How U.S. Cities Fight Money Laundering

Money Laundering Enters Real Estate

In this article, Jay Ryan, Executive Vice President at Accuity discusses measures U.S. cities are taking to combat money laundering and how the scheme has evolved and became a successful tool for identifying real estate money-laundering risks, focusing on Geographic Targeting Orders and assessing its performance since its introduction in 2016 by FinCEN. 

The purchase of expensive, high-end residential properties through opaque corporate structures in some U.S. cities, notably New York and Miami, had been an issue of growing comment and concern, not least because the trend was pushing property prices in the cities up sharply. The Miami Herald was among the local newspapers that spent years trying to uncover who was behind some of the biggest transactions, such as the $3 million cash deal in 2011 for an oceanfront condo in Bal Harbour. 

It was the release of the Panama Papers – a leak of thousands of confidential files of a Panamanian law firm Mossack Fonseca – that provided the clues the Herald needed. The papers showed that the company buying the condo, Isaias 21 Property, was ultimately run through an offshore company registered in the British Virgin Islands, owned by a Brazilian politician who was under indictment in Brazil for corruption. The Miami Herald’s analysis of the Panama Papers found eight instances in which a foreign national linked to bribery, corruption, embezzlement or tax evasion had bought a property in the city through an offshore company. 

Money laundering through real estate is a growing problem in many cities around the world. In the U.S. and U.K., the use of offshore shell companies in transactions, which allow the identity of the ultimate owner to be hidden, have become an area of concern. In New York, for example, around $8 billion is spent every year on homes worth $5 million or more, and over half of these transactions are made through shell companies. 

Real estate transactions have attracted the attention of regulators and governments around the world in their fight against money laundering and terrorism financing. Our recent report, “Money Laundering and Real Estate,” highlights how anti-money laundering (AML) legislation and requirements, until now mainly aimed at banks, have increasingly been applied to real estate professionals. Each country and region is moving at its own pace and in its own way, but the general trend is unmistakable. Before too long, real estate professionals will have to become very familiar indeed with AML legislation. 

The U.S. has taken a different path from many other jurisdictions and, so far, has not explicitly required professionals involved in real estate transactions (other than financial institutions) to meet AML requirements. Instead, the U.S. has favored Geographical Targeting Orders (GTOs), which were first introduced by the U.S. Treasury’s Financial Crime Enforcement Network agency (FinCEN) in 2016. These require title insurance companies, their subsidiaries and agents to report on the beneficial owner of legal entities, including shell companies, that are used to buy certain luxury residential real estate (meaning those above a certain price threshold, which varies geographically) in specific locations. 

GTOs now cover seven areas: all boroughs of New York City; five counties in California (Los Angeles, San Francisco, San Diego, San Mateo and Santa Clara); three counties in the Miami metropolitan area (Miami-Dade, Palm Beach and Broward); the county that includes San Antonio, Texas; and the City and County of Honolulu. Under the GTOs, all title insurance companies are required to identify and report the “natural persons” behind shell companies that make cash-only purchases of high-end real estate in these markets and report details of the transactions to FinCEN within 30 days of completion. 

The GTO scheme has been renewed and expanded three times since it was first introduced – in 2017 the scope of the scheme was expanded to include transactions completed through wire transfers as currency, checks, and money orders – and there is growing speculation that it could be made permanent and rolled out across the U.S. The approach seems to be working; according to FinCEN, about 30 percent of the transactions covered by the GTOs so far have been found to involve a beneficial owner or purchaser that is also the subject of a previous suspicious activity report. FinCEN has also published an advisory notice to help the real estate sector identify money-laundering risks. Regulators clearly believe that real estate professionals have an important role to play in tackling money laundering – it’s only a matter of time before AML screening becomes a fact of life for the sector.