On January 1, Congress passed an end to the secrecy of Shell companies that sparked a boom in high-priced New York condominiums. The new law could hinder the flow of international capital into Manhattan real estate and provide investigators with powerful new tools to uncover money laundering and other financial crimes.
The National Defense Authorization Act, vetoed by President Donald Trump, gives the Treasury the power to maintain and maintain a register of the “beneficial” or true owners of most companies incorporated in the United States, including limited liability companies. LLCs are a popular means of buying real estate, partly because of the secrecy they grant.
In the 2010s, neighborhoods like West Chelsea and “Billionaire Row” south of Central Park were redesigned as developers rushed to meet international demand for chic housing – many of which were bought by buyers paying full price through Shell companies .
“After the financial crisis, investors looked for higher returns and wanted hard assets. And that was the beginning of a huge development, ”Jonathan Miller, CEO of Miller Samuel, a valuation firm, told Gothamist.
When an LLC purchases property without a mortgage (commonly referred to as an “all cash” transaction) there is no need to report suspicious activity. Since there is no money lending, the rules of knowing your customers that banks must adhere to do not apply.
For years, law enforcement officials have warned that this situation presents an attractive void for criminals looking to launder the proceeds of their crimes. In 2018, Manhattan District Attorney Cyrus Vance, Jr. requested a national beneficial owner register, similar to that drawn up under the newly approved rules of Congress.
“All too often an anonymous charter report means the end of our investigation,” Vance said in prepared remarks to a conference of certified accountants. “We routinely work with foreign law enforcement agencies to prevent cross-border threats. It is detrimental to these partnerships, and frankly embarrassing, when we have to tell international law enforcement agencies that we cannot help them run down US-based criminal businesses because information about the owners of companies incorporated in our states is beyond our reach . ”
In 2006, Vance’s predecessor as prosecutor, Robert Morgenthau, discovered that a large office building in Midtown at 650 Fifth Avenue was partially owned by an Iranian bank that sponsored the country’s missile program and the Revolutionary Guard. The bank’s stake in the profitable building had been hidden by a Shell company. The building was eventually confiscated by the federal government.
In 2012, the federal government confiscated an apartment in Manhattan that the family of the former president of Taiwan had bought. The money for the apartment came from a bribe that had been delivered in fruit boxes to the president’s residence.
According to a series in the New York Times about anonymous money in New York real estate, the New York City Treasury Department requested that beneficial ownership information be reported in the transfer records when a property changes hands. (The information is not publicly available, but can be obtained through a Freedom of Information request.)
The following year, the Treasury Department passed a Geographic Targeting Order that monitors cash purchases in Manhattan and Miami. An academic paper found an immediate and dramatic drop in the total dollar value of anonymous transactions by about 70%. The program has been renewed and expanded to include the suburbs of Chicago, Los Angeles, San Francisco and several other cities.
Information gathered in the Treasury Department’s new database includes the beneficial owner’s name, address, date of birth, and a driver’s license or other government ID number. In a move that disappointed proponents of transparency, Congress decided to make the information available to investigators and prosecutors, but not to the public. A similar registry in the UK, Companies House, is freely searchable by anyone.
Sam Chandan, dean of NYU’s Schack Institute of Real Estate, said the economic impact of the new law may not be immediately apparent, even at the top of the real estate market. He said the super-luxury home market has already been hit by unfavorable tax changes such as the cut in state and local tax deductions in the 2017 tax revision and the New York “mansion tax” passed in 2019.
“Overall, this is a segment of the market that has slowed down and we don’t see as much enthusiasm for bringing new developments online,” said Chandan.
It’s ironic that a law stripping shell companies of their anonymity should be passed in the final days of the Trump administration over Trump’s veto.
Trump Tower was one of the first buildings in Manhattan to sell large numbers of units to anonymous LLCs. Buzzfeed reported in 2018 that more than 1,300 units were sold to unnamed buyers in Trump buildings. Trump’s former campaign chairman Paul Manafort was convicted in 2018 for failing to report foreign income to the IRS – money he used to buy a townhouse in Brooklyn and an apartment in downtown Manhattan. And when Trump had to buy Stormy Daniels’ silence in the final weeks of the 2016 campaign, his then-ally Michael Cohen arranged the payment through a Delaware LLC: Essential Consultants.