|Cash Buyers of Prime US Property to Be Reported to Financial Crime Regulator|
People who buy high-end property in Manhattan, New York and Dade County, Miami in cash between March and August this year will be identified and reported to the US Treasury's Financial Crimes Enforcement Network (FinCEN).
The Treasury Department says it is concerned about the amount of illicit money thought to be flowing into luxury real estate as a money laundering technique. According to Federal Bureau of Investigation figures, foreign investors spent USD104 billion in the US property market between April 2014 and March 2015. In one notorious case from 2006, an Equatorial Guinea official bought a USD30 million house in California using money from the country's treasury and channelled through shell companies.
'We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium US real estate to secretly invest millions in dirty money', said FinCEN's director. 'Cash purchases present a more complex gap that we seek to address.'
FinCEN's new rule takes a wide view of the meaning of 'cash', applying it to bank account funds as well as currency. Essentially, it affects any purchase in which the purchaser does not require a bank loan or mortgage.
The new rule will be introduced first in two of the US's property hot spots: New York's Manhattan district, and Miami's Dade County. According to the New York Times, in Manhattan, deals worth for more than USD3 million will be reportable – in Miami the reporting threshold is USD1 million.
The implementation is by means of a so-called Geographic Targeting Order (GTO) aimed at title insurance companies operating in the two regions. The companies concerned are not suspected of wrongdoing, but have been chosen because title insurance is a common feature in the vast majority of real estate transactions. The GTOs will be in effect for 180 days beginning on 1 March 2016 and will expire on 27 August 2016. Calvery said that if officials find that many sales involved suspicious money, permanent reporting requirements across the country will be developed.
This will be the first time that the US government has forced real estate companies to disclose the identities of those conducting all-cash transactions. It is unlikely to be popular with the real-estate industry, some members of which have made huge profits in recent years from a building boom funded by wealthy buyers. They may also find it troublesome to reliably identify beneficial owners who work through a chain of anonymous shell companies set up for the transaction. Beneficial owners are defined by the Treasury as individuals who directly or indirectly own at least 25 per cent of the equity of the entity that bought the property. The title company will be required to copy these individuals' driving licences or passports and forward their names to the Treasury.
FinCEN said its action will 'shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers' identities'.
'Of course, there is transparency in US financial institutions because of Know Your Customer rules', commented tax crime expert Jack Townsend. 'But other forms of wealth, particularly US real estate, can be effective ways to hide wealth, ill-gotten or otherwise, from foreign tax administrators and collectors, as well as foreign and US law enforcement with respect to money laundering and other illegal activity.'
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Jan.15, 2016