Real-Estate Faces New Compliance After Getting A Pass
By Samuel Rubenfeld
January 15, 2016
A U.S. Department of Treasury order targeting secret high-end real estate buyers could represent a day of reckoning on anti-money laundering compliance for the industry, experts say.
The industry, which has until now avoided a requirement to implement anti-money laundering compliance programs, now faces its biggest challenge on that front. Though the order only increases the burden on title insurance companies, other industry players could soon find themselves needing to comply, experts said.
The geographic targeting order on Manhattan and Miami from Treasury’s Financial Crimes Enforcement Network goes into effect March 1, and it lasts about six months, but experts expect its reach to broaden. As such, Jennifer Shasky Calvery, FinCEN’s director, said in a statement and repeated in subsequent interviews that the order will “produce valuable data” that will assist and “inform our broader efforts” to fight money laundering in the real estate sector.
Experts say Treasury first needs to know where the money is coming from before it can take any further action.
“There has been such an influx of offshore money…and there’s no record of who the purchasers are of these very high-end luxury apartments,” said Seth Kaplowitz, a lecturer on finance at the San Diego State University college of business administration.
The order follows years of reporting in multiple cities, including New York and Miami, on the secrecy of real-estate transactions. It requires title insurance companies to submit to FinCEN a form identifying the beneficial owners of a corporate entity buying a luxury property entirely in cash. Under the order, a beneficial owner is anyone who has a 25% or greater interest in the entity purchasing the real-estate, and the deal has to be worth more than $1 million in Miami or $3 million in New York. The information will be stored in a FinCEN database available only to law enforcement, FinCEN said.
Anti-money laundering experts say title insurance companies are sometimes the only financial institution involved in an all-cash real-estate transaction, creating an information gap on a deal in which the high-end property is typically held by an limited liability company, or LLC, or a special-purpose entity.
“The Treasury Department is obviously attempting to fill a perceived gap in reporting,” said Matthew Schwartz, a partner at Boies Schiller & Flexner LLP.
Andrew Ittleman, a partner at Fuerst Ittleman David & Joseph PL, said FinCEN chose the March 1 start date to give title insurance companies time to develop the anti-money laundering compliance programs necessary to comply with the order. “In order to do this, they’re going to need enhanced due-diligence and enhanced record-keeping features that they’re not going to be able to implement overnight,” said Mr. Ittleman.
The real-estate industry fought for and received a temporary exemption against a mandate that it implement anti-money laundering compliance programs after the Sept. 11, 2001, attacks. That exemption hasn’t been lifted in the years since, and activists cited the FinCEN order as evidence the exemption should end.
Stefanie Ostfeld, deputy head of the U.S. office of nonprofit Global Witness, called for the order to be made permanent, for it to apply nationally and for the ownership information to be made public. “Anonymous shell companies unite all crimes that generate money,” she said, calling for Congress to require the collection of information on the beneficial owners of all U.S. companies, not just those in real estate.
Marcos Jimenez, a partner at law firm McDermott Will & Emery LLP, echoed her notion on real estate firms. “There’s no reason why the real estate industry, which is involved in transactions that are in the billions of dollars every year, should get a pass,” said Mr. Jimenez.
The order serves as a peek into the sector, said D.E. Wilson, a partner at the law firm Venable who formerly was acting general counsel at Treasury. After the initial look, expect a larger move, he said.
“This is a way for FinCEN to test whether it ought to be in this business. When it gets into an area, they get in in a limited way, and then they move fully,” said Mr. Wilson.
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