How Miami’s real estate market is coping with Treasury’s shell company crackdown: panel

South Beach (Credit: James Willamor)
South Beach (Credit: James Willamor)

For those in Miami’s real estate market waiting for the Treasury Department to stop tracking shell companies that buy luxury homes, don’t hold your breath.

A panel of industry experts, gathered Wednesday morning at the downtown Miami Hilton hotel, said the Financial Crimes Enforcement Network was only getting started with its efforts to crack down on money laundering in residential real estate.

In January, FinCEN launched its first so-called “Geographic Targeting Order,” or GTO, which required title insurers in Miami-Dade County and Manhattan to disclose the true owners of limited liability companies that paid all cash for homes priced above $1 million. The order was greatly expanded in July, encompassing all of South Florida, chunks of California and Texas, and all five of New York City’s boroughs.

“This is very much a pilot program,” said Leonard Prescott, regional counsel for the First American Title Insurance Co. and one of the panelists. “They’re either going to extend the [geographic targeting orders] or start rulemaking.”

Prescott was one of five industry heavy hitters assembled by the Greater Miami Chamber of Commerce to dish on how FinCEN’s controversial tracking of shell companies in luxury real estate was affecting South Florida.

Other speakers included attorney Marshall Martin, who acted as the moderator; John Tobon of Homeland Security Investigations; Leonard Prescott, regional counsel for the First American Title Insurance Co.; Danielle Blake of the Miami Association of Realtors; and Rick MacNamara, director of anti-money laundering risk supervision at the Federal Reserve Bank of Atlanta’s Miami branch.


One of the major takeaways from Wednesday’s panel is that the bureau appears to be adapting to industry critics who said the GTOs had glaring loopholes.

For one, wire transfers had previously been excluded from the list of payment types that had to be reported. That’s because they’re not covered by the Bank Secrecy Act of 1970, which gave the Treasury Department authority to issue global targeting orders.

But Tobon said FinCEN has proposed legislation to include wire transfers in future GTOs. The expanded targeting order also grew to include personal and business checks, whereas beforehand only money orders, cashiers checks and traveler’s checks would trigger a disclosure requirement.

The bureau itself isn’t a law enforcement agency, he said. Its global targeting orders are meant to gather a trove of data to both help the government track down money launderers, and inform future legislation. So far, FinCEN said it’s on the right track: more than 25 percent of the transactions covered in the original 180-day reporting period involved someone named in a “suspicious activity report” filed by financial institutions.

Regardless, it’s an uphill battle.

The fight against laundering money through real estate stretches back decades in South Florida, Tobon said, long before the Panama Papers investigation revealed just how big of a role shell corporations and overseas money played in the region’s construction boom.

He said a prime example is Al Capone’s former waterfront getaway on Palm Island, which the fabled mobster bought in the late 1920s.

“[Capone] didn’t buy that from the savings bonds he got from his grandmother,” Tobon said.

The primary roadblock in tracking down launderers — and the one FinCEN hopes to resolve with its disclosure requirements — is how opaque and complicated discovering who actually bought a property can be, he said.

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Seven out of 10 times, he said, an investigation hits a brick wall because the web of corporations hiding the true owner becomes too thick to untangle. Technology has also made keeping tabs on money moving into the country much more difficult.
With today’s smart phones and online banking systems, “even before you brush your teeth you could move $10 million,” he said.

Effects on the luxury market

The actual impact on luxury sales has been tough to determine, Blake said.

Miami’s high-end home market had already suffered dips in sales volume at the beginning of the year when FinCEN announced its pilot program, she said, and the industry is still sending mixed signals going into the winter season.

There are a host of other likely culprits responsible for the sales slowdown: a tumultuous stock market, a strong U.S. dollar dissuading foreign buyers and economic instability in feeder markets outside the country.

She added that if anything, the Panama Papers had a much larger impact on how both industry members and the outside world view Miami’s real estate market.

“We don’t get approached by people saying ‘We have $3 million to launder, help me do it,’” Blake said.

As for why Miami was singled out, she said it was the city’s huge volume of all-cash deals that drew FinCEN’s eye. Homebuyers that finance their purchase with a mortgage are already covered under disclosure requirements from lenders, but residential purchases without financing are a different matter.

Tobon added that the prevalence of shell corporations in home purchases above $1 million also contributed to FinCEN’s focus on the luxury sector, as opposed to the overall residential market.

But while luxe brokers and developers were left wondering how their buyers would take the news, South Florida’s title insurance industry scrambled to understand how the disclosure requirements would affect their business.

“It ruined Christmas for me,” said Prescott, whose company First American Title Insurance Co. was one of the first to learn of the targeting order.

He said the immediate worry was that title insurers, many of which are small “mom and pop” businesses, were being tasked with an enormous burden by having to vet and report any all-cash transaction. In South Florida, that also meant going back through years of preconstruction condo deposits to see whether each buyer’s form of payment was covered under the targeting order.

Facing hefty civil and criminal penalties for failing to report, the industry quickly adapted. He said his company now won’t issue title insurance if an all-cash buyer refuses to disclose his or her true identity.

There are still those who try to skirt the rules. Prescott said he’s heard of lawyers citing client privilege to avoid giving up the beneficial owner, as well as buyers asking for their deposits to be refunded so they can use wire transfers instead.

And now that the initial shock has worn off, he said he’s more appreciative of the goal FinCEN is trying to accomplish.

“The fact that ISIS is flipping condos on Miami Beach because it’s a good investment; that should motivate all of us,” he said.