On Wednesday, January 13, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced Geographic Targeting Orders (GTOs)1 designed to address growing concerns over the heightened risk of money laundering occurring in connection with all-cash purchases of luxury residential real estate properties. The GTOs will temporarily require title insurance companies located in the United States to identify the beneficial owners—or natural persons—behind limited liability companies (LLCs), partnerships, and other legal entities used to pay all cash for high-end residential real estate. The GTOs will apply to residential sales in Manhattan of at least $3 million and in Miami-Dade County of at least $1 million.2 They are set to take effect on March 1 and last through August 27, 2016.
Announced as part of FinCEN’s initiative to combat money laundering in the real estate sector, the GTOs will reportedly affect billions of dollars in real estate transactions.3 In particular, FinCEN Director Jennifer Shasky Calvery stated that FinCEN was seeking to address the perceived information gap posed by allcash purchases (as opposed to those transactions involving mortgages where there are existing disclosure requirements) and “to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.”4
Foreign-owned US real estate holdings have been the subject of increased scrutiny in recent years. In 2010, the Department of Justice (DOJ) launched its Kleptocracy Asset Recovery Initiative, which focused on preventing corrupt leaders from seeking safe haven for their stolen wealth in the United States.5 The initiative has led to high-profile forfeiture actions of US properties purchased by shell companies, including the seizure of a Manhattan condominium allegedly purchased with bribe proceeds from the former president of Taiwan, and a current investigation of Najib Razak, the prime minister of Malaysia, accused of stealing $700 million in government funds. Similarly, in an unprecedented 2013 decision, a Manhattan federal judge authorized prosecutors to seize 650 Fifth Avenue as proceeds of money laundering. The building is a prominent New York skyscraper that was owned by entities found to be a front for Bank Melli Iran, an institution wholly owned by the Iranian government.6
Last year it was revealed through a series of articles in the New York Times that a number of purchases of multi-million dollar luxury apartments in Manhattan were made by individuals with connections to foreign corruption and other criminal activity.7 It was also reported that nearly half of the most expensive residential properties in the US (including in New York and Miami) are purchased anonymously through shell companies. Following these reports, New York City Mayor Bill de Blasio’s administration imposed new disclosure requirements on LLCs and other entities buying or selling property in New York City.8 These new rules were designed to identify owners of real estate who were evading city income taxes.
Of course, LLCs in real estate transactions have a range of uses that are not sinister, including the obvious limitations on personal liability, beneficial tax treatment, investment and operational flexibility, and simple privacy. But even though the vast majority of property sales are innocent, one of the classic ways to launder money is through the purchase of real estate in a manner that shields the identity of the ultimate owner. Thus, greater resources have been and will be directed at investigations into luxury real estate sales involving shell companies.
The recent initiative by FinCEN will allow the Treasury Department to share the information it gathers with federal law enforcement as part of a broader federal effort to increase the focus on money laundering in real estate.9 Indeed, it was reported that the FBI recently created a new unit to assist the DOJ in investigating individuals involved in money laundering, particularly those involved in or hiding behind shell companies, including accountants, lawyers, and other individuals who establish the entities.
It therefore appears increasingly probable that participants in the real estate industry—particularly those who deal in high-end real property—may find themselves involved in an investigation focused on money laundering. This is most likely to be initiated through the receipt of a government subpoena for information. It is advisable for companies to prepare for this possibility and designate a specific individual at the company, preferably counsel or compliance personnel, to spearhead efforts to respond to any subpoena. Companies should follow best practices with regard to a subpoena response, including practices concerning document preservation and collection, the identification of all relevant custodians and sources of information, and consideration of confidentiality restrictions in third party agreements, among other issues.
It is now clear that the federal authorities are focused on investigating high-end real estate transactions involving the purchase of properties with cash through LLCs and other entities. It is therefore to be expected that there will be an uptick in investigations in this area. Once FinCEN’s GTOs are implemented, it will be interesting to see in the coming months how and whether the disclosure requirements will be extended temporally and to other jurisdictions, as well as whether they lead to actual cases.