Feds Seek Money Launderers

Treasury Department To Require Title Insurance Companies To ID Cash Buyers

Starting March 1, the U.S. Department of Treasury will require title insurance companies to identify the actual people behind the cash purchases of high-end properties in Manhattan and Miami.

The pilot program runs through Aug. 27, 2016, and is intended to combat money laundering by foreign criminals, many of whom use hot U.S. real estate markets as “safe deposit boxes” for their plunder.

“Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering,” Treasury Dept.

Financial Crimes Enforcement Network (FinCEN) director Jennifer Shasky Calvery said in a statement. “But cash purchases present a more complex gap that we seek to address.”
Marc Israel, president and chief counsel of MiT National Land Services, a New York City title insurance company, said the goal of thwarting money launderers is laudable, but he questions how effective the new regulations will be – particularly given all the regulations already in place.

“The title insurance industry is already required to run Patriot Act searches and act as an information and tax collector for the IRS with the Foreign Investment in Real Property Tax Act (FIRPTA),” Israel said.

The new regulations only apply to purchases in excess of $3 million in Manhattan and $1 million in Miami; less expensive properties will not be affected. Israel also pointed out that many honest people, like professional athletes and entertainers, have legitimate reasons for wanting to remain anonymous and purchase a property using a shell company, usually an LLC.

“In fact, in countries where certain high net worth people are regularly targeted for kidnapping, it is understandable that they would not want to publicize where they and their children live,” Israel said. “The government must insure that this information remains strictly confidential.”

Under the Patriot Act, mortgage lenders are required to verify the identity of their customers. Real estate agents have no such obligation. Title insurance is something the vast majority of buyers purchase. However, if a buyer wanted to remain unidentified, they could evade the new regulations and take their chances by forgoing title insurance, but that’s a substantial risk.

Depending on the success of the FinCEN program, it’s possible it could be expanded to include other cities, like Boston, where unidentified cash buyers are becoming increasingly common.

In 2014, unidentified, all-cash buyers purchased 69 Massachusetts properties valued at more than $1 million. In 2015, there were 75, and in the first two weeks of this year, there were two.  The median price of these homes was $1.6 million according to information from The Warren Group, publisher of the Banker and Tradesman.

Anonymous Buyers Can Be Problematic
Attorney Clive D. Martin of Robinson & Cole, co-chair of the condominium law and practice committee for the Massachusetts Real Estate Bar Association, said he thinks the new regulations are well-intended, but a big administrative burden on title insurance companies; he wonders how it effective it will be.

“I would not be at all surprised if this program is expanded in time or in scope,” Martin said. “This is not a revelation, everyone knows it’s going on. The criminal mind is infinitely imaginative. What’s the likely outcome? It may stop some of these transfers from taking place, but I don’t think this is the end of the issue, by any means.”

Martin, who represents condominium associations, said anonymous owners present their neighbors with another problem. Many live abroad and are nearly impossible to track down if they don’t pay their condo fees or have a problematic tenant, often a family member.

“A condo is a community and it only works if people are involved,” he said. “When these units are owned remotely and anonymously, there is no involvement in the community. As a lawyer who represents condo associations, you’re in the unfortunate position of suing owners for violation of rules or condo fees. It’s sometimes rather difficult to make service on these remote services, often a Hong Kong entity many degrees removed from the people who are living in the unit. How do you actually reach the owner?”

Martin pointed out that anonymous buyers sometimes use a “straw buyer” to purchase a property.  That person may be an employee, a relative or some other person who, for a small fee, will sign the deed to the property in the place of the actual buyer, thus illegally shielding the true owner.

“There are a lot of legitimate reasons for anonymity, but it’s a grand way of hiding ill-gotten money,” Martin said.

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