Eyeing All-Cash Transactions

The Feds are taking a closer look at money laundering in all-cash purchases of luxury residential real estate.

By Brittany Magee

The federal government is taking a big step into the world of luxury real estate, but not as a buyer. The U.S. Department of the Treasury is requiring the disclosure of identities behind all-cash transactions in high-end residential real estate for the first time.

In January, the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department issued a Geographic Targeting Order (GTO) that will obligate certain title insurance companies, which are involved in nearly all real estate sales, to identify the individuals behind “shell companies” that purchase residential properties with all cash. For the time being, the GTO is limited to transactions only in New York City’s Manhattan borough and in Miami-Dade County, Florida——two major destinations for affluent property buyers.

Any buyer who pays all cash for properties over $1 million in Miami and over $3 million in Manhattan, or has at least a 25 percent ownership of a property, also known as a beneficial owner, must be reported to FinCEN. The initiative will only last for 180 days, expiring Aug. 27, 2016. And the Treasury will put all information collected into a database for law enforcement officials.

“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,” FinCEN Director Jennifer Shasky Calvery says. “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.”

Potential Money Laundering

Money laundering in real estate has become a growing concern for federal agencies, and increasingly more resources are being put into investigating shell companies, such as limited liability companies, or LLCs. While the use of shell companies in real estate is legal, FinCEN is concerned about the possibility of corrupt individuals using all-cash transactions as attempts to hide their assets and identities since no banks are involved in the process.

“Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering,” Calvery says. “But cash purchases present a more complex gap that we seek to address.”

Currently, more than 20 percent of home purchases nationally are all-cash purchases, according to the National Association of REALTORS® (NAR). In December, the month before FinCEN launched its initiative, 24 percent of transactions were all-cash sales, down from 27 percent in November. While these numbers are down nationwide from recent years, Florida and New York are still in the top five states that continue to see high rates of cash sales at 45.2 percent and 44.1 percent, respectively, based on a 2015 analysis by CoreLogic, a financial services company that provides consumer, financial and property information.

All-cash deals represented more than 50 percent of Miami’s total sales alone, according to a 2015 news release from the Miami Association of REALTORS®. In New York City, sales to shell companies have reached 42 percent on the Upper East Side, and 63 percent of luxury properties downtown were sold to undisclosed buyers, as reported in The New York Times.

Ultimately, if FinCEN’s initiative proves that more real estate sales in Manhattan and Miami-Dade County involve suspicious transactions, the Treasury will develop permanent reporting requirements nationwide.

The Role of REALTORS®

With government agencies keeping a close eye on all-cash LLC transactions in two major sectors of luxury real estate, what does that mean for REALTORS® in those markets and markets like them?

Since this is the first time the government has required such disclosure from real estate companies, there are predictions a lull in luxury residential transactions will follow, as buyers will balk at such exposure or want to distance themselves from the idea that the use of LLCs is now inherently criminal. Some believe the new requirement is a positive thing, however.

“This new law will in no way reduce the number of real estate transactions in any significant way, except for those of known criminals,” says James Salas, CRS, a broker associate of E Realty International in Key Biscayne, Florida, an island community in Miami-Dade County. “A simple disclosure explaining the benefits of the law would go a long way to help future buyers feel comfortable purchasing real estate through LLCs.”

One thing is certain—the Treasury Department agrees with the NAR’s statement that the majority of REALTORS® are not able or liable to detect money laundering, since the funds involved in real estate sales are handled by financial institutions. In fact, it was found that most REALTORS® involved with LLC transactions don’t know much about the buyers because of their detachment from the finances.

REALTORS® can help identify signs of money laundering, however. Working closely with FinCEN, NAR developed a set of voluntary guidelines for REALTORS® to spot potential criminal activity in transactions. NAR has promoted this information to its members through various forms of communication, including on its website, at national meetings and in numerous publications.

Only time will tell how FinCEN’s initiative will affect the luxury residential market in New York City and Miami, and in high-end markets throughout the rest of the country potentially in the future. “This law should have been adopted long ago,” Salas says. “Most residents and purchasers using LLCs welcome the new law since it serves to clean up the community of the rare criminals using LLCs as a shield.”

Brittany Magee is a freelance writer based in Chicago.

For more information, read this news release from the United States Department of the Treasurys Financial Crimes Enforcement Network.