A new law that targets wealthy buyers who scoop up high-priced homes and commercial properties through anonymous shell companies could help stop the flow of illicit cash into real estate. But some money laundering experts say the measure has loopholes that could be easily exploited.
The Corporate Transparency Act requires true owners of shell companies to identify themselves to the U.S. Treasury Department’s Financial Crimes Enforcement Network. Those who do not comply face criminal penalties. The measure, tucked into the massive annual defense spending bill that President Donald Trump vetoed, became law Jan. 1, when Congress overrode his veto.
“By requiring shell companies to disclose their true, beneficial owners, bad actors who want to park their illicit money in New York real estate will no longer be able to hide their identity from law enforcement,” said Rep. Carolyn Maloney, the New York congresswoman who sponsored the bill.
Luxury real estate purchases made through shell companies don’t just happen in Manhattan. Federal authorities in recent years have charged foreign buyers with using limited liability companies to launder money through South Florida real estate deals.
Last year, the nonprofit Tax Justice Network called the United States the second-worst offender when it comes to “helping individuals to hide their finances from the rule of law,” behind only the Cayman Islands. The group considers both countries “hotbeds” of financial secrecy.
States such as Delaware, New Mexico and Wyoming are among those that allow buyers to anonymously register LLCs, and do not require individuals to disclose their identity when creating a legal entity. Many wealthy buyers and celebrities use these LLCs to purchase real estate, essentially hiding their identity.
The new legislation technically still provides that barrier. Under the law, the database of beneficial owners will not be made available to the public.
In a statement to The Real Deal, Maloney said she first looked into the issue 20 years ago, following the Sept. 11 attacks. That’s when she “became very focused on terrorist financing, and anonymous shell companies — often formed right here in the U.S.” Maloney added that LLCs “are the vehicle of choice for terrorist groups around the world that want to move their money.”
Over time, the legislation evolved to also address money laundering through ordinary real estate purchases. In an op-ed in The Hill last month, Maloney said the bill would also help to lower housing costs in New York City. She said the measure would make it tougher for anonymous buyers who purchase but don’t occupy pricey units in luxury high-rises, or so-called ghost towers.
ID required
Under the new legislation, a beneficial owner is defined as a person who has “substantial control over an entity,” or owns and controls at least 25 percent of the interests in the company. The applicant registering the LLC or shell company must provide identifying information about the beneficial owner, including name, date of birth and a current business or residential address. That information is then compiled into a database by FinCEN.
The legislation also requires LLCs report changes in control of ownership. Providing false information or failing to update the ownership information will result in a fine or a possible prison term of up to two years.
The legislation is another tool the Treasury Department, through FinCEN, can use to crack down on money laundering. FinCEN’s Geographic Targeting Orders, first issued in 2016 and since sharpened, requires title insurance companies to collect and report information about beneficial owners. The orders apply to purchases made by shell companies in 12 major U.S. metros including New York, Los Angeles and Miami. They target non-financed purchases of residential real estate over $300,000, including cash, check, fund transfer or virtual currency.
Unlike the Corporate Transparency Act, those orders do not require shell companies to report their beneficial ownership directly to FinCEN.
But some industry pros say the new legislation doesn’t have the teeth needed to attack the real problem.
Ross Delston, a Washington, D.C.-based lawyer and expert on money laundering, said there are few safeguards to prevent companies from providing inaccurate information to the government.
“The database has no mechanism to allow FinCEN to check or conduct due diligence on the stated beneficial owner,” Delston said.
Under the law, only FinCEN, law enforcement and some financial institutions — like banks or mutual funds — will have access to the database.
Banks can use that database when a customer is first doing business with them, but the applicant must consent to giving the financial institution access to their information. There’s a chance a customer could refuse and head to an alternative lender, Delston said.
It is also unclear how the law will affect entities outside the U.S. that own real estate or want to purchase property here.
Maloney said the act requires disclosures from foreign companies that are registered to do business in the U.S., but some legal experts are unsure whether buying and holding real estate meets this requirement.
Some law firms have already set up task forces to help their clients navigate the law. Even with the added level of regulation, lawyers say the measure won’t reduce investment in U.S. real estate.
“Ultimately, the U.S. real estate market is very attractive for both onshore and offshore investors,” said Terri Adler, managing partner and real estate chair of the law firm Duval & Stachenfeld. “As long as the regulations and privacy to the information make sense and work, it will not stop investors from coming here.”