The biggest weakness in the Treasury’s new LLC order? Wire transfers

“This loophole is large enough you can drive a fleet of trucks through,” attorney says

TRD New York /
Jan.January 29, 2016 08:00 AM

The Treasury Department’s new initiative to track all-cash LLC buyers has been slammed by industry insiders as unnecessary, unconstitutional and a “witch-hunt.” But the most damning criticism? The initiative, which aims to crack down on money laundering and ill-gotten gains, may not even work.

The order, which requires title insurers to disclose the true buyers of homes over $3 million acquired in-all cash deals through shell companies, only focuses on sales completed with paper checks and dollar bills, and excludes wire transfers, which experts say are commonly used on so-called “cash deals.”

“We don’t have people coming to closings with suitcases full of cash,” said Stuart Saft, who heads Holland & Knight’s real estate practice. Monitoring payments made with currency will have no effect, Saft said, because those payments simply don’t exist at the $3 million-and-up level.

At the luxury price point, the true all-cash deal — which conjures up cartoonish images of men in dark sunglasses slapping down bands of bills after tense negotiations — is close to fiction, said real estate attorney Adam Leitman Bailey.

Paying with cashier’s checks or certified checks, however, is much more common, and is covered by the Treasury’s new reporting requirements. Title insurers typically know more about buyers than any party in a deal, according to real estate attorney Petro Zinkovetsky, and are likely to have collected information that a bank issuing a cashier’s check may not have.

“The bank doesn’t need the information of every single owner of the LLC to issue a check,” Zinkovetsky said. The Treasury Department’s order will likely allow the government to identify LLC members that it could not through its normal monitoring of the banking system.

But by excluding wire transfers, the initiative has no teeth, attorneys said.

“It’s foolish,” said Aaron Shmulewitz, an attorney at Belkin, Burden, Wenig & Goldman. “Funds are going to be wired to the title company [directly] in advance of the closing, and the title company is going to hold on to it.” Since title companies will not be asked to disclose LLC members on wire-transfer transactions, the Feds will have to rely on the banking system’s limited ability to track the names behind LLCs.

A spokesperson for FinCEN, the Treasury Dept.’s financial crimes unit, told The Real Deal the government was looking to track “a narrow subset of transactions that are generally not scrutinized under existing AML [Anti Money Laundering] controls, while also minimizing burden by conforming to existing rules that the covered businesses are already familiar with.”

“To the extent that we see a shift to all-wire transactions,” the spokesperson added, “we adapt in the future accordingly.”

But Shmulewitz said the wire transfer loophole was “large enough you can drive a fleet of trucks through.”

“Who initiated the wire transfer? Some bank, some investor in some country abroad?” he said, casting doubt on the government’s ability to reliably identify LLC members.

A source familiar with the workings of the Treasury Department told TRD the government may already feel confident in its ability to track wire transfers. Payments by money order, the source said, are messier because the records are often on paper and are more tedious to track down. In such cases, going directly to the title insurer for information is a better bet.

FinCEN has brought the hammer down hard on banks that have failed to do due diligence on foreign wire transfers.  In 2012, it hit HSBC with a $500 million civil penalty for its failure to adequately review trillions of dollars in annual transfers. And in 2015, the German Commerzbank AG agreed to pay a penalty of $258.7 million for, among other things, violating U.S. sanctions by processing 959 wire transfers and other transactions involving Iranian financial institutions.

Another source put forward a more bureaucratic reason: the Treasury form used to enact the order, FinCEN Form 8300, which is used to report transactions over $10,000, does not cover wire transfers, and the form would have to be formally changed for it to do so.

“We’re asking the title insurers to use an existing form with existing definitions,” a FinCEN spokesperson said. “A covered transaction is triggered only when ‘such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form.’  This generally conforms to existing Form 8300 requirements (which are not triggered by wire transfers), which reduces burden on covered businesses because they are already familiar with the Form 8300 filing requirements and have filed Form 8300’s in the past.”

The temporary “geographic targeting order” on Manhattan real estate begins on March 1 and ends on Aug. 27, at which point many believe the government will assess what it has learned and move to implement something that is both more comprehensive and more permanent.

“They’re going to need to start from scratch,” Bailey said.

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