When Treasury officials rolled out a plan last year to unmask anonymous buyers of luxury real estate, a key criticism was that it excluded deals involving wire transfers — a gaping loophole large enough to drive a truck through, some said. By closing that loophole this week, regulators hope to tighten the noose around bad actors trying to launder money through pricey property.
But there’s more.
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The Treasury Department’s financial crimes unit, FinCEN, also hinted at its eventual plan to apply LLC disclosure rules to deals nationwide by broadening the rule to Hawaii, an increasingly important market for Chinese and Russian buyers, sources said. And it signaled its intent to expand the net to commercial real estate deals in the near future, according to sources who cited the fine print of an eight-page advisory published by FinCEN on Aug. 22. Money laundering in commercial real estate has largely flown under the radar but may present an even greater threat than laundering in the residential market, as The Real Deal explored in an investigation last year.
“While the focus remains on luxury real estate, they’re foreshadowing [a focus on] commercial real estate,” said Marc Landis, a managing partner at Phillips Nizer LLP. “They’re continuing to broaden the things that they’re going to look at.”
In the meantime, FinCEN gave the LLC disclosure rule more teeth when it added wire transfers to a rule requiring title companies to disclose the buyers of luxury real estate who purchase using an LLC or corporate entity.
“Most transactions, including ‘all-cash transactions,’ include a wire transfer somewhere in the process,” said Aaron Shmulewitz of Belkin Burden Wenig & Goldman LLP. Closing off the loophole “will bring into the statute a very large number of the transactions that have been exempt for the last year-and-a-half.”
To some, the move was overdue. “No one walks in with a suitcase full of cash at a closing — ever,” said Petro Zinkovestky, a real estate attorney who works with foreign buyers.
Regulators are also honing in on other markets that may be vulnerable to money-laundering. Hawaii, for example, has become a “hub for foreign investment, especially coming from the Far East,” said Landis. While that in of itself isn’t problematic, several recent cases of money laundering there have underscored the risk associated with regions that are relatively close to countries like Russia and China, where it’s hard to trace the source of funds.
Many in the market expected the Treasury to extend the geographic targeting order (GTO).
“FinCEN has gone on record saying it’s an effective program,” said Pierre Debbas of law firm Romer Debbas. “Now they’re realizing, now that the program is up and running, let’s focus on what people are doing to get around it.”
And to date, the Treasury’s initiative hasn’t hurt deal flow, sources said. In many cases, legitimate buyers purchase real estate through LLCs, for reasons such as avoiding inheritance taxes or privacy concerns, said Bruce Cohen, an attorney at Cohen and Frankel. Foreign buyers have pulled back sharply from investing in New York real estate for reasons other than the increased scrutiny, according to Debbas. These include the strong dollar, anxiety about the Trump administration and China’s crackdown on overseas investment. Buyers are also concerned about property values, particularly on the high end. “Those four factors are bigger than FinCEN,” Debbas said.
“As part of our due diligence, I vet our clients — whether its for bank purposes, government purposes or just internally,” said Ed Mermelstein, an attorney at Rheem Bell & Mermelstein, LLP. “Our goal is to be consistent with anyone that walks in through our doors, to make sure we don’t expose our office or the transaction to any possible impropriety.”
Still, critics said the revised GTO still falls short of what’s needed to stop the flow of dirty money into real estate. Global Watch’s Mark Hayes, for one, said FinCen needs a more comprehensive approach.
While temporary orders are effective tools for gathering data in high-risk cities, “without rule-making the effort falls short,” he said. “If the goal is to change the status quo to disincentivize the use of real estate for money laundering, it doesn’t go far enough.”
Debbas pointed out there that are still ways to circumvent the rule, such as buying property outside the GTO’s jurisdiction, forgoing title insurance or spending less than the amounts laid out by FinCEN. (In Manhattan, a $2.99 million sale would not be subject to a GTO.)
“This policy has to be iron tight and it should be applied across every major market — if not nationally,” he said.
Shmulewitz acknowledged that for FinCEN regulators, closing loopholes is an uphill battle. “Some smart practitioner now will probably come up with some new loophole. And a year from now, or two years from now, the Treasury Department will try to close that loophole,” he said. “It’s like whack-a-mole.”