L.A. real estate professionals say the Treasury Department’s latest attempt to sniff out dirty money in real estate deals has missed the mark.
The majority of agents, mortgage brokers and title insurers surveyed by The Real Deal said they expect new regulations governing the use of LLCs will do little to curb money laundering, since there are wide loopholes. Instead, the inability to hide the identity of all-cash buyers through such entities will put additional pressure on title insurers and escrow companies, minimally slow down deal flow, and put the privacy and personal information of high-net-worth individuals in jeopardy, they said.
“It’s like we’re penalizing the good, above-board people and it’s not going to stop anything, only slow things down and put people’s personal information at risk,” said Scott Paul, president of Better Escrow Service in Burbank. “It’s intrusive and carries the potential for identity theft to occur. There’s a lot of grumbling going on.”
Michael Nourmand, president of Nourmand & Associates Realtors in Beverly Hills, said he doesn’t expect anyone to stop buying in L.A. because of the new regulations.
“I don’t think it is going to have much impact on the L.A. real estate market,” he said. “In my experience, the vast majority of buyers using LLCs are doing so to limit their liability and the secondary benefit is confidentiality. The new rules may create a new headache for buyers but its affect on the market will be limited.”
The Treasury Department’s latest expansion of a pilot program requires title companies to identify the true buyers behind anonymous, all-cash deals in L.A. The rules will apply to all residential properties priced at more than $2 million in Los Angeles County as well as San Diego County. The program, which has already been in effect since March in New York City and Miami, will go into effect in L.A. starting August 28.
Some said they were surprised that the price threshold for deals that would be scrutinized was so low.
“I’m shocked,” said Rad Vasile, vice president of sales at Property ID Title Company in L.A. “Two million for L.A. — that’s just your regular residential home. Homes that would sell for $100,000 in Texas would sell for $1 million here.”
The new regulation comes in the wake of several high-profile money laundering scandals, some of which have touched L.A. An 11,000-square-foot gated Beverly Hills estate is just one of several properties across the country that was allegedly purchased with money misappropriated from the 1Malaysia Development Bhd fund, a state fund designed to benefit the Malaysian people.
The property, at 912 Hillcrest Road, was purchased for $17.5 million by Riza Aziz, a film producer and the stepson of Malaysian leader Najib Razak. The FBI is reportedly gearing up to seize the property.
Brokers called the Aziz incident an “isolated case.”
“It’s a needle in a haystack,” said Sebastian Wolski of Nest Seekers International, noting that he thinks the source of most of the capital flowing into L.A. real estate comes from legitimate sources.
“I’d say the majority of people are just concerned about their privacy,” he said. “They don’t want people to know how much they’re spending.”
Some said the disclosure regulations will just end up lining the pockets of accountants, business managers and attorneys who will fight to protect the privacy of celebrities and Hollywood types who make up a large component of the high-end L.A. buyer pool.
“I’m not sure how celebrities will navigate this but clever people will come up with some way to do it,” said attorney Jay Neveloff of Kramer Levin. “We’ll see a lot of lawyers and accountants trying to think of ways around this.”
Despite lots of cynicism in New York when the program was initially announced, the Treasury Department said it has already had a positive impact.
“The information we have obtained from our initial GTOs suggests that we are on the right track,” Jamal El-Hindi, the agency’s acting director of the Financial Crimes Enforcement Network (FinCEN), said in a statement. “By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”
Some L.A. agents admitted it can be difficult even for them to determine the source of funds when it comes to a high-end purchase.
“In the past, I don’t think brokers have questioned it very much,” said Greg Harris of brokerage Compass in Beverly Hills. “We had a Chinese buyer once who disappeared in the middle of the Escrow and then miraculously came back from China with the rest of the money. It’s hard to know how many people are buying a property sometimes. It looks like one buyer but they could be bringing money together from family and friends.”
Still, not everyone thinks the effort is a good use of government resources.
“The government is spending so much to find the dictators or people using ill-gotten gains to buy apartments,” Neveloff said. “But these people will just buy art or expensive diamonds, instead. They’ll find another way to hide their money.”