Jan152016

US cracks down on money laundering in real estate

By forcing owners of shell corporations to reveal their identities, US officials will slow the flow of illicit money into high-end real estate.

People who make money outside the legal financial system have a problem. If they want to put their money back into legal circulation without exposing their nefarious activities, they need to “launder” the money through some kind of financial transaction, and ideally they want to hold the asset secretly so the authorities can’t find it if they get caught. Owning real estate through a shell corporation is a favored activity of money launderers.

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Since most agree that cracking down on drug cartels, organized crime, and other illegal activities is a good thing, preventing drug kingpins from anonymously buying properties with ill-gotten gains would find universal support. Unfortunately, that isn’t the case. It’s not only drug kingpins that oppose exposing illegal transactions, it’s the realtors who profit from these sales that resist cutting of the flow of bad money.

The National Association of realtors consistently and vehemently opposed any regulation that would expose criminals buying real estate through shell corporations. This shameful and self-serving opposition kept this loophole open for many years, years spent in service of blood money. The US government finally overcame realtor objections and closed this method of money laundering.

U.S. Will Track Secret Buyers of Luxury Real Estate

By LOUISE STORYJAN. 13, 2016

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 all-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. …

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There are legitimate reasons to buy real estate through a financial entity. Pooling funds to make large purchases is one of the primary functions of financial entities, so it’s natural that many real estate transactions are structured this way. In California, nearly all commercial real estate is owned by a financial entity, not to launder money, but to avoid Proposition 13 re-assessments when the property is sold.

The people entering into legitimate transactions, have no reason to hide their identities, so other than the inconvenience of providing a few documents, most people won’t resist revealing who is buying the properties. However, people who want to hide illegal transactions would very much like to keep their identities secret, and they will work feverishly to find new loopholes to prevent revealing who they are.

Though this law is designed to catch criminals who violate US or international law, what about the Chinese nationals that aren’t violating any law in the US, but may be violating laws in China forbidding the expatriation of money out of China?

If the US discovers the names of Chinese citizens who bought real estate legally here in the US, will the US government turn this information over to the Chinese government? What grounds would the US officials have for refusing such a request? And why would they want to?

Right now the Chinese buyers of US real estate (and Irvine real estate) believe that once they get their money out of China, they are in the clear. This new policy of the US government potentially changes that.

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If Chinese buyers know their purchase information may be turned over to the Chinese government, will fear of a crackdown back in China shut off the flow of this money?

What would that do to Irvine real estate?

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.

… If Treasury officials find that many sales involved suspicious money, Ms. Calvery said, they would develop permanent reporting requirements across the country.

Real estate professionals, especially in the luxury market, often know little about buyers, and until now, they have not been legally required to. 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.

Why are so many LA homes bought with entities to hide the owner’s identity? For some famous people, the anonymity is probably necessary, but that is such a small percentage of the population that it can’t fully explain the proliferation of LLCs here. I suspect many of these shell company transactions are Chinese buyers, particularly since buying through shell companies is one of the favored ways of getting money out of China.

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If the scrutiny of shell corporations expands, the high end of the US housing market will suffer. But that’s a small price to pay to deny criminals a place to hide their money.


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