Title insurers push back on new LLC disclosure rule

US order preceded by EU mandate

Title insurance companies, charged with revealing the identity of secret buyers of luxury real estate under a new government directive, are asking for limits to the disclosure requirements before the rule takes effect in March.

The American Land Title Association (ALTA), a lobbying group that represents more than 5,500 title companies, asked Treasury officials in a letter dated Jan. 13 to restrict the new order to certain residential deals and sought leniency in cases where a third party may hold part of the money for the transaction.

“In some instances a minimal amount of the purchase price may be held by a third party… in these situations, a title insurer could be unaware that a specific transaction is covered by the order,” ALTA CEO Michelle Korsmo wrote in a letter to the director of the Treasury’s Financial Crimes Enforcement Network (FinCEN). “We urge FinCEN to use a reasonable and good-faith test for determining insurers’ compliance.”

In an attempt to trace the source of funds pouring anonymously into New York real estate, the Treasury Department said Wednesday that title insurance companies would be required to discover and disclose the identities of cash buyers who buy property through limited liability corporations and shell companies. The initiative will apply to Manhattan sales above $3 million.

Because buying title insurance is ubiquitous in real estate, that sector will bear the brunt of the new disclosure requirements. All buyers – from developers who buy sites to individuals who purchase co-op and condo units – purchase title insurance to protect themselves against losses stemming from title defects or liens. Title insurance is a $14 billion industry nationwide, and in New York state, insurers underwrote $830 million worth of premiums for the first nine months of 2015, up 20 percent from a year earlier.

“They are not fighting the order, but they do want to limit it,” said a source close to ALTA, whose leaders are expected to meet with Treasury officials next week to discuss compliance with the new regulations. “They’re not happy with it, but they know they can’t stop it.”

The order, which was reviewed by The Real Deal, distinguishes between LLCs and other types of entities that purchase real estate in relative anonymity.

The rule for LLCs is the most stringent, and requires all members of an LLC to be identified. “That’s more exacting than you would otherwise expect to see,” said Bob Axelrod, a director of Deloitte’s anti-money laundering practice.

[vision_pullquote style=”1″ align=””] “They’re not happy with it, but they know they can’t stop it.” [/vision_pullquote]

However, other legal entities – such as limited liability partnerships or trusts – must only disclose owners who hold more than 25 percent of the company. If a shell company with 100 shares is owned equally by 10 people, for example, none need be revealed.

“While it’s not the most stringent rule … it seems like it’s a lot better than what’s going on,” said Axelrod, who said his takeaway is the new order will cause title insurance agencies to change their way of doing business by altering their way of collecting owner identity details when a shell company is the buyer. “The order does have teeth.”

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For title insurers, the new order will be something of a high-wire act.

“We pride ourselves on protecting our clients’ confidentiality, and the confidentiality of deals we work on,” said Yoel Zagelbaum, president of national title insurance firm Riverside Abstract. “Obviously, we will have to balance that with the requirements of the government and regulators and work within the new boundaries.

Others questioned whether the information ultimately could be shared with non-governmental parties.

“I believe the privacy of the members will be safeguarded,” Esen Edip, president of Titles of New York, wrote in an email. “In any event, a legitimate investor who does not reside in the city would still invest and leave it to their legal team and financial advisor to protect their identity.”

TRD spoke to top players from across the real estate world about the implications of the transparency initiative, and their common reaction could be summed up in a word: confusion.

From left: Marc Landis and Ed Wilson

From left: Marc Landis and Ed Wilson

But the Treasury’s move came as no shock to those steeped in the world of anti-money laundering. “This is something that’s been brewing for a pretty good while,” said Ed Wilson, former acting general counsel at the U.S. Treasury and now a partner at the law firm Venable LLP.

Wilson said that, two years ago, an international anti-money laundering group known as the Financial Action Task Force recommended that beneficial ownership be disclosed for all shell corporations. As a result, the European Union finalized a directive in 2015 requiring the disclosure of beneficial ownership to central registries in each EU country.

“The sellers of real estate are going to need title insurance in this game. They won’t be able to complete the sale until the buyers give up the information,” Wilson said.

Marc Landis, chair of the real estate practice at law firm Phillips Nizer LLP, speculated that the order could come to have greater implications down the line. The current order is effective only between March and August.

“While the order said it’s for six months, I would suspect they would continue if they get the information they need. If not, they will tighten it up in some fashion,” he said. The Federal Bureau of Investigation has expressed support for the Treasury’s initiative.

Once officials work out the kinks with the Jan. 13 order, Landis added, why not expand to other high-end markets such as San Francisco, Silicon Valley and Boston? “They will find the needles in the haystack and find it’s worth scouring through more haystacks to find more needles,” he said.