The Real Deal New York

Trump hums a different tune on regulating shell companies

The new administration has already renewed Treasury rules that monitor LLCs buying luxury properties, and insiders expect more to come
By Will Parker | June 01, 2017 10:00AM

When President Donald Trump jumped into office on Jan. 20, he came vowing swift deregulation that would free up American businesses and expand a struggling economy. But there’s one lesser-known regulation on the books that his administration has given its blessing to and may even expand — and the industry it affects is the one in which Trump made his name.

In January 2016, during Barack Obama’s presidency, the financial crimes unit of the U.S. Treasury Department, known as FinCEN, announced a pilot program requiring title insurance companies to disclose the real names behind shell companies buying up luxury residential properties in Manhattan and Miami. In turn, investigators were given more power to chip away at the veils of secrecy and track suspicious people cutting all-cash deals.

The announcement riled up many New York City real estate players, with dozens voicing concerns that the new rules would deter investments from abroad. Since then, one area of contention has been buyers from countries with strict capital flight rules;  some fear that their names could get leaked to the governments of their home countries.

Despite those concerns, the reporting requirements, known as geographic targeting orders, were later expanded to include more cities, and this past February the Treasury Department under Trump renewed the temporary regulations for another six months. Now several industry attorneys and real estate lobbyists say they expect the renewals to continue.

“The current administration is focused on regulatory reform and removing unnecessary barriers,” said Christie DeSanctis, a Washington lobbyist with the National Association of Realtors. “This is an area, however, that is likely to be more active and with more regulations.”

Upon renewal, the Treasury sent a clear message that the shell company disclosures have proven tremendously useful. FinCEN’s acting director, Jamal El-Hindi, gave congressional testimony at the time stating that 30 percent of transactions reported to the agency included the names of persons who were already suspected of engaging in suspicious financial activity.

FinCEN’s spokesperson, Stephen Hudak, was not at liberty to discuss the specifics of any investigations with The Real Deal but said the disclosures are helping to fill out an existing database shared with law enforcement agencies, including the FBI and DEA. He noted that the reporting order has helped in tracking a person suspected of more than $140 million in suspicious financial activities since 2009 and unearthed transactions of another individual accused of public corruption in Asia and South America.

Some transaction methods, however, such as wire transfers, aren’t covered by the reporting order, which means suspicious activity on that front is still falling through the cracks. For that kind of regulatory expansion, the Treasury is counting on Congress. “We’re hoping to get a legislative fix to allow us to broaden what we can look at and what we can find, but we’re not there yet,” Hudak said.

Aaron Shmulewitz, a real estate attorney with Belkin Burden Wenig & Goldman, remains critical of the FinCEN rules due to the wire transfers loophole and other factors. The disclosures, he said, could fuel a drop in real estate deals from abroad. But so far there is no evidence of a direct correlation. The real estate attorney also said he’s surprised that the current Treasury is sticking to these regulations — especially given Trump’s success as the former face of New York luxury real estate.

“Everything about Trump and everything about his administration would tend to militate against it,” he said.

The title insurance industry, meanwhile, generally accepts that the reporting rules are here to stay, said Steve Gottheim, a lobbyist for the American Land Title Association. “We’ve expected and known that at the point the information [became] valuable to law enforcement, this was not something that was just going to up and go away,” he said. Both Gottheim and Hudak characterized the working relationship between the Treasury and the title insurance industry as positive.

The reporting orders are up for renewal in August, and Gottheim said the entire industry is under the assumption that some form of the current order will be renewed then. Cities currently under watch outside of New York include Miami, San Antonio, Los Angeles and San Francisco. While in Manhattan only transactions over $3 million trigger the reporting rules, the threshold in the outer boroughs is lower, at $1.5 million.

“I definitely think at it’s something that will be implemented permanently. That’s what I’m telling clients,” said Pierre Debbas, a condo attorney at the New York law firm Romer Debbas who works with foreign buyers. “Mostly people are accepting it now. I’ve only had two people ever say, ‘I can’t have this happen.’”