A new law aimed at wealthy buyers buying high-priced homes and commercial real estate through anonymous Shell companies could help stop the flow of illicit cash into real estate. However, some money laundering experts say the measure has loopholes that could easily be exploited.
Under the Corporate Transparency Act, real owners of Shell companies must identify themselves to the Financial Crimes Enforcement Network of the US Treasury. Anyone who does not comply will be prosecuted. The measure, embedded in the massive annual defense spending bill that President Donald Trump vetoed, became law on Jan. 1 when Congress suspended its veto.
“By asking Shell companies to disclose their true beneficial owners, bad actors who want to park their illegal money in New York real estate can no longer hide their identities from law enforcement,” New York Congresswoman Carolyn Maloney said sponsored the bill.
Luxury home purchases through Shell companies aren’t just happening in Manhattan. Federal agencies in recent years have accused foreign buyers of using limited liability companies to launder money through property deals in South Florida.
Last year the nonprofit Tax Justice Network named the United States the second worst offender when it comes to “helping individuals hide their finances from the rule of law,” just behind the Cayman Islands. The group regards both countries as “breeding grounds” of financial secrecy.
States like Delaware, New Mexico, and Wyoming are among those that allow buyers to register LLCs anonymously and not require individuals to disclose their identities when incorporating a legal entity. Many wealthy buyers and celebrities use these LLCs to buy real estate, essentially hiding their identities.
Technically, the new legislation still offers this barrier. According to the law, the database of beneficial owners is not made available to the public.
In a statement on The Real Deal, Maloney said she first looked at the issue 20 years ago after the 9/11 attacks. At the time, “it was very focused on terrorist financing and anonymous shell companies – which were often founded here in the US”. Maloney added that LLCs are “the tool of choice for terrorist groups around the world looking to move their money”.
Over time, the legislation has evolved so that money laundering is also combated through ordinary property purchases. In a statement in The Hill last month, Maloney said the bill would also help lower housing costs in New York City. She said the move would make it more difficult for anonymous buyers who buy, but not occupy, expensive units in luxury high-rise buildings, or so-called ghost towers.
According to the new legislation, a beneficial owner is defined as a person who has “substantial control over a company” or who owns and controls at least 25 percent of the shares 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. FinCEN then compiles this information in a database.
Legislation also requires LLCs to report changes in control of ownership. Failure to provide false information or update property information will result in a fine or possible prison term of up to two years.
Legislation is another tool the finance department can use to fight money laundering through FinCEN. FinCEN’s Geographic Targeting Orders, first issued in 2016 and refined since then, require property insurance companies to collect and report information on beneficial owners. Orders are for purchases made by Shell companies in 12 major US metropolitan areas, including New York, Los Angeles and Miami. They target unfunded residential property purchases over $ 300,000, including cash, check, money transfer, or virtual currency.
In contrast to the Corporate Transparency Act, Shell companies do not have to report their beneficial ownership directly to FinCEN for these contracts.
However, some industry professionals say the new legislation doesn’t have the teeth to address the real problem.
Ross Delston, a Washington, DC-based attorney and expert on money laundering, said few safeguards were in place to prevent companies from providing inaccurate information to the government.
“The database does not have a mechanism that allows FinCEN to verify the identified beneficial owner or conduct due diligence,” said Delston.
By law, only FinCEN, law enforcement agencies, and some financial institutions – like banks or mutual funds – have access to the database.
Banks can use this database when a customer does business with them for the first time. However, the applicant must agree to give the financial institution access to their information. There is a chance a customer will refuse and go to an alternate lender, Delston said.
It’s also unclear how the law will affect companies outside of the United States that own or plan to buy real estate here.
Maloney said the law requires disclosures from overseas companies registered to do business in the U.S., but some legal experts aren’t sure if buying and holding real estate meets that requirement.
Some law firms already have task forces in place to help their clients navigate the law. Even with the added regulation, lawyers say the move won’t reduce investments in U.S. real estate.
“Ultimately, the US real estate market is very attractive for both onshore and offshore investors,” said Terri Adler, managing partner and real estate chairman of the law firm Duval & Stachenfeld. “As long as the regulations and privacy on the information make sense and work, it won’t stop investors from coming here.”
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