Beginning in March of this year, the Treasury Department will take steps to increase transparency in luxury real estate transactions. The new initiative will target all-cash real estate purchases made by shell companies, LLCs, partnerships, and other entities that conceal the homebuyer’s identity. The use of shell companies in real estate purchases is legal, and this will be the first time that high-end buyers—often private by nature and necessity—will be required to reveal their identities. While an individual might utilize a shell company or LLC to protect their privacy and protect themselves from liability, the Treasury and the FBI are aiming to crack down on the international buyers who use these transactions to hide illicit funds and illegal activity.
Money Laundering & Luxury Real Estate
In “Towers of Secrecy,” a series of investigative articles published in 2015, The New York Times pulled back the curtain on all-cash, multi-million-dollar real estate purchases made by mysterious shell companies in Manhattan. This investigation revealed that many of these real estate transactions were being used to shield the significant wealth of foreign politicians and business people who had been accused of or tied to criminal activity. The Times reported: “Many of the owners represent a cross-section of American wealth: chief executives and celebrities, doctors and lawyers, technology entrepreneurs and Wall Street traders. But The Times also found a growing proportion of wealthy foreigners, at least 16 of whom have been the subject of government inquiries around the world, either personally or as heads of companies. The cases range from housing and environmental violations to financial fraud.” This investigation revealed that, of all the homes worth $5 million or more in the United States, nearly half are purchased using shell companies. It also suggested that, in many instances, luxury real estate professionals do not know the true identities of their clients.
Unmasking Secret Buyers
Partly in response to The Times’ findings, the U.S. Treasury is launching their initiative to unmask mysterious buyers of high-end homes. The initiative will start in Manhattan and Miami-Dade County, running from March through August, and apply only to all-cash purchases made through shell companies. When a shell company pays cash for a Manhattan property worth at least $3 million or a Miami property with at least $1 million, the title insurance company will be required to identify the “natural persons” behind the transactions—“each individual who, directly or indirectly, owns 25 percent or more of the equity interests” of the entity that purchased the property. The title insurance company will then copy the license or passport of each individual and report their findings to the Treasury. The government will compile this information in a database for federal law enforcement, who will investigate the buyers and the origins of their cash.
If many sales involve suspicious money, the Treasury will instate permanent reporting requirements across the entire country. The Treasury also noted that, as part of a broader push to crack down on money laundering in real estate, future investigations would focus on the professionals who assist in these suspicious transactions, such as lawyers, bankers, and real estate agents.