No More Anonymity for Cash Buyers of Luxury Miami-Dade Homes

Jan 15, 2016   

By Carla Vianna and Celia Ampel
January 15, 2016

For international buyers purchasing luxury condominiums in Miami, new federal regulations aimed at removing secret identities on deals worth more than $1 million threatens to slow an already-lagging housing market.

What’s become routine in Miami’s cash-happy luxury housing market will get federal scrutiny with the U.S. Treasury Department peeling back a layer of secrecy on high-end deals with no names attached.

The U.S. Treasury Department’s Financial Crimes Enforcement Network issued orders Wednesday requiring title companies to disclose the names behind limited liability companies making the big-dollar home buys starting March 1 in two places — Miami-Dade County and Manhattan.

While luxury brokers are wary of the effect the order will have on their international clients, most of whom prefer anonymity when closing multimillion-dollar deals, title companies called for clarification Thursday.

Title companies must report the identity of the person primarily responsible for the purchase along with a driver’s license or other form of identification, according to the American Land Title Association. If an LLC is involved, the underwriter must provide the name, address and taxpayer identification number of all its members.

The report also must include the closing date, address, purchase price and down payment amount. The title companies are required to keep the records for five years.

The association’s CEO, Michelle Korsmo, said title companies are looking forward to helping FinCEN crack down on money laundering, but they need clarification on the orders.

Title insurance companies worry the definition of residential real estate may be murky, and they hope trusts will be excluded from FinCEN’s look at “legal entities” used as shell companies. A trust is not considered a separate legal entity under common law in several states, the group wrote FinCen in response to the orders.

“We urge FinCEN to use a reasonable and good-faith test for determining insurers’ compliance with this order,” ALTA wrote. “We believe the clarifications requested and joint education with the insurer and FinCEN should ensure that all covered transactions that the insurer is aware of will be reported; however, even with the best efforts of title insurers, there may be transactions of which the insurer is not made aware.”

The rate of cash deals in Miami is twice the national average primarily due to the volume of international buyers, according to the National Association of Realtors. About 27 percent of all U.S. housing sales were cash deals compared to about 55 percent of Miami sales in November 2015. About two-thirds of Miami condominium and 40 percent of single-family home sales were cash.

“We are seeking to understand the risk that corrupt foreign officials or transnational criminals may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

Luxury broker Ben Moss with ONE Sotheby’s International Realty said most Miami brokers have probably run into a situation where a thought crossed their minds: “How does this person have this kind of money?”

Sales Slipping

Miami luxury condo sales decreased nearly 15 percent in the third quarter of 2015 from the same period in 2014. In the same quarter last year, the number of $1 million-plus condo listings grew to 1,791, the Miami Association of Realtors reported.

If buyers are no longer allowed to remain anonymous, local real estate professionals say the order may do more than scare away dirty money. It may scare off South Florida’s top investors.

“There’s a good possibility that it could chill residential purchases with cash in the community,” said Marta Alfonso, a principal in the management advisory services department at accounting and consulting firm Morrison, Brown, Argiz & Farra.

Closing a luxury home deal using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

For example, the top sale in Key Biscayne in 2015 was purchased by Boca Breeze LLC for $47 million. The buyer was registered in Delaware, where corporate records do not list principals.

Florida LLCs must list owners, but some records link to untraceable Delaware LLCs.

Moss said many of his Latin American clients buying under the protective shield of an LLC have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers in Florida have learned to completely shield their names by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

Alfonso speculated, “You might see an increase in activity before the requirement takes effect.”

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, he said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

FinCEN’s announcement emphasized it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would-be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said. “It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white-collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

“There’s a good possibility that it could chill residential purchases with cash in the community,” said Marta Alfonso, a principal in the management advisory services department at accounting and consulting firm Morrison, Brown, Argiz & Farra.

Closing a luxury home deal using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

For example, the top sale in Key Biscayne in 2015 was purchased by Boca Breeze LLC for $47 million. The buyer was registered in Delaware, where corporate records do not list principals.

Florida LLCs must list owners, but some records link to untraceable Delaware LLCs.

Moss said many of his Latin American clients buying under the protective shield of an LLC have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers in Florida have learned to completely shield their names by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

Alfonso speculated, “You might see an increase in activity before the requirement takes effect.”

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, he said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

FinCEN’s announcement emphasized it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would-be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said. “It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white-collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

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