Over three years ago, in August 2012, we described how [13]while US regulators and authorities were cracking down on such "illegal" banks as Standard Chartered and HSBC, they were allowing the non-corporate shielded entities, the actual individuals who benefited from the bank crimes, slip through the cracks simply by allowing them to park billions of ill-gotten gains in US real estate:
When it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal [14]: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned." In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors - those wonderful people who bring you the existing home sales update every month (with a documented upward bias [15]every single time) - which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.
As a reminder [16], here is where the NAR stands on the issue of its most generous clients possibly being some of the worst criminals known to man, courtesy of Elanus Capital:
Many of you reading this will undoubtedly have spent time in an international bank and been forced to sit through countless hours of “know your client” and AML training. Fascinating to note that the National Association of Realtors lobbied for and received a waiver from such regulation. That’s right, realtors actually went to the U.S. government and said: we want to be able to help foreign business oligarchs and other nefarious business people launder money through the real estate markets of the United States – and prevailed.
Here's their official position:
"NAR supports continued efforts to combat money laundering and the financing of terrorism through the regulation of entities using a risk-based analysis. Any risk-based assessment would likely find very little risk of money laundering involving real estate agents or brokers. Regulations that would require real estate agents and brokers to adopt anti-money laundering programs may prove to be burdensome and unnecessary given the existing ML/TF regulations that already apply to United States financial institutions."
Hat’s off to the NAR – that is some serious doublespeak. My translation: We’ll support you as long as we don’t have to support you.
If after skimming the above, readers are still confused what the reason is for the luxury segment of the US housing market continuing to rise in price and hit record highs, even as all other segments of the quadruplicate US housing market as explained here [17] languish, the explanation was very simple (and explained most recently back in October [18]): the "hot money" belonging to Chinese and all other global oligarchs would be laundered by parking into the new "Swiss bank account" that U.S. real estate has become.
However, just like Swiss bank accounts lost all their anonymity shortly after the Global Financial Crisis, and led to massive fund outflows from Switzerland (and ironically, into luxury US real estate), so after many years of us explaining how the ultra luxury segment of the US real estate market was being used as a money laundry vehicle, the US government has finally decided to crack down on these "secret" buyers.
As the NYT reports [19], "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.
The logic behind the move is clear: "this initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities."
... a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies.
“We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative. “We think some of the bigger risk is around the least transparent transactions.”
Our only question is what took so long?
What happens next remains to be seen, but now that the buyer anonymity of luxury real estate buyers is gone, and with it the opportunity to launder illegal money in the US, much to the chagrin of the NAR, we would expect a substantial drop in both demand and prices for the one segment that has so far been the most stable support of the entire U.S. housing market.
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Below is the full announcement by the US Treasury [20]:
FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami
“Geographic Targeting Orders” Require Identification for High–End Cash Buyers
WASHINGTON – The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. FinCEN is concerned that all-cash purchases – i.e., those without bank financing – may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. To enhance availability of information pertinent to mitigating this potential money laundering vulnerability, FinCEN will require certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.
With these GTOs, FinCEN is proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.
“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 FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”
Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.
The information gathered from the GTOs will advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering. This would mitigate the key vulnerability associated with these transactions – the ability for individuals to disguise their involvement in the purchase.
FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern. The GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies. To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.
The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on August 27, 2016.
Any questions about the Orders should be directed to the FinCEN Resource Center at 800-767-2825.
