Will Trump end crackdown on dirty cash in luxury real estate?

Jan 22, 2017   
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January 22, 2017
By Nicholas Nehamas

Just a month after President Donald Trump’s inauguration, a federal anti-money laundering program that targets luxury real estate is set to expire.

The dragnet monitors pricey home deals for signs of dirty cash, helping detect criminals who launder money through real estate. Manhattan and Miami-Dade County were the first markets scrutinized by the feds.

Here’s the big question: Will Trump — who made his money as a developer — keep the heat on the real estate industry? And if the administration of a developer-turned-president chooses not to renew or expand the regulations, will it be perceived as a conflict of interest?

Unlike other industries where cash changes hands freely, real estate has few checks on buyers.

Drug dealers and corrupt foreign officials have been busted buying condos and mansions in the United States. While the Obama administration rules were blasted by developers and brokers as faulty, they don’t seem to have hurt business as much as first feared since going into effect in March.

Trump’s decision could affect home prices in South Florida and other top markets. Streams of foreign cash are driving up prices beyond what many locals can afford, even as they’ve created jobs in the construction and real estate sectors. More than 70 percent of foreign buyers in South Florida pay cash, according to the Miami Association of Realtors. (Cash deals are vulnerable to money laundering because they don’t involve banks, which are required to report suspicious activity.)

The new president’s team did not respond to interview requests. And the Financial Crimes Enforcement Network (FinCEN) — the U.S. Treasury Department agency responsible for the rules — said it could not comment on its plans.

“As we are still in the data-gathering phase …. we cannot speculate on any future actions,” said Stephen Hudak, a FinCEN spokesman. The agency has described the regulations — renewed for 180 days at a time — as a pilot program to decide if real estate deserves permanent anti-money laundering rules.

Law enforcement supports the push.

In the United States, it’s possible for a shell company to buy a home without anyone knowing who the real owner is. That allows criminals to stash cash in real estate, officials say.

“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” said John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida. “We come across real estate being purchased with illicit funds once every other case. And then the challenge becomes who is the real owner. … When we knock on the door of the individuals involved in the real estate transaction, they say they don’t know.”

The initiative — known as a geographic targeting order (GTO) because it zeroes in on specific metro areas — is set to expire on Feb. 23. Before then, FinCEN could renew the order for another six months. Or it could announce plans to make the measure permanent. Or it could simply allow the rules to lapse, saying it had accomplished its data-gathering mission.

Another GTO targeting electronics exporters in Doral was not renewed after a year.

FinCEN’s director, Jennifer Shasky Calvery, left the agency last year. That means Trump’s nominee for Treasury secretary, former Goldman Sachs executive Steven Mnuchin, if confirmed, will appoint her successor.

Decision time

Trump staked his presidential campaign on business-friendly policies and support for law enforcement.

But in real estate, those pledges could clash like bulldozers playing chicken. via GIPHY

In a video address previewing his first 100 days in office, Trump said he would “formulate a rule which says that for every one new regulation, two old regulations must be eliminated.”

“So important,” he added.
In other speeches, he cast himself as a “law and order” candidate.

“On crime, I am going to support more police in our communities, appoint the best prosecutors and judges in the country, pursue strong enforcement of federal laws, and I am going to break up the gangs, the cartels and criminal syndicates terrorizing our neighborhoods,” he said in an August speech.

Laundering money through real estate is a key way criminal organizations hide their profits.

Lee Stapleton, a South Florida attorney and former federal prosecutor, said even with a change to an anti-regulation administration, she feels a reversal is unlikely.

“It’s difficult to un-ring the bell,” Stapleton said. “Once these regulations have been put in place, it’s more likely that they will be expanded to other cities rather than removed from the cities where they already exist. … If it’s

something that’s been successful in the test cities, it’s possible to see it nationwide.”

So far, there’s been little indication which way FinCEN will go.

Andrew Ittleman, an attorney who focuses on anti-money laundering compliance, said he was sure the rules were here to stay — when it seemed like Democratic nominee Hillary Clinton would be the next commander-in- chief.

“We now have a president who used to be a real estate developer,” Ittleman said. “That’s a big wild card. … He’s going to have a decision to make as to his priorities: Do we want to curb this kind of money laundering? If so, is it worth curbing future real estate development?”

For the Trump administration, any decision on the issue presents a conflict of interest, said Richard Painter, a former chief ethics lawyer for George W. Bush who has urged Trump to divest his family’s business holdings.

“If the regulation gets rescinded, it could appear Treasury is backing off money laundering in real estate,” Painter said. “And why? Because the president is a real estate developer who sells a lot of high-end units? Or because of a legitimate policy goal? No one will know.”

As a developer, Trump signed licensing deals for several luxury condo towers in South Florida. Among the buyers at three Trump-branded properties in Sunny Isles Beach were members of a Russian-American organized crime group, a Venezuelan oilman convicted in a bribery scheme and a Mexican banker accused of robbing investors of their life savings, a Miami

Herald investigation found. (An attorney for Trump said his organization was not involved in sales.)

Crackdown begins

In January 2016, FinCEN announced it would begin monitoring secretive luxury home transactions in two markets: Miami-Dade and Manhattan.

The agency chose Miami and Manhattan because in both places many homes are bought with cash and banks report a high number of suspicious transactions. The regulations were later expanded to other markets in New York, Florida, Texas and California.

The rules require title insurance companies to report the true owners of shell companies using cash to buy luxury homes. In Miami-Dade, the regulations kick in for deals of $1 million or more. In Manhattan, the price point starts at $3 million. (Title insurers play a role in almost all real estate transactions.)

Banks operate under similar “know-your-customer” rules.

At the time, real estate players balked, worried about a negative effect on business and the industry’s reputation. The Miami Realtor’s Association hosted a seminar entitled “How to Avoid the Treasury Trap.”

So far, however, the effect on sales has been muted, according to Realtors, analysts and industry data.

While it’s true that luxe sales fell dramatically in South Florida in 2016, most of the decline is attributable to a strong dollar, economic instability in Latin America and overbuilding, said Ron Shuffield, president and CEO of EWM Realty International, one of South Florida’s top brokerages.

“When you started getting to a point where it was 100 percent more expensive to buy here than it was the year before, many of the big Latin American buyer markets shut down,” Shuffield said.

The number of sales began to fall before the GTO went into effect. Since then, the free-fall has continued. In Miami, sales of more than $1 million fell 19 percent year-over-year since the order began in March 2016, according to EWM and Trendgraphix. In New York City, sales were down 6 percent, appraisal firm Miller Samuel found.

In July, FinCEN announced it would expand its order. Now under heightened scrutiny: all five boroughs of New York City; Miami-Dade, Broward and Palm Beach counties; the San Francisco bay area, Los Angeles and San Diego; and the county that includes San Antonio, Texas.

Sales in affected markets in California and Texas markets have boomed, suggesting the GTO is playing only a small role in the South Florida and New York slowdowns.

FinCEN hasn’t said how many transactions have been reported. In a conference call with reporters last year, a Treasury official revealed that a quarter of the transactions reported to the agency in Miami-Dade and Manhattan involved people whose banks had also filed suspicious activity reports about their business dealings.

Not so bad for business

The narrowly tailored order hasn’t been as burdensome as the industry feared.

“I don’t think our title companies have had to deal with more than a couple of these transactions,” Shuffield said. “We thought there might be a stigma that would attach to New York and Miami. But I think people have forgotten about it.”

One reason for that: Cash, in FinCEN’s definition includes hard currency, personal checks, business checks, traveler’s checks and money orders. But it does not include bank wire transfers, the most common way buyers pay for pricey homes.

FinCEN’s authority does not allow it to track wire transfers. But it has asked Congress for that power, with the support of law enforcement.

“We’re one of the only countries in the world that doesn’t keep track of incoming and outgoing wires,” said Tobon. “The banks do it, but they do it for their business purposes. I have to get a subpoena, and the info is very limited.

If I were working for the [Royal Canadian Mounted Police], I would have that in real time.”

If permanent regulations allow monitoring of wire transfers, the order could have a more dramatic affect, brokers agree.

Some buyers have tried to avoid the disclosure requirements by using wire transfers instead of cash, according to Leonard Prescott, Florida counsel for First American Title Insurance, who spoke at a Greater Miami Chamber of Commerce event last year.

While the effects of the crackdown are difficult to measure in economic terms, they have helped educate the business community and the public, said Jonathan Miller, a New York-based housing analyst.

“Before this ruling, I don’t think most were aware of the scale of kleptocracy around the world, so it helped shed some light on it,” he said. “With the new administration and their outward goal to reign in regulations, I have to wonder if it will be remain in place indefinitely.”

Richard Steinberg, a luxury broker in New York and Palm Beach, said he doesn’t think the order was well conceived. But he has changed the way he does business since it was issued: Even though the rules apply to title insurers, not brokers, he now insists on knowing the names of all his buyers, not just their lawyers or accountants. So far, he said, clients have agreed.

“Why look for problems?” he asked. “I don’t want anything to come back and haunt me.”


Andrew S. Ittleman, a founder and partner of Fuerst Ittleman David & Joseph in Miami, concentrates his practice in white-collar criminal defense, anti-money laundering compliance, and food and drug law. He litigates extensively against the U.S. government in civil and criminal matters. He may be reached at aittleman@fidjlaw.com.

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