When it comes to foreign buyers, who’s to judge?

More than half of Manhattan luxury apartment purchases were made through shell companies last year — a statistic that has received much attention this week amid new reports focusing on how these corporate veils are sometimes used to move ill-gotten gains.

That LLCs are often used to optimize tax efficiency on investment properties and avoid unnecessary liability is well known to many in the industry. Some real estate attorneys who have represented foreign buyers in the purchase of Manhattan real estate feel that the connection being drawn between shell corporations, foreign buyers and criminal activity is unfair.

“I have many clients, not necessarily foreign, who decide to purchase in an LLC,” said Meg Goble of Rheem, Bell & Mermelstein. “I don’t think the [reports] are giving the full picture of what’s out there.”

The New York Times’ five-part investigation into clandestine foreign buyers at the Time Warner Center concludes today, with a story about a Russian minister buying a $37.5 million condo at the Related Cos. building through a shell company. The newspaper gave front-page real estate (for lack of a better term) to each story in the series.

Foreign scapegoats?

While LLCs are clearly used by an array of buyers, whether they are American or foreign, and whether they have something to hide or not, Goble feels that the potential for abuse of the tool by Americans is somehow being ignored.

The Times stated that at least 16 foreign buyers of Time Warner Center luxury condominiums have been the subject of government inquiries. Of the building’s American residents, Goble asked, “How many of them have been audited on their federal income tax?”

Furthermore, the issue of moving funds anonymously is not unique to real estate, said Jay Neveloff, a real estate attorney at Kramer Levin Naftalis & Frankel. “There isn’t an asset class anywhere in the United States where you couldn’t maintain anonymity,” he said. “It could be art, it could be an office building. It could be diamonds. The tangible asset system doesn’t require disclosures of names.”

Ed Mermelstein, a Rheem, Bell & Mermelstein founding partner who works extensively with Eastern European buyers, said that “the bent on the [NYT] story which tries to indicate that foreigners are trying to siphon funds into the United States and painting it as there being possible illegalities associated with these moneys coming into the U.S. is, to a large extent, ridiculous.”

Vetting

There is a misconception, attorneys said, that foreign funds should be viewed with heightened suspicion, and that if a foreign buyer chooses to purchase under an LLC, that suspicion should be greater still.

Goble said that from her standpoint, the vetting process for foreign buyers and American buyers does not differ much. In each case, she makes every effort to meet the client in person. “I’m not separating things into foreign buyer and US buyer,” she said. “You’re basically doing the same thing with every transaction. You want to know that the person is who they say they are.”

This approach stands in sharp contrast to what Elizabeth Sample, a top real estate broker with Sotheby’s International Realty who has worked with buyers at the Time Warner Center, said to the Times earlier this week.

“They have to have the money,” she said. “Other than that, that’s it. That’s all we need.”

All the attorneys interviewed by The Real Deal said that they, at least ostensibly, always know the identities of their clients.

“Even before you are retained by the client, you find out who they are, if they are in any way associated with any political organization,” Mermelstein said. “We want to make sure we are not going to have any problems with the U.S. government and Patriot Act issues that pop up,” adding that if an attorney allows a transaction involving illegally acquired funds to take place, they would lose their law license and be subject to criminal liability.

Goble admitted that uncovering an individual’s true source of funds is challenging, especially when the legwork sometimes takes place over a rushed three-day period, with the pressure of losing the deal if the contract is not signed posthaste.

Scott Claman of Giddins Claman, who has also represented foreign buyers, described the process of vetting a foreign client, saying that attorneys use many of the same research tools that a layman would.

“You can go online and in about 10 to 15 minutes find out what you need to know about most people,” he said. “If I had someone trying to buy a $15 million dollar apartment who is running a limo company out of Bogota, I would question it… Most people check out.”

As for where to draw the line, Claman said that while there are codes of attorney conduct, it is also up to individual discretion. If a person has not been jailed but is accused of criminal behavior, it isn’t necessarily against the rules to assist them in a transaction, though lawyers are technically required to avoid even the “appearance of impropriety.”

“I realize that the court of public opinion is different than the court system,” he said. “You have a reputation in society.”

But according to Goble, not every attorney can claim to be so scrupulous.

“Even if I were to say, ‘I don’t really want to get involved in this’ — they’re going to find a lawyer,” she said.

Know your client

Attorneys see banks as having the last word on whether the funds involved in a transaction are legitimate, because of their greater access to financial records. Goble said that banks are vigilant when it comes to “know your client” regulations, while Mermelstein said that banks always request details on what wired funds are for, who the source is, and how the money was acquired, and will close your account if any issues arise.

One source recalled an instance in which a Ukrainian buyer of a condo at Extell Development’s One57 lost a multimillion-dollar deposit after their bank account was frozen due to European sanctions on a close relative.

157 West 57th Street

But while attorneys and banks can be held liable for assisting a criminal in the transfer of funds, building sponsors typically aren’t, Goble said, and added that criminal background checks are not always a part of condo and co-op board review processes. While building sponsors and condo boards complete financial reviews, they are more interested in whether specific bank deposits signify borrowed money than whether they signify criminally-tainted money.

“There’s only so much [building sponsors] are entitled to know,” Neveloff said. “If you have resales and you’re talking about a condominium in specific, a condominium is a piece of real estate. It’s not a co-op.”

On the other hand, Mermelstein said that in elite buildings, there is a real concern about the identity of building occupants. He mentioned Zeckendorf Development’s 15 Central Park West as having particularly stringent standards.

The Manhattan skyline with 15 Central Park West on the left

“Trying to have either a purchaser or a renter approved in that type of building is close to impossible if you cannot prove that this is a person and that their money has been brought into the United States in a way that can’t be questioned,” he said.