Cracking shells: US Treasury widens LLC disclosure law throughout LA, NYC

FinCEN's Jamal El-Hindi
FinCEN's Jamal El-Hindi

In its effort to root out dirty money flowing into luxury real estate, the Treasury Department said it will expand a pilot program requiring title companies to identify the true buyers behind anonymous, all-cash deals.

In new geographic targeting orders (GTOs), officials will require the disclosure of buyers in all five boroughs of New York City as well as parts of Florida, California and Texas. Previously, officials targeted all-cash deals by shell companies spending more than $3 million in Manhattan and Miami. That order took effect in March.

Despite gaping loopholes that elicited sneers and eye-rolls from real estate insiders, federal officials insisted that the earlier GTO had a measurable impact: More than a quarter of all transactions covered by the pilot program were linked to possible criminal activity, Treasury officials said.

“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 Wednesday. “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.”

Beyond New York, the new rules target Florida’s Broward and Palm Beach counties; Los Angeles County; San Diego County; San Francisco, San Mateo and Santa Clara counties; and Bexar County, which includes San Antonio, Texas. The new geographic targeting order (GTO) is effective for three months starting Aug. 28.

Officials said additional cities were included in the new GTOs based on the presence of a luxury market attractive to foreign buyers, the prevalence of shell companies used in cash deals and information provided by law enforcement.

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Since the first GTO took effect in March, title insurance companies have been required to identify and disclosure the owners of shell companies that purchase Manhattan real estate in all-cash deals valued at $3 million or more. In New York, title insurance companies will now report the identities of buyers in cash deals over $1.5 million in Brooklyn, Queens, Staten Island and the Bronx.

Officials said the expansion of the program is not a permanent solution, but rather a data-gathering tool that will inform the government’s long-term approach.

In a statement, the American Land Title Association said its members were taking the measure seriously. “We appreciate FinCEN’s efforts to prevent money laundering schemes and the illegal purchase of real estate,” said Michelle Korsmo, ALTA’s chief executive officer.

Numerous real estate experts told The Real Deal earlier this year that the Treasury’s LLC disclosure rules were mostly without teeth and merely became an annoyance.

The expansion of the pilot program will do little to change that view. Wire transfers are still not monitored by the program, though officials said that’s because legislature prevents them from being included in the GTOs. FinCEN supports legislation that would change that statue, officials said.

Similar to the first disclosure rule, the new GTOs target title companies since they are involved in nearly all real estate transactions. Earlier this year, title insurance companies asked for limits to their role, and the new GTOs require title companies to retain records related to the LLC disclosure for five years.