposes.
Analysts point out that this new initiative will impact tens of billions of dollars in real estate transactions all across the country. Treasury officials note that buyers in sales of more than $3 million in Manhattan must be reported, and in Miami-Dade County all sales of more than $1 million require the buyer to be identified. Keep in mind that 1,045 residential real estate transactions in Manhattan topped $3 million in the last six months of 2015, totaling to $6.5 billion, based on data from PropertyShark.
The new initiative is clearly just a test program, as it is only in two cities and just in effect from March through August of this year. However, if the Treasury determines that many sales involved suspicions of money laundering activities,,they would move forward with permanent reporting requirements throughout the U.S.
It seems likely that at least some problem deals will be found, given the scale of the luxury real estate market in this country. In an earlier investigation, the NYT determined that almost half of the high-end homes in the U.S. that sold for over $5 million are bought with shell companies, and the percentage is even higher in Manhattan and LA.
Statement from the director of the Financial Crimes Enforcement Network
“We are concerned about the possibility that dirty money is being put into luxury real estate,” Calvery commented. “We think some of the bigger risk is around the least transparent transactions.”