On February 1, 2016 we posted US Real Estate Investments & Anonymous Entities Again in Spotlight for US Money Laundering!, where we discussed that the Financial Crimes Enforcement Network (FinCEN) on January 13, 2016 issued a 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. The Treasury’s program will affect billions of dollars in real estate transactions. In Manhattan, the initiative requires buyers in sales of more than $3 million to be reported; in Miami-Dade County, it requires reporting on sales of more than $1 million. In Manhattan, 1,045 residential sales cost more than $3 million in the second half of 2015, worth some $6.5 billion in aggregate, according to PropertyShark, a real estate data company.
The key findings from the investigation are:
- Lawyers from 12 of the 13 firms we visited suggested using anonymous companies or trusts to hide the minister’s assets. All but one of these firms recommended using American companies.
- One of the lawyers was the President of the American Bar Association at the time.
- Several lawyers suggested using their law firms’ own bank accounts to help prevent U.S. banks realizing whose money it really was, or to have the lawyer act as a trustee of an offshore trust and use this position to open a bank account.
- While most of the lawyers asked for some information about the minister, and his source of funds, only one lawyer refused to provide assistance during the meeting itself.
According to Law360, loopholes continue to allow sophisticated individuals to sidestep the attention of regulators.
Title Insurance Companies
The new rules, for example, limit the reporting requirements to Title Insurance Companies. Title insurance is usually required by a lender, typically a bank providing a mortgage, for protection against risks originating from flaws in the real property's title. Purchases completed without outside lenders, however, generally negate the need for title insurance and therefore eliminate the only party, a title insurance company, required to report the transaction.
The GTOs, however, specifically target purchases made without a bank loan or other similar forms of financing. In other words, by exempting those transactions that would most likely include title insurance, FinCEN has exempted from its reporting requirements most transactions likely to involve a title insurer, the rule’s mandated reporter.
Mortgages
Another category of transactions exempt from the reporting requirements are those involving a mortgage. Admittedly, FinCEN drafted the new rules in an effort to track what it perceives to be potentially the highest-risk category of real estate purchases: all-cash transactions. If an individual or an entity, including a limited liability company, finances the deal with a small mortgage, the transaction is exempt from the rules' disclosure requirements.
25% Ownership
The FinCEN rules require title insurance companies to identify the beneficial owners, defined as “each individual who, directly or indirectly, owns 25 percent or more of the equity interests” of the legal entity purchasing the real estate. This definition leaves the door open for buyers who splinter their ownership among multiple individuals, such as family members or attorneys, to avoid the 25 percent regulatory threshold.
Offshore Trusts or Foundations
Similarly, beneficial owners could utilize offshore trusts or foundations to benefit an individual, the trust's beneficiary, without conferring the legal status of "owner." These offshore entities are targeted frequently by financial regulators, which have long recognized that individuals have used these vehicles to conceal the origin of illegal proceeds. In using a nominee to control the funds of a trust or foundation, a beneficial owner is able to shield his or her identity from the scrutiny of regulators. Foreign bank secrecy laws barring and even criminalizing disclosure of banking information likewise serve to assist in the concealment.
Wire Transfers
Real estate purchases funded solely through wire transfers also may sidestep the reporting requirements. The FinCEN rules are triggered by purchases made using currency, a cashier’s check, a certified check, a traveler’s check, or a money order. Payment of the purchase price through a wire transfer therefore serves to exempt a transaction from the rules’ requirements. It should be noted that regulators have already targeted lackluster due diligence efforts in connection with foreign transfers. In the last several years, HSBC and Commerzbank have paid combined penalties in excess of $750 million partly for failing to properly scrutinize wire transfers.
The loopholes in these rules, allow sophisticated real estate purchasers to continue buying in these areas largely unimpeded. A savvy financier could easily navigate these rules to circumvent their purpose of curtailing the flow of dirty money.
The rules are timed to expire in August, 2016. However FinCEN may be using the next six months to gather information and assess the efficacy of the measures. In other words, after studying the loopholes and other shortcomings to the rule, FinCEN may reissue or even expand the rules, shoring up the present regulatory gaps.
Marini & Associates, P.A.
Read more at: Tax Times blog
